If youāre looking for a simple answer, itās this: captive product pricing is when consumers make a one-time purchase (usually a lower-priced core product) but are required to purchase accessories for the main product to be useful (usually higher-priced).
There are many consumer good examples of this pricing strategy. The most notorious is likely disposable razors.
Then, there are more recent examples like the Nespresso.
The average price of a Nespresso machine is between $130 and $250. Certainly, you can find more expensive ones that have special colors or features. And, you might find refurbished ones or off-brands for slightly cheaper.
But those Nespresso pods are required for most machines, and they cost $1.10 – $1.50 for each cup. It doesnāt take long for this machine to cost just as much or more than a traditional espresso machine.
But alas, if you have the Nespresso machine, youāre their captive audience.
The more important question is, ādoes this pricing strategy work for SaaS companies?ā And, is there a way to leverage this pricing strategy without annoying users?
Freemium as Captive Product Pricing
When it comes to a low-cost core product, you canāt go any cheaper than free. For this strategy to be categorized as a captive product pricing model, the product must have an actual free version, not simply a free trial.
But wait, if there is no investment by the user for the free version are they actually a captive audience?
Of course, they are, especially when you think about what they might invest that isnāt actual money.
Letās say your product is task management software or project management software. You give them a free version if they are a single user. The free version may be missing some advanced features, but overall, itās a functional product that may add value in the form of increased productivity.
The user at this point is investing time curating their projects or tasks on the platform and integrating it into their daily workflow.Ā
What if they want to introduce new users to the platform because their team of one has grown? Now they have a choice, either upgrade the software to a paid version to add āseatsā to their dashboard or re-invest time building out their daily workflow on a new platform.
In this situation, theyāll likely opt to upgrade their current software to save time (not money). They donāt want to learn new software and integrate it into their already efficient workflow.
Even better, if your platform does what it promises and has an excellent user experience when it comes to task management or project management, why wouldnāt they be interested in upgrading to unlock the advanced features as well as incorporate new users.
Subscription Models as Captive Product Pricing
A simple subscription pricing model isnāt captive product pricing, even if they pay for the service every month or every year. Itās also not when companies like Netflix start with a low-priced model to beat the competition (Blockbuster) and then increase the price over time, thatās categorized as penetration pricing.
Instead, the captive product pricing model is when a subscription pricing service unlocks new features or products at higher subscription rates.Ā
So, itās more like Hulu or Peacock, sure there is a free (or low-cost) option, but to have a commercial-free viewing experience or to watch specific shows, youāll have to pay more.
Once The Office left Netflix, the new streaming service on the block, Peacock, saw an increase in their subscribers who specifically wanted this show. The challenge is keeping after theyāve finished the series.
Add-ons Are Captive Product Pricing
The gaming industry is bursting with captive product pricing models through an add-on strategy. Hereās an example, maybe youāre a massive fan of Simsāa life simulation game.
Of course, you can purchase and play the basic version of the game, but itās going to cost extra to have pets, special powers, interesting jobs or unique outfits for your characters.
While the basic version of the game is about $40. The $5-$40 add-ons will add up. In fact, if you were to purchase all 53 kits and expansions it would cost $939.90
What makes this textbook captive product pricing is that the core product is the gameāand itās fully playable at $39.99. However, if youāre sold on the experience, itāll cost a lot more to improve the gameplay through accessory purchases.
Gaming isnāt the only industry that uses this approach. We can also take a peek at HubSpot’s pricing strategy.
You can begin using Hubspotās CRM software today for FREE. And the best part is itās an excellent tool. So good, that you might want to integrate other business activities like marketing, blogs, social media, etc. In fact, the more you want to do on the platform, the more you have to pay.
All of the add-ons, again start adding up and drastically increase the price over time.
Does this mean that SIMs players feel scammed or that HubSpot users find themselves frustrated?
No, not usually.
In fact, theyāre happy to pay more.
Why?
Keyword: value. At the end of the day, users are happy because those extra expenses come with added value. And, most importantly, they feel that itās worth it.
This brings us to the final answer to the question ādoes this pricing strategy work for SAAS companies?ā And, is there a way to leverage this pricing strategy without annoying users?
The answer is yes, and when users are captivated not captive, theyāre happy to invest in the accessories.
The Difference Between Captive Users and Captivated Users
Someone with a nice Nespresso machine spending $10 – $20 a week on pods might find themselves frustrated because they are being held captive. The same is true for the consumer purchasing expensive disposable replacement blades for their razor.
It doesnāt have to be a bad experience for the buyer. You just have to put yourself in their shoes and ask, āam I being held captive, or am I captivated.ā
When you are captive, you might feel like youāve fallen for a scam. Maybe you begrudgingly continue to purchase pods because you already have the machine. But youāre not telling your friends about the experience because you’re not happy, and worse, you might be embarrassed that you, āfell for it.ā
Captivated audiences respond differently. Theyāre excited about the newest accessory. They might brag about their latest āexpansionā in Sims to friends who also like the game. They might share all the ways they use task management software with colleagues to get them to join as well.
It all comes down to understanding how an accessory will add value to the core product.
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