If you’re looking for a simple answer, it’s 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 doesn’t 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, you’re their captive audience.
The more important question is, “does this pricing strategy work for SaaS companies?” 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 can’t 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 isn’t actual money.
Let’s 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, it’s 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.
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 “seats” to their dashboard or re-invest time building out their daily workflow on a new platform.
In this situation, they’ll likely opt to upgrade their current software to save time (not money). They don’t 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 wouldn’t 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 isn’t captive product pricing, even if they pay for the service every month or every year. It’s also not when companies like Netflix start with a low-priced model to beat the competition (Blockbuster) and then increase the price over time, that’s 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.
So, it’s 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, you’ll 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 they’ve finished the series.
Add-ons Are Captive Product Pricing
The gaming industry is bursting with captive product pricing models through an add-on strategy. Here’s an example, maybe you’re a massive fan of Sims—a life simulation game.
Of course, you can purchase and play the basic version of the game, but it’s 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 game—and it’s fully playable at $39.99. However, if you’re sold on the experience, it’ll cost a lot more to improve the gameplay through accessory purchases.
Gaming isn’t the only industry that uses this approach. We can also take a peek at HubSpot’s pricing strategy.
You can begin using Hubspot’s CRM software today for FREE. And the best part is it’s 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, they’re happy to pay more.
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 it’s worth it.
This brings us to the final answer to the question “does this pricing strategy work for SAAS companies?” And, is there a way to leverage this pricing strategy without annoying users?
The answer is yes, and when users are captivated not captive, they’re 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 doesn’t have to be a bad experience for the buyer. You just have to put yourself in their shoes and ask, “am I being held captive, or am I captivated.”
When you are captive, you might feel like you’ve fallen for a scam. Maybe you begrudgingly continue to purchase pods because you already have the machine. But you’re not telling your friends about the experience because you’re not happy, and worse, you might be embarrassed that you, “fell for it.”
Captivated audiences respond differently. They’re excited about the newest accessory. They might brag about their latest “expansion” 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.
Want to Learn More About Pricing Strategies?
Pragmatic Course: Pricing | $1,195
Learn more about pricing segmentation in the Price course. You’ll also learn how to determine market value and how to maximize your profit while minimizing discounting.
You’ll be introduced to several pricing tools including
- Product Portfolio Worksheet
- Isoprofit Tables
- Pricing Ownership Matrix
- Value Matrix
Pragmatic Learning Network: Accelerate Your Subscription Business | $500
Pricing expert Mark Stiving brings his expertise on subscription models to our Pragmatic Learning Network to help product teams improve their subscription businesses and drive growth.
In this self-paced course, students will learn:
- The three revenue buckets and how they drive prioritization
- The three levels to pull to create and capture more value
- Which growth strategies are best based on the life cycle of a product
- The four ways to grow revenue from a single customer