Captive pricing, also known as captive product pricing, is a pricing strategy where a "core" product is offered at a lower price, but additional products required to fully use the core product are charged separately. 

A classic example is printers: they are sold at a discount, yet require expensive ink cartridges to be purchased separately. In many cases, these cartridges cost more than the printer itself. In the software industry, a similar approach is seen with graphic design software offered at a reduced price, but users are required to download images from the company's stock photo service. 

One real-world example is Adobe, which offers older versions of software for free but removes backward compatibility, encouraging users to upgrade to a costlier version for collaborative purposes.

Other SaaS pricing strategies to look into:

- Cost-plus pricing
- Value-based pricing
- Dynamic pricing
- Skimming pricing
- Penetration Pricing
- Competitor based pricing
- Demand based pricing

What Is Captive Pricing?

Captive product pricing is a strategic approach that involves offering a base product along with product add-ons. The core product serves as the customer magnet, while the accessory products are required in order to actually use the core product. 

For instance, think of a coffee machine that requires specific coffee pods in order to function. Here, the machine acts as the core product, while the pods serve as accessory items. Similarly, video game consoles require you to purchase games separately. In some cases, companies may even sell the core product at a loss, knowing that they will recoup the cost through the sale of accessories. 

This pricing strategy is also applicable to Software-as-a-Service (SaaS) businesses, where tiered options with additional features are offered, thus increasing revenue through upselling opportunities. Implementing captive product pricing effectively requires careful consideration of what works best for your company.

The Core Product and The Captive Product

Captive product pricing consists of two main components: the core product and the captive product. 

The Core Product

When pricing products, companies must balance profitability and customer appeal. The core product, which customers purchase once, is priced more affordably than the captive product.

This attractive price point plays a crucial role in attracting customers. However, companies should still account for supply, demand, and production costs to determine a profitable price for the core product.

The Captive Product

To enhance the value of a core product, nothing beats a captive product. A captive product is specifically designed to take the core product to the next level.

While it may be tempting to focus on the lower priced core product, customers will soon realize the true value lies in the supplemental captive product, which is why it's priced higher.

The captive product is an essential component that cannot be overlooked. However, be careful when setting the price of the captive product, as it can greatly affect the perceived value of both items.

Captive Pricing for SaaS Companies

When using captive pricing for SaaS products, the core product typically offers enough functionality with a free or basic subscription to showcase its value. However, expanded features may require specific upgrades, like modules for custom reports.

So, how does captive pricing work for a SaaS company? A core product will demonstrate the basic value of the entire product line. Users will then be able to purchase additional products. . A company can continue to develop add-on products to meet user needs. This helps build brand loyalty and customer satisfaction, allowing for further value increase.

Alternatively, SaaS providers can leverage partnerships and third-party integrations to address customer pain points. It is crucial for providers to understand their customers' typical use cases. By doing so, captive pricing not only boosts revenue but also enhances customer value.

Models Used for Captive pricing

Let's now explore some examples of captive product pricing in the SaaS industry. 

Flat-Rate Pricing

Some SaaS tools offer a simple pricing model that includes basic features, suitable for small businesses and freelancers. The core product delivers enough value for customers to achieve results.

As businesses grow, they can easily upgrade their account with specific features, paying only for what they use.

Pay-as-you-go

Pay-as-you-go pricing is a usage-based pricing model. This means that the price of a product will vary directly based on users’ needs.

For example, a cloud service will charge based on the size of what you are storing or the amount of time you store something in the cloud. 

Tiered pricing

The most popular captive pricing strategy is the tiered model. Customers can choose a tier that suits their needs and expectations, usually through a monthly or annual subscription.

Upgrading to a higher tier provides more features or allowances, even if you only need one feature from that tier. To effectively implement this model, it's important to ensure that your tiers align with the needs and growth of your customers.

How to Implement Captive Product Pricing

Below are simple steps to follow when implementing captive product pricing:

1. Pick a Product Combination

To select two products to combine for this strategy, seek one that demonstrates significant demand and another that has relatively low demand when sold on its own.

Both products should complement each other, and one may even require the other. Think of the relationship between a razor handle and disposable razor cartridges.

The product in high demand will serve as the primary focal point for attracting customers, while the product with lower demand will function as a supplementary offering.

2. Pick a Price for the Bundle

Price the bundle in a way that makes it an attractive deal for customers. Make the captive product heavily discounted to make the bundle hard to resist.

If we take the razor example, you would offer the handle at a significantly discounted price and include the captive cartridges at a higher value.

3. Get Customers to Buy the Captive Product

To ensure that customers obtain the captive product, you can make the captive product essential to using the core product.

This means that the core product is unavailable for standalone purchase, thereby compelling customers to pay for the captive product in order to obtain the core product.

4. Market the Core Product

To effectively market your products, prioritize promoting the desirable main product. Emphasize its benefits and value. While the captive product is important, it's crucial to capture customers' attention with an enticing core product.

5. Try a Subscription Model

A subscription model, which involves customers paying regular fees for a captive product, is an ideal approach for captive product pricing.

This model ensures ongoing revenue and provides customers with a reason to stay loyal to your product bundle. 

Examples of SaaS Captive Pricing

Below are some additional examples of captive product pricing, specifically for SaaS-style software products.

Accounting Software 

We can imagine a SaaS accounting software platform specifically designed for small businesses. For example, this accounting platform offers a monthly subscription for $29.99, encompassing all essential features.

It may even be offered at a discount for a 12-month subscription, further enticing users to purchase the base subscription. 

To further enhance the platform's capabilities, users have the option to purchase add-ons from the company's dedicated marketplace.

These add-ons include expanded reporting options, expense tracking, and additional license seats to support growing businesses. These additional features ensure a continuous delivery of added value to customers through competitive product pricing.

Billing Platform 

In this particular scenario, a billing platform’s fees escalate according to the volume of transactions.

Additionally, captive functions depend on peripherals and integrations with payment services.

A real-life example is the payment service, Square, that operates on a usage-based model, where the initial sign-up is free, but additional subscription services are offered for peripheral attachments like card readers.

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