Captive pricing is selling one product at a low margin to enter the market and block customers from buying a more remunerative "tied" product (e.g. razors are inexpensive and the revenue is made on blades that must be used with that specific razor) (M. Goic 2011, p. 44). Marketers use captive pricing because it is certain that, finally, customers will have to buy the refills, recharges, or expensive replacement parts or services over time in order to continue using this product. Companies set a very low starting price for the product because the seller knows that the consumer will eventually have to buy spare parts at a higher price (J. L. Ferguson 2009, p. 97).
Examples of captive pricing
Many modern companies use this strategy. Captive pricing is used in Starbucks, where baristas urge customers to spend more by proposing additional products (e.g. reusable mugs) (M. Hilčišin, B. Gahir, D. Gannon, A. Boguszakova, P. Silondi, S. Gray, G. Allen, J. Boehringer 2015, p.14).
Companies conduct initial sales of the product at a reduced or even zero-price because they are the only ones selling this specific product and in this way, they make sure that the future purchases will be made at a highly profitable price. Captive Pricing, sometimes called Captive-Product Pricing basically involves making additional products that have to be used with the main product (e.g. video game consoles and printers). There are several varieties on this practice:
- Selling the leading product at a low price with the following products sold by only one seller at a premium price. The customer is not legally required to purchase printer ink but must do so to run the main product.
- Selling the main product at a great discount and then the customer is legally obliged to buy the captive product. This technique is used by a significant number of mobile phone providers. In this case, the phone is much cheaper if the customer signs a contract for 2 years.
- Giving away the main product for free to stimulate the sale of a captive product. By giving away a candy dispenser, a company can get its customers to buy candy in the future.
Today, in the market we can observe any number of transpositions of free or discounted main products and voluntary or mandatory captive products. It is important to maintain, at least for a moment, monopolistic control of the internal sales market. An example is the launch of a phone with chargers and cables not available from other sellers to have a monopoly on these additional items at least for some time (R. A. Greenwood, C. D. Wrege, P. Gordon 2014, p. 1-2).
- Alwis A., Kremerman V., Shi J., (2005), D&O Reinsurance Pricing -A Financial Market Approach
- Ferguson J. L., (2009), Fair or Foul? Determining the Rules of the Fair Pricing Game, Dissertation, Georgia State University
- Greenwood R. A., Wrege C. D., Gordon P., (2014), The Origins of Captive Pricing: Electric Lamp Renewal Systems, HCBE Faculty Articles. 58.
- Goic M. (2011), Essays on Multi-product Pricing, Carnegie Mellon University Tepper School of Business Pittsburgh, Pennsylvania
- Hilčišin M., Gahir B., Gannon D., Boguszakova A., Silondi P., Gray S., Allen G., Boehringer J.,(2015), School Of Business Selection Showcase, Centre for Research and Interdisciplinary Studies, Prague College, CRIS Bulletin
- Kujala J., Murtoaro J., Artto K., (2007), A negotiation approach to project sales and implementation, Project Management Journal Volume 38, Issue 4
Author: Weronika Piotrowska