What is Captive Product Pricing – The Ultimate Guide for SaaS
Creating a pricing strategy that works for SaaS businesses takes a bit more time and effort.
That is because you’re selling a service that’s supposed to evolve with the changes in the market and grow with the company.
This is where the captive product pricing strategy comes to play. It allows you to offer a core product that everyone needs to pay for plus additional accessories every customer can choose for themselves.
In this article, we’ll explain the different captive product pricing strategies, and provide examples and some hacks that will be very helpful for anyone switching their pricing model.
What is captive product pricing?
Captive product pricing is a pricing strategy that relies on a base product and different additional products that can be added to the package.
Your core product is what attracts the customers and the accessory products sweeten the deal. Typically your core product only needs to be bought once, while the additional ones can be bought depending on the need.
When talking about physical products, a good example of a captive product pricing strategy is a coffee machine that requires coffee pods. The machine would be the core product, while the pods are accessory products.
That way, you’re a recurring customer, since you keep going back to the brand to buy coffee pods which are essential in order to use your coffee machine.
An alternative example is a video game console. Once you buy the hardware, which is the core product, you need to buy games, which are sold separately.
Knowing that you’ll need to purchase accessories like games and controllers, companies can sometimes sell the core products at a loss, knowing that they will make it up by selling accessory products.
When it comes to SaaS businesses, the captive product pricing strategy works similarly.
SaaS brands usually provide tiers which consist of a base model which is the cheapest option and higher tier options which provide all the features of the base model with additional accessories.
This type of pricing strategy can help you increase revenue since there are a lot of chances for upselling. In order to do it successfully, you need to figure out the best way for your company to utilize captive product pricing.
How to utilize captive product pricing?
The captive product pricing model gives your customers more power than other forms of pricing do.
They can choose which pricing tier they want to pay for and that way, they’re not paying for a service or features they won’t use.
However, in order for captive product pricing to work in SaaS, you need to make sure these 2 factors are correctly set up. They are the core product and the accessories.
Your core product needs to be functional and valuable on its own. If it’s not, your business model is in trouble. The idea is to have customers try out your core product, fall in love and subsequently upgrade.
Of course, in order for anyone to even consider upgrading, the accessory products need to be worth it, and the price point needs to be fair.
There should be multiple reasons to upgrade.
It could be to:
- add more users
- utilize higher-tier features
- get more allowance (for example be able to send more business proposals in a month)
- integrate more tools
Understanding the value of your core product
Captive product pricing could help you build brand loyalty since brands can continue using your services as they grow. This means that you’re providing value every step of the way as your customers are scaling their businesses.
Ultimately, not only is it important to have a core product that is valuable, but your additional features also need to complement it and be useful to your target audience.
If you’re offering something they won’t use, you’ll have a hard time upselling your customers. Now, we all know that sometimes you create a product or service thinking it will be used in a specific way, and then you discover that your audience is using it in a completely different way.
That’s why you need to listen to your audience and have them in mind when creating the captive product pricing. Make sure to listen to their input every time you’re thinking about changing your price points.
In order to truly understand how much you should charge and how to set up your captive product pricing, you need to figure out your time to value.
You can do that by reading our helpful guide that focuses on understanding your time to value metric and how it can lower your churn rate.
Captive pricing strategy examples
We’ve already mentioned the famous coffee machine and pods example, now it’s time to look at examples of captive product pricing specifically in the SaaS industry.
Software with a flat pricing model
Some SaaS tools offer a flat pricing model that includes the basic features. It’s enough for small businesses and freelancers. The core product provides enough value so that customers can see results.
However, once the businesses start to grow, they can easily upgrade your account with specific features that you buy individually. That way you’re only paying for what you’re using.
Pay-as-you-go pricing model
This type of captive product pricing is based on the number of transactions you have on a monthly basis.
Brands that use this pricing model usually don’t disclose their price, but ask you to reach out to them for a quote. The price is then calculated based on your specific needs.
This could mean that two companies of similar sizes could be paying very different fees, depending on the ways they use the service.
Pay-as-you-go offers more personalization than any other captive product pricing models.
Tiered pricing model
The most popular captive product pricing strategy is the tiered model.
This model relies on a package deal, usually a monthly or annual subscription and you choose the tier based on your needs and expectations.
If you want to use more features or have more allowance, you’ll need to upgrade to a higher tier. So even if you’re only looking to use one feature from the higher tier, you need to pay for the whole package. In order to successfully implement this model, your tiers need to follow the needs and growth of your customers.
Bonus tips for captive product pricing
In order for your business to thrive with captive product pricing, you need to have the capacity for it.
That means that your core product needs to be valuable and have enough users for you to be able to create additional accessories and sell them on a consistent basis.
If your biggest draw and USP is that you’re the cheapest option on the market and you manage that by underpricing your core products, your additional products need to be attractive and have added value.
You need to figure out which features to offer in your core product and which ones to save for higher tiers. The best way to do this is by having your finger on the pulse and regularly communicating with your audience base.
Once you set up your tiers, you can’t change them. If you do, you will anger the customers that paid more to use fewer features.
Also, make sure that your marketing efforts are focused on existing customers, as well as new leads. You need to provide support, educational materials and more in order to create loyal customers that you can easily upsell.
Captive product pricing is a great pricing strategy for SaaS businesses, as well as companies that sell physical products. If done correctly, it can help you increase profit margins, raise customer loyalty and increase the value of your conversions.
The captive product pricing examples we provided can help you find the right product pricing strategy for your business. If you’re looking to switch your pricing to a captive product, just make sure that both the core product and the accessories have their individual value and work well together.
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