Captive Product Pricing

I never knew my earlier posting on pricing will generate so much in interest from people I know or from people who have crossed my blog just as a passing interest. However, one good example I found interesting in those discussion was Captive Product Pricing. Is captive product pricing separate pricing principle or should follow the same 3 product pricing paradigm we just discussed earlier:

1. Cost based pricing
2. Value based pricing
3. Competition based pricing

To my understanding of pricing theory the pricing paradigms I talked about are fundamental principles on which every known pricing strategy should be evaluated against. No pricing model can challenge or alter these building blocks of pricing.

Lets look at the Captive Product Pricing as an example. Captive product pricing is done for a captive market where the market is fairly narrow and choice is limited to the extent of a monopoly. Some examples of these are razor blades, tyres for automobiles or cartridges for printers. And best one all of you Satellite TV customers must be facing in India on subscription pricing for various TV channels.

Couple of things to note here is who is defining the larger market. Is the captive product a standards based product (to the extent of being a commodity) or a specific supply to a product. Example can be single razor blades are standardized and you will not need to buy a razor from Gillette to use a Gillette blade. However, you may need a Mach 4 razor from Gillette to use a Mach 4 blade.

How does one price in such situations?

Well one can always lure the customer with bundling offers to make sure she gets into buying a package deal of the razor with some free blades, but charge a huge premium on the blades alone as replacement part. The strategy Gillette always employs for its innovative patent protected blades or HP for the costly cartridges  for cheap inkjet printers. When it comes to competitive pricing comparisons sales people do these smarts as an example:

You can buy an HP printer but cartridge will be so expensive that you may be better of buying a Canon printer but the cartridge will be cheaper and in the long run you will be paying a lot less as an example.

or may be the other way round

The savings you make in cartridge will not be  sufficient to recover the cost of the savings you make in the printer. Because in some sense in the life time of the printer you will hardly use 3 cartridges and that will not be enough saving for you anyway. So why not buy a cheaper printer and save on the initial cost. And if you buy a maintenance contract for printing 100,000 sheets of paper cartridges and printers will be free from us with necessary upgrades as necessary. 

The hard thing for the seller always to keep in mind is in no circumstance a customer will plan pay a price beyond the lifetime value of what she is paying for the service or an crude estimate for the same is the basis is time based like an ARPU used in the telecom industry. If I spend Rs. 2000/- in talking over the cellphone I will try to keep my cell phone bill to that level every month as much as possible. By creating a price bundling you are trying to make it Rs. 3000/- even if you provided me a free blackberry and thus show me a lot of saving it's very unlikely I will value that free blackberry long enough. But it may still be a deterrence for me to switch as I will cease to keep my phone and thus lose all the private data I have on the mobile handset. Over a period of time as a customer my demand for more talk time will be there but I will still not like to pay more than Rs. 2000/- for it. And while pricing in the captive market this is a significant point and that is when people think of switching.

How does a buyer do in such situations?

If you are purchasing tech products or products where complexity is high and difficult in comparison I will suggest to keep 2 metrics in mind before you get into a captive product purchase scenario.

1. Total Cost of Ownership
2. Switching cost

TCO estimation will give a good understanding on where you stand on comparison with the other products in the market. Keeping a guard on switching cost will help you keep your options open for subsequent switch. While these are well known concepts for the B2B markets the B2C markets is where customers get beaten pretty badly. And particularly, when the market is in early phase of development.

Lets talk about the satellite TV market. The equipment prices are almost free in most cases or there is significant competition to keep it low. But every time there is a new channel that comes up satellite TV companies find innovative means of pricing those so that people keep buying additional packages or what in the scheme is called top up plans.

Similarly, cell phones market was fairly in the same situation and it'll be completely cease to exist once we get number portability in India. Although economic switching cost in cell phone is fairly low the inconvenience in changing the numbers is fairly hard. However, multi-SIM phones are a good options to address some of the woos there but not a complete solution though.