Disclaimer: This post is based on a simple observation and a basic idea. There's a high probability that this disclaimer will actually be longer than the following post. And yeah, my heartfelt thanks to Allout.
A fundamental method of pricing is known as captive pricing. Simply put, captive pricing is a method wherein the companion product is priced low and supplies are priced high. For example, Mach 3 sells its razor (plus 1 blade) at Rs. 99/- to the first time buyer while a single blade alone costs Rs.82/-. Essentially, the initial low (potentially loss making) price of the razor stimulates future sales of blades (which provide a high margin).
Yesterday, the ever increasing threat from mosquitoes forced me to borrow an Allout mosquito repellent from a friend. Allout is a typical example of captive pricing - for a first time buyer, the machine is given practically for free. The idea is to make profits by future sales of refills. However, this was a unique case (or at least a first for me). What I believed to be an Allout-kit turned out to be an Allout machine with a Mortein refill. If I were allout, I would dig a hole and bury myself in it and if I were mortein, I'll simply stop producing machines and reduce the selling price of my refills.
No prizes for guessing the lesson from this story then: Captive price your product only if you can be the only beneficiary from future supplies to the product. In the story above, Allout could've (and should) patent the design and dimensions of its machine to prevent loss of future sales to scavengers. However, in businesses where products are captive priced and service the main revenue generator, this can be a much bigger problem. How do you deal with it? The solution isn't very straight-forward...happy thinking. :)
A fundamental method of pricing is known as captive pricing. Simply put, captive pricing is a method wherein the companion product is priced low and supplies are priced high. For example, Mach 3 sells its razor (plus 1 blade) at Rs. 99/- to the first time buyer while a single blade alone costs Rs.82/-. Essentially, the initial low (potentially loss making) price of the razor stimulates future sales of blades (which provide a high margin).
Yesterday, the ever increasing threat from mosquitoes forced me to borrow an Allout mosquito repellent from a friend. Allout is a typical example of captive pricing - for a first time buyer, the machine is given practically for free. The idea is to make profits by future sales of refills. However, this was a unique case (or at least a first for me). What I believed to be an Allout-kit turned out to be an Allout machine with a Mortein refill. If I were allout, I would dig a hole and bury myself in it and if I were mortein, I'll simply stop producing machines and reduce the selling price of my refills.
No prizes for guessing the lesson from this story then: Captive price your product only if you can be the only beneficiary from future supplies to the product. In the story above, Allout could've (and should) patent the design and dimensions of its machine to prevent loss of future sales to scavengers. However, in businesses where products are captive priced and service the main revenue generator, this can be a much bigger problem. How do you deal with it? The solution isn't very straight-forward...happy thinking. :)
