What is Optional Product Pricing?
Optional product pricing can help SaaS companies earn more money while charging less for their otherwise premium product. Want to know how this seemingly paradoxical model works and the benefits it can have on your product-led growth?
Read on to learn all that and more!
- Optional product pricing is a strategy where you sell your core product at a low cost and then encourage consumers to buy more accessories, features, or complementary products.
- The pricing strategy works by acquiring users with a base product priced low, expanding their lifetime value by upselling many features that provide added value and relying on your USPs to beat out competitors during the initial purchase decision.
- Optional product pricing differs from captive product pricing because the costly accessories or features aren’t necessary for the main product to function as advertised.
- Optional pricing drives revenue growth and sales volume for companies while reducing risk for customers by offering a more flexible subscription structure that can adapt to their use case.
- There are other pricing models you should consider using, such as penetration, captive, skimming, prestige, value-based, and competitive-based pricing.
What is the optional product pricing model?
The optional product pricing model is a strategy in which you sell the core product at a lower price to attract customers but charge a higher price for the add-ons (such as extra features or expanded capacities) that improve that main product.
How an optional product pricing strategy works
This is how the optional product pricing strategy works:
- Acquisition. You start by acquiring large numbers of customers by offering your core product at a low price point.
- Expansion. You increase the revenue that each user generates by upselling them on additional features or cross-selling them on complementary products.
- Value. Your product must offer features that create value for users either by solving specific problems or helping them complete their workflows more efficiently.
- USP. Reducing the price of your main product isn’t enough to land users so you’ll need to create a unique selling proposition that sets your product apart from its biggest competitors.
To learn how to effectively prioritize and highlight key features that meet customer preferences and generate significant value for your organization, make sure to join Krzysztof Szyszkiewicz in the upcoming Product Drive 2023“Product Packaging” session.
Optional product pricing vs. Captive product pricing
Optional product pricing and captive product pricing might seem like the exact same model.
However, there’s actually a key difference between the two. In the first model, a second purchase is optional since upsells/cross-sells are never mandatory and the additional features/products are purely supplemental.
Conversely, captive product pricing is a more aggressive approach in which the secondary product is actually required to get the main product to work as intended. This means users will have no choice but to purchase it as well (which is why the pricing model is referred to as “captive”).
Here are two examples:
- Smartphone cases. Purchasing a case improves your smartphone by increasing its durability, but your phone can still function as advertised without a case on. This makes the case an optional product.
- Printer ink. Printers can’t print documents unless they have adequate amounts of printer ink. Because the printer is incapable of functioning without printer ink, this makes printer ink cartridges a captive product that customers have no choice but to buy.
What are the benefits of offering optional products?
There are quite a few benefits to reap by offering optional products:
- Revenue growth. Optional product pricing can speed up your revenue growth by acquiring more customers at a lower price and then increasing their lifetime value (LTV) through account expansion opportunities.
- Sales volume. Giving customers the option to buy the core product first and then get additional features/products at a discounted price will increase your overall sales volume.
- Pay-as-you-go. The optional product pricing strategy is akin to a pay-as-you-go model where customers only pay for the features they need instead of needing to spend more upfront just to get features that they probably won’t use.
- Risk reduction. By lowering the barrier to entry, you’re also reducing the risk that a customer faces when buying your product. This will give them time to test out the product and experience the value it provides without having to make a big financial commitment (similar to how a free trial works).
What are the disadvantages of using an optional pricing strategy?
Of course, there are a couple of drawbacks to optional product pricing that you should be aware of too:
- Loss leaders. If you price your core product too low, then it could become a “loss leader” that brings in new customers but isn’t able to generate profit on its own. This isn’t uncommon in the SaaS industry but it could put undue strain on your financials, especially if you have a high burn rate.
- Customer confusion. Optional product pricing models could confuse customers if the messaging around inclusions isn’t crystal clear. This could lead to some prospects thinking that your core product lacks key features or other customers being upset that important features will cost them extra.
- Lower (base) LTV. Because the primary product is priced cheaper, the starting point for customer lifetime value will be lower. This means that if your upselling and cross-selling efforts fail, you could end up stuck with customers who aren’t generating much revenue for your company.
Common examples of optional product pricing model
Let’s explore some examples of optional product pricing that are used in different industries.
HubSpot sells users optional products in the form of add-ons for each plan. These include custom SSLs and increased limits for features like reporting, lists, teams, or API usage.
Offering optional pricing in this way ensures that users on the Starter tier won’t see $500 add-ons and vice versa.
Adobe has different prices for each of its products. It offers a basic version of Photoshop at just $9.99/month but also has a premium version with more features that costs $19.99/month. Adobe is also known for cross-selling products like Acrobat, Lightroom, Illustrator, Premiere Pro, After Effects, and more.
This lets customers purchase multiple products based on their specific use case instead of needing to shell out the full $54.99/month for Creative Cloud. Offering optional pricing for various solutions from the same company has helped Adobe increase sales and market value over the past few decades.
Casetify sells cases for smartphones (both Android and iOS) using optional pricing. Specifically, it uses the optional product pricing model by relying on accessory products like screen protectors, blue light filters, and phone straps.
The product’s accessories are featured prominently to boost sales of optional products.
Other pricing strategies for SaaS
While the optional product pricing approach certainly has benefits, it’s not the only pricing strategy you should consider.
Here are six more pricing models that SaaS businesses should check out if they’re trying to increase revenue (or the overall profit a company earns):
- Value-based pricing. Value-based pricing uses the (perceived) value of your product as the basis for setting its price point. Generally, you’ll want to offer more value than the amount you’re charging (aim for a 1:10 cost-value ratio if possible).
- Penetration pricing. Penetration pricing consists of reducing the full price of your product to get it below what other companies offer and capture as many users as possible within your target market. Once you have sufficient market penetration, you can switch to a more profitable pricing model.
- Competitive-based pricing. Competitive-based pricing involves heavily adjusting your price point in accordance with that of your most popular competitors. This could make it difficult to turn a profit since you’re pricing based on market averages rather than your operating costs.
- Captive pricing. Captive pricing is a strategy where you offer your basic product at a lower price and then charge extra for multiple products (that are necessary for the core solution to work) in order to increase revenue.
- Skimming pricing. Skimming pricing is an unorthodox model where you start at higher prices upon launching your product and then gradually lower it over time. This helps you capture power users with the highest-TLV power users and early adopters first then acquire budget-sensitive customers later.
- Prestige pricing. Prestige pricing (also known as premium pricing) is a strategy where you price your product higher than its competitors to give its positioning a sense of exclusivity and luxury. This extra cost becomes the main draw of your product and essentially turns it into a Veblen good.
The entire ethos behind optional product pricing is to personalize the customer experience both before and after the sale. If you’d also like to personalize the in-app experience through segmentation, analytics, and no-code flows, then it’s time to get your free Userpilot demo today!