Captive demand and lock-in effects

Much pricing ignores that customers are often not free to switch. Lock-in creates pricing room that does not show up in standard models but is crucial for the right pricing strategy.

Classical pricing theory assumes the consumer can freely choose between alternatives. In reality, that is often not the case. Switching costs — economic, psychological, practical — create lock-in that fundamentally changes price dynamics. A locked-in customer has different price sensitivity than a free customer.

Captive demand is the share of demand that cannot realistically switch. It may be due to contracts, technical incompatibility, habit, or because the switching cost exceeds the price saving. Understanding how large the captive share is and where the boundary lies is central to pricing — but it is rarely measured.

Reflect measures switching propensity and lock-in as an integrated part of price analysis. We segment the market into free and locked-in customers and model price response separately for each segment. That gives a far more nuanced picture than an average price elasticity.

Key takeaways

• Switching costs create lock-in that changes price dynamics
• Captive demand has fundamentally different price sensitivity
• Contracts, habit and technical incompatibility drive lock-in
• Average price elasticity hides segment differences
• Free and locked-in customers must be modeled separately

Example

A telecom operator used the same pricing model for new and existing customers. Analysis showed that existing customers (18 months left on contract) tolerated a 15% price increase without churn, while new customers reacted already at 5%. Separate pricing increased ARPU by 8% without increasing customer loss.

Related articles

Discuss your pricing with us