Monday, July 15, 2013

The State of Movie Theater Pricing

Would You Like a Movie with your Popcorn and Drink?

By Kirsten Snyder - Director, Integrated Insight

After working in revenue management for airlines, the industry that fathered the concept of demand based pricing, I am amazed to see other industries with perishable products that charge the same price day in and day out with little variation.  So I have been scratching my head for awhile when I look at movie theater pricing.  Why does such a huge money making industry rely on popcorn and soda to generate the majority of the theater revenue?  They offer matinee pricing, senior discounts, different pricing for 3D and IMAX and even 3D IMAX, but what movie theaters have not done is use customer demand to set pricing and in turn use pricing to influence customer demand.

A recent article on called “Should we REALLY expect  $50 movie tickets?  Probably” specifically discusses how Regal and Paramount bundled several products to create a $50 mega ticket.  This in itself is an interesting concept, especially to counter an apparent industry challenge of declining home video sales.  However, I found Steven Spielberg’s perspective on theater pricing to be the most interesting.  He believes that movie pricing will begin to move toward a demand based model and I agree.  Likely a significant shift to get from current state to future state, including more collaboration between theaters and studios, but I think it is inevitable.

Think about the factors considered when contemplating a night out at the movies - what movie is playing and interest in that movie, what time it is playing and where it is playing.   As the theater owner, if you know the 7pm showing  of World War Z on the Saturday of opening weekend is going to be the highest demanded time and movie, why would that cost the same as the Monday evening showing of Iron Man 3 that has been out for 2 months?  A demand based pricing strategy could actually spread demand and enable theaters to “right size.”

So, why aren’t theaters following the same path as airlines, hotels, sporting events, concert promoters, and many more?  I would suspect several reasons, with studio contracts and fear of lost business high on that list.  Theaters have a tiered revenue sharing structure in which the studio receives a higher share of the revenue closer to release date and less revenue the longer the movie has been out.  In one instance of a very popular movie opening, the studio took 100% of the ticket revenue and the theater got nothing for the first week.  With this type of tiered revenue structure, theater owners may not think it is worth it to implement a seemingly more complicated pricing structure, especially if there is a risk of volume loss. 

To solve this studio favored revenue structure, the writer of the article “Economics Of The Movie Theater – Where The Money Goes And Why It Costs Us So Much” believes that the theaters need to collectively stand up to the studios to negotiate a better revenue sharing model.  Perhaps a “collective bargaining” of sorts would make it easier to renegotiate studio contracts, while at the same time continuing to offer an even playing field for the theaters.

However, even if a new deal is negotiated with the studios, most theaters are a commodity, offering virtually the same product.  Without differentiated product, the theaters are really competing on price, which is a losing proposition.  Given they have been doing this for years, theater owners may be wary to step out and change prices due to the risk of lost business.  Investing in differentiated product and segmentation can help continue to drive demand regardless of higher prices, while also upselling guests into higher yielding pricing -more to come on those topics.

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