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 ew.com 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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