The price saga continues...Media sensationalizes cinema profit margins

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Did you see it too? CNN kicked off the month of February with a report on “America’s Biggest Ripoffs.” The report was online at CNNmoney.com and also broadcast on the cable network. Movie theatre popcorn was the lead-in to the segment, which blared, “Movie concession operators make a 900% profit margin from popcorn!!”

The report was one-sided and very slanted to sensationalize the “economic crimes” against the American consumer. But it did raise the question of concession pricing yet again.

It is my understanding that the human body can survive for two hours without consuming any food or water. So let’s just put it out there right up front that no one is forced to buy anything in a movie theatre. To see a movie, you only have to purchase a ticket. It is a choice to purchase from the concession stand. Granted, we have chosen to prevent any outside food and beverage to be brought in, but this is not uncommon and is accepted practice at most entertainment venues. I think the true issue is perceived value.

The public is capable of making comparisons, especially with pricing. Therefore, value must be perceived by the consumer in order to “buy in” to an offering. There is value at the concession stand. There is value in being able to walk into a movie theatre and order great food and snacks on the premises without preparing it yourself, carrying it yourself, or making sure that the product is fresh. The concession operation provides this service.
To many people, the simple nature of this offer is of great value and is paid for with little regard for the exact price. They are willing to buy, period. To other people, there is a greater limit to the amount that this service is worth. If a combination of popcorn and soda and candy is considered to be too high, or really is out of their budget, then they don’t buy.

The fact that there are people who will buy concession products in a consistent manner is very beneficial to the consumer. In May 2008, Wesley Hartmann, associate professor of marketing at the Stanford Graduate School of Business, and Ricard Gil, assistant professor in economics at the University of California, Santa Cruz, determined that pricing concessions on the high side in relation to admission tickets makes sense. By putting a premium on the secondary product offering, concessions, theatre operators are able to offer the primary product for less money and attract a much wider audience. Thus they create more customers in general and profit more from those customers who do place a premium value on the concession service.

Hartmann and Gil presented their findings in their paper titled “Why Does Popcorn Cost So Much at the Movies? An Empirical Analysis of Metering Price Discrimination.” It is a microeconomic study of the profitable price discrimination strategy often referred to as “metering price discrimination.” Concessions were found to be purchased in greater amounts by customers that place greater value on attending the theatre. In other words, the decision by exhibitors to shift their margins from movies to concessions allows them to increase their attendance and potential customer market, both before and after the ticket sale. The benefit to the consumer is that the price for the primary product, the ticket, remains relatively low.

This economic explanation for concession sales was not fully presented in CNN’s report. Neither was the high cost of hotel mini-bar stock and management, only the 1300% margin from the item cost. Why would it be? It only serves to reduce the shock value of the report, something the media has come to depend on, which is a different topic altogether. But the reason it matters is perceived value. Shouting to the public “You are getting robbed!” is not good for our business. This was part of my theme in my previous article about movie theatre candy being sold at Walgreen’s for one dollar a box; these things can make the most diehard of concession customers question their own behavior.

The challenge for the concession stand is to present an offering of perceived value to the loyal concession consumer and entice some of the uncommitted to buy food and drinks on premise. This is the real question of price, not what CNN or anyone else would like to sensationalize about the price or nutritional content of our products. What is the right price point, for the right size, for the right product mix that maximizes our return on investment and keeps our per-capita income high?

Unique product offerings, fresh quality products, and film-related marketing are what keep consumers coming to the concession stand. Providing these at a price that is not perceived as exorbitant or unfair is critical to revenue and profitability. Some of the answers to this have been different price levels for different times, different sizes, and different theatres. Others offer combinations with price discounts and coupons with purchases and points with reward programs.

Do we as an industry believe that concession prices have reached a threshold? Has per-capita income suffered from continued annual price increases? Do consumers pay substantially more for concessions at the movie theatre than at comparable entertainment venues? These are the right questions for us to be analyzing on a market-by-market basis to ensure that we are striking the balance between serving our customers and running profitable businesses. While outsiders may enjoy dramatizing the price level, it is nonetheless a serious question that we must continually examine.

Please send any comments to Anita Watts at anitaw@reactornet.com.