Pricing Like It’s 1969
Pricing Like It’s 1969
Part 2 of a four-part series. Movie theaters must bring their pricing practices into the modern era.
The Shortcut:
Theater prices have effectively remained unchanged for several decades, despite persistently falling attendance and an entertainment landscape that has fundamentally shifted consumer behavior. But all is not lost! Exhibitors have a major tool at their disposal, and that tool is pricing.
Read Time: 17 minutes
Parts in the Series
Part 2: Pricing Like It’s 1969
Part 3: From Pixels to Popcorn
Part 4: Cementing Cinematic Synergies
Introduction
In Part 1 of the series, I walked you through the long-term secular decline of movie theater attendance, and the still difficult to justify decisions Exhibitors have made to not only not cut back on their theatrical footprint but to invest further over the last 40 years.
This has left the Big 3 (AMC, CineWorld, Cinemark) with balance sheets that are heavily over-levered and both rent and Opex costs that simply cannot be afforded, pre-pandemic and most certainly after.
I posited that Exhibitors need to cut their current theater ownership by 20-40% just to have a chance at longer-term survival, let alone having the capital from operating cash flows to make both upkeep and evolutionary changes to the theatrical product they offer.
In this piece, we’ll assume that Exhibitor CFOs are working through their cost-cutting strategies and wish to improve their monetization capabilities for present-level of theatrical demand. There is a lot of work to be done so let’s get into it.
Current State of Monetization
Looking at the inflation-adjusted numbers for the past 35 years, ticket prices have remained flat for effectively 20 years:
Because attendance has fallen while screens were continuously built, the monetization rate per screen fell 28% through 2019. Note that these include only admissions, not concessions, and as I’ll discuss shortly, concessions are hugely important to further develop for each Exhibitor.
But suffice to say that I would generally expect companies with declining customer counts to do whatever it takes to extract more surplus from its existing customer base - which has not been the case!
If we look back even further:
We can see that theatrical customer demand has fallen directly in line with total spending, such that inflation-adjusted annual ticket revenues per patron have fallen from $112 to $27.50. If we expand this out further, we can run a quick experiment on “seat utilization” using AMC’s data:
AMC has 1 million total seats across its US theaters
The most premium AMC in Los Angeles shows 4.23 movies per screen each day, so if we generalize this value, there are about 1.54B available seats to monetize per year in the US.
In 2022 they sold 141.38M tickets in the US.
This means that just 9.2% of available seats were monetized last year. Most of these unsold seats come from the difficult to fill slots - weekday matinees, for example - where most adults are working and therefore (largely but not entirely) unavailable to be monetized.
Even if we only included two screenings per seat each day - aligned with the post-dinner slots only, even on weekends - utilization is still just 19%. Is this better/worse than expected? Honestly I don’t know.
When I see 80-95% of my available product is left unsold, and when rents for the buildings housing those seats eat up 15-25% of my total sales each year, well, I want to find better ways to monetize.
With balance sheets not yet cleared and thus capital super tight, Exhibitors need to rapidly adjust their monetization models without significantly impacting their rapidly diminishing capital reserves. There are two hyper-obvious ways to accomplish this:
Optimizing the prices of one-off ticket purchases
Scaling subscriptions (and perhaps) loyalty programs (covered in Part 3)
Why Don’t Exhibitors Price Discriminate?
“[Uniform pricing] makes no sense, and I believe the entire industry should revisit it.” - Edgar Bronfin, Universal Pictures owner (1998)
Price discrimination, an unfortunate name for a powerful tool, is necessary for most businesses attempting to fill scarce, timely resources (like seats in a plane or in a theater), especially when there is a significant fixed cost base to monetize (as we covered extensively in Part 1).
Byrne Hobart just devoted a whole piece in his great Capital Gains newsletter on the topic, the basic premise of which is that price discrimination:
“subsidizes fixed-cost industries like airlines and ride-sharing [and theaters] by extracting every last penny from people who are willing to, or have no choice to, pay.”
Put differently - the same good can/should be priced differently to different consumers under different conditions. This is not solely a profit-making endeavor but is a tool, a “financial incentive,” to (a) encourage demand in the troughs and (b) capture demand surplus at the peaks.
When a film is cost equivalent at times of year when worse movies come out, why would I go when I have so many other entertainment options? Theaters can help incentivize me to come out with differentiated pricing and content. This specific form of price discrimination economists call “Rate Fencing”:
“Rate fences are designed to allow customers to segment themselves into appropriate rate categories based on their willingness to pay for their preferences”
Why is this so necessary? Well, given the persistently falling demand, it is incumbent on Exhibitors to actually attempt to maximize value from current demand, which they are shockingly not doing? Not when ticket prices have actually fallen 12% on an inflation-adjusted basis over the past 50 years:
Now to be fair, it’s not as if Exhibitors don’t use price discrimination at all:
The above screenshots represent the same showtimes and screen type for the same film on the same day, across two very different demographics: the Cinemark 20 in Merriam, KS versus my local Cinemark in Playa Vista (LA).
So Exhibitors do price discriminate a bit - across geographies - to directionally match household income distributions. There’s also slight price flexing for matinees versus prime time shows, but even this application is overly simplistic and logically inconsistent - why is there matinee pricing on the weekends, when demand is at its peak?!
More broadly, why is ticket pricing so uniformly consistent, especially for products with widely varying costs (budgets) and inherent levels of demand? With demand falling so precipitously, why haven’t theaters attempted to use every mechanism available to them?
AMC specifically cites its pricing department in its 10-K…but seemingly all they’ve come up with recently are:
Stubs A-List subscriptions
Discount Tuesdays
Somewhat surprisingly, Exhibitors used to be much more adventurous with their rate fencing endeavors. In Cheap Tuesdays and the Demand for Cinema, the researchers comment that, prior to the Paramount decree,
“variable pricing strategies were used with respect to films categorized by quality. This practice subsequently continued into the 1950s and 1960s where ‘event’ movies were often priced above other movies. Price variation between weekends and weekdays and by type of seat within an auditorium was also evident.”
And from Uniform Prices for Differentiated Goods:
“Uniform prices in their present form first appeared in the early 1970s. The first event movie that opened nationwide at regular admission prices was The Godfather in 1972. It is implausible that all exhibitors across the country decided individually to charge a regular price for The Godfather. Therefore, it seems reasonable to infer that Paramount, the producer–distributor of the movie, was at least somewhat involved in this pricing transition. Such intervention, if it occurred, was in violation of the Paramount decrees. The Godfather, however, set a new norm for event movies.”
Regardless of this history, there are really only three reasons why Exhibitors have not fully embraced this rather standard and well-tuned strategy. First is that their contracts with distributors may make this more difficult/untenable - I’ll return to this one in a bit. Second is that Exhibitors are just conservative by nature and prefer to keep things largely as they are.
It’s difficult to support this empirically, and given that a different ethos used to be the default…I’m not wholly convinced that conservatism is the major factor (though it may still contribute).
The final hypothesis is that this is the actual strategy; that exhibitors have effectively and uniformly adopted a “razors and blades” approach (what economists call “metering”), with the admissions ticket serving as the discounted initial purchase and in order to sell significantly more where the profits are, on concessions (the “blades” in this analogy).
At first blush this kind of makes sense - it’s a truism that theaters don’t really make money on the ticket and make all of their profits on concessions. Unfortunately this “truism” is laughably incorrect.
Looking solely at the US in 2022, a year in which AMC reported attendance 141.38M (effectively tickets sold), yields:
Average admissions ticket per patron of $11.62
Average concessions per patron of $7.47
With an 83% gross margin on concessions and 49.5% margin on admissions, this means the gross profits (removing COGS) break down as:
$6.20 for concessions
$5.75 for admissions
That is, just 52% of gross profits come from concessions. A (slim) majority, sure, but a far cry from the adage that “theaters don’t make money from tickets”. No, both tickets and concessions are profit drivers for Exhibitors, and as such, both should be price discriminated at a much higher rate in order to maximize returns.
It’s a bit confusing why this very obviously false narrative would persist, but it’s not the only point of confusion. Researchers question “why exhibitors employ…rudimentary forms of indirect price differentiation, while forgoing simple and potentially more profitable strategies of variable pricing”, expanding:
“[Exhibitors] decide which movies will be shown in particular show times. Thus, when the number of movies that play at a theater is larger than the number of screens in that theater, some movies run in less popular show times. Similarly, exhibitors’ decisions about how to allocate movies to screens constitute another form of indirect price differentiation, because in most multiplexes the auditoriums vary in their screen size, quality of sound systems, and seat condition.”
A different researcher offers a possible explanation for these inconsistencies:
“The theater chain may be engaging in a profitable metering price discrimination strategy, even though it is unaware of the strategy.”
Optimizing One-Off Ticket Pricing
“I’m in the restaurant business. Dinner is more profitable than lunch. But I drive enough at lunch in incremental profit to also be open for dinner. If you wanna be able to have theaters where we can make an investment in them, where people show up for a big spectacle, you need to accept lower profit margins on smaller films.” - Gary Marcus, CEO of Marcus Theaters
I’ve rattled on about why price discrimination is necessary, but how might it actually look in practice? Acknowledging that Exhibitors are already rate fencing theaters by location, there are four additional vectors that could or should be used to varying degrees:
Seat Pricing
Urgency Pricing
Temporal Pricing
Movie-Level Pricing
Seat Pricing
AMC recently announced its plans to start experimenting with rate fencing of seats. This approach is far from new, as it was prevalent until the 1970s then obsolesced because:
Theaters suddenly had a ton of excess capacity
They could not actively monitor who was in what seat
The former is still a major issue, though with modern software and the large-scale shift from “general admission” to “seat-level ticketing” the latter is not. The approach also isn’t completely illogical, as sports and concert venues use this to great effect.
The most sought after seats in a theater are always middle seats, which means they are always filled first, and by definition this means that seats further from the middle are typically the last to be filled (if at all). AMC is attempting to deal with this fact by pricing central seats higher and edge seats lower.
The issue here is twofold. First, movie theaters are not, in fact, architected like sports or concert venues, where different sight lines abound and where proximity to the action is highly correlated with desirability (and thus rate fencing).
Exhibitors like AMC have already invested a ton of capital ensuring that films are incredibly enjoyable from any seat - this is effectively why stadium seating was introduced - and they should continue with this approach.
Relative to concert or sports venues, it is a distinct selling point of a movie theater that all seats can be perceived as “equally good”. Not perfectly equal, mind you, but the delta between the best and worst seats at my local Cinemark is incredibly small relative to the delta between floor seats and the nosebleeds at the arena formerly known as Staples Center.
Second, what seat-level rate fencing actually accomplishes is forcing all patrons to go price hunting across seats, unnecessarily increasing the complexity of the booking decision for what are likely to be minimal returns.
Given the falling demand and sub-10% utilization rates, the last thing an exhibitor should want is potential patrons washing out because of seat-level cost perception frictions. I understand what AMC is attempting to do, but I think there’s a more elegant way to accomplish the goal, and that is with…
Urgency Pricing
If we accept that edge seats are the least desirable and thus last to be filled, Exhibitors should instead offer “last minute” offers to try and fill seats. Rather than the highly complex “every seat has a price” approach, this is straightforward (single discounted price) and clearly incentivizes lower demand seats that would otherwise go unsold.
Is there downside risk in conditioning customers to just wait until tickets are discounted? Sure. But there are two ways Exhibitors deal with this.
The first is more passive - most patrons will (likely) prefer the combination of better seats and certainty of not waiting until the last minute (especially when viewing in groups).
The second is more active - Exhibitors could/should couple last minute discounts with “early bird incentives”. That is, booking much earlier yields rewards to the patron (e.g., discounts on concessions, reward points for future tickets, etc), a behavior that’s well established across many other non-theater businesses.
Both of these use cases - “last minute” and “early bird” - are forms of price discrimination that leverage urgency to better align pricing with demand elasticity.
Temporal Pricing
Forecasting returns for individual films has always been fraught, but temporal patterns of demand are moderately predictable and thus key targets for rate fencing. Broadly speaking, there are three levels of temporal aggregation for Exhibitors to consider:
Seasonal
Weekly
Daily
Forecasting efficacy diminishes as the temporal unit shrinks, and as such, the effect sizes of price discrimination Exhibitors can expect should also shrink with the temporal unit. Starting then from the most macro unit - seasonal - demand consistently shows two major peaks and several smaller peaks throughout the year, corresponding to different holidays:
The above figure is obviously old but nonetheless illustrates annual patterns of demand that persist to this day. Distributors typically release their biggest movies at these times, so it’s possible that these peaks correspond only to the “event-worthiness” of the given film.
Researchers have found otherwise: “about two-thirds of this seasonal variation can be attributed to seasonal variation in demand, with the remaining driven by more attractive movies released in high-demand seasons.”
That is, seasonal variation itself is 2x as important as the films released, likely because these reflect the periods in which (a) consumers congregate together in highest concentrations and (b) group theater-going is reinforced over time by Distributors releasing their biggest movies in the same period. Needless to say, Exhibitors should flex the cost of tickets to match with these predictable (and relatively inelastic) patterns of demand!
Shifting down one temporal level, weekly moviegoing patterns are moderately predictable, as demand typically peaks in the roughly 30 hours between Friday and Saturday night, declines through Tuesday, then typically flips positive again Tuesday/Wednesday (as most new releases launch on Thursday evenings).
The size of these peaks and troughs is volatile, but the shape of these demand flows can be trusted and better rate fenced. Generally, peak demand from Friday to Sunday is 3.5x higher than on weekdays, and some Exhibitors have thus experimented with “Discount Tuesdays” to financially incentivize demand in the trough.
Cheap Tuesdays and the Demand for Cinema hypothesizes three potential impacts from Tuesday discounting:
Market expansion (new customers enter the market)
Market stealing (attracting customers away from a competitor)
Cannibalization (discounting customers that otherwise would have paid full price)
They ultimately find that “Discount Tuesdays” likely EXPAND the market by attracting more price-conscious (demand-elastic) customers, which both Exhibitors and Distributors have confirmed:
“Experimenting with pricing is great. We did it with 80 for Brady. It paid off for us. Every Tuesday night was the biggest day of the week at the box office. A certain part of the audience, especially the older that goes to the movies on Tuesday, wants a bargain.” Paramount CEO Brian Robbins
“We have our value Tuesday program that’s very important and drives different customers to theaters that we had lost.” Marcus Theaters CEO Gary Marcus
But the process shouldn’t stop there. The researchers further concluded: “Our elasticity estimates and a revenue-maximisation exercise are consistent with considerable over-pricing for a substantial selection of films.” Exhibitors should likely expand this model across ALL lower-demand days of the week by testing weekday passes, which:
“offer moviegoers packages of several tickets that they can use on weekdays but not during the first week in which a movie plays. Like matinees, weekday passes mostly target specific audiences with peculiar characteristics and sensitivities. Most moviegoers are not affected by these forms of price differentiation.”
Demand flows across annual and weekly periods are moderately predictable and should be rate fenced, but there’s another temporal vector that is similarly predictable, independent of what films are actually playing - time of day.
As I mentioned above, Exhibitors do a bit of this with matinee pricing, but in an overly simple and oddly executed fashion. Matinee prices every day of the week, at (mostly) the same price, grossly misrepresent actual price sensitivities. From Uniform Pricing:
“The major price differentiation scheme, low matinee rates, targets individuals who are flexible during the day and do not necessarily perceive moviegoing as an evening entertainment outlet. It is still unexplained why exhibitors offer matinee rates on weekends and holidays, when the demand for movies is likely to be less elastic than it is on regular weekdays.”
This means of course that prices should remain elevated (but not uniform) in the Friday-Sunday peak, but also that prices should be highly flexible and (in most cases) far far lower during periods of near-0% seat utilization.
Because most demand cannot actually attend the movies during the day, super low prices are a major incentive to drive at least some return for seats that otherwise will yield nothing.
Movie-Level Pricing
The final and most (unnecessarily) controversial piece of price discrimination is altering prices for each film. There are two primary ways to accomplish this:
Time since release
Movie Popularity
The first is simple - films that have been in theaters longer should cost less than newly-released films, matching the typical demand curve following a release:
Pricing based on popularity is more complex and likely the one most likely to rankle, well, everyone. To be clear, I am not suggesting here that every one of the 750+ films released each year is priced independently. The contractual complexity here is astronomical and unnecessary. No, what I’m offering is that films ultimately be classified into, say, three different buckets:
Blockbusters
Majors
Indies/Docs
These roughly align with production budgets, but in a step-wise versus continuous fashion, and research has shown that “production costs and gross box-office revenues [are] strongly correlated, with simple correlation coefficients of 0.5–0.7”.
While there certainly would be haggling between Distributor and Exhibitor about which bucket a given film may fall into (and thus how much flexibility the Exhibitor will have in pricing), there should be no quibbling that such a rate fence is necessary and far overdue.
There is simply no equivalent in other industries for pricing equivalence between products with 50x deltas in product costs. Further, film budgets (this “product cost”) roughly, directionally align with potential demand. That is, demand for a blockbuster, especially opening weekend, is largely price inelastic and should set the peak of ticket pricing. Indies and docs, though I love them, are niche products and highly price elastic.
Framing
One additional principle to offer here is not about the price discrimination itself but about the framing of such pricing decisions.
“The framing effect suggests that people’s choices are contingent on whether the problem is framed positively (in terms of gains) versus negatively (in terms of losses)” Kahneman & Tversky (1981):
Translated into non-psychologist speak, the idea is simple: imagine that a movie ticket will end up costing you $10, but is framed in two different ways:
A discount from $12 to $10
A premium from $8 to $10
The end price is the same, but most customers will look favorably at the discount and unfavorably at the premium. Applied against the rate fencing factors that I just detailed, Exhibitors should effectively “waterfall” their pricing changes, starting from the most premium tickets, then cascading prices to lower and lower demand tickets such that customers perceive them as being discounts rather than premiums, even if the price is the same.
Conclusions
I’ve presented each of these rate fencing items independently, but in practice Exhibitors must build systems that tame the combinatorial complexity created by price discriminating across these four macro factors.
Price discrimination is no longer a nice to have but an absolutely essential ingredient for Exhibitors to maximize the value of current moviegoing demand using a la carte pricing, providing significant improvements along two different strands:
ARPU Growth: Improving total monetization for current demand by better matching price to elasticity.
Customer Growth: Increasing total demand, specifically from the more price conscious customer segments.
In the next piece in the series, we’ll move on from financing and monetization and directly take on the current (poor) state of the theatrical product with which consumers interact today.