In March of 2012, Justin Thompson, a 20-year-old security technician from Livonia, Michigan, decided to go to the movies.
Inside, he encountered an atrocity we’re all familiar with: the movie theater concessions stand, with its $8 popcorn, $6 sodas, $5 candy bars.
Left with no alternative, Thompson indignantly bought a treat at an 800% markup.
It's interesting to think about why popcorn is priced so high. In my ECONS101 class, when we cover pricing strategy, we talk about firms making strategic pricing decisions where they may not be profit maximising on one product, but that enables them to maximise profits from other products they sell. The obvious example of this is loss-leading, a relatively common practice at supermarkets for example. Supermarkets sell some of their products at a loss, in order to encourage more shoppers into the store, with the goal of getting those shoppers to buy other products that the supermarket can profit from. It seems that movie theatres are engaging in something similar:
When a theater wants to show a film, it must agree to pay the distributor a percentage of all ticket sales. This percentage is higher during the first few weeks of a film and decreases over time, but generally averages out to ~70%.
So, if a theater sells a movie ticket for $9, its cut is only $2.70 — and that’s without accounting for other expenses.
Theater owners could price tickets higher, but it wouldn’t do them much good since 70% of any increase goes straight to the studios. Instead, they think of movies as a loss leader: their primary goal is to get as many people through their doors as possible, even if it means breaking even (or losing money) on the price of admission...
Unlike tickets, concession sales are not shared: theaters keep 100% of the revenue they generate. And this revenue generates much higher profits.
The Hustle looked through annual reports (2015-2018) from two leading movie chains (AMC and Cinemark) and found that concessions account for ~30% of total gross revenue, yet make up 45-50% of gross profits.
So, having priced the tickets low in order to get people to go to the movies (although, I leave you to judge whether the tickets are actually priced 'low' or not!), the movie theatre hopes to make profits from the concessions. The most interesting part of the article is this bit on the markups:
Why are the markups highest for popcorn (788%), and lowest for candy (313%)? My ECONS101 class should know the answer - popcorn must have the least elastic demand. That is, moviegoers are less sensitive to an increase in the price of popcorn than they are to an increase in the price of soda or candy.
The reason for that probably comes down to the availability of substitutes. Movie theatres have rules against you taking your own food in from outside (i.e. food not purchased at their concession stand). It's fairly easy to subvert this by bringing things in your handbag or pocket though. However, that works well only for small items (candy), and less so for drinks. Popcorn, on the other hand, you want to consume while it's hot, and it's a lot bulkier, so more difficult to conceal. So, substitutes are most available for candy, and least available for popcorn. The result is that the optimal markup is highest for popcorn, and lowest for candy. And that explains the $8 bucket of popcorn.
[HT: Marginal Revolution]
Read more:
No comments:
Post a Comment