Want to Raise Profitability Per Transaction…Lower Prices
Whenever I meet Chris, a studio executive friend of mine, I ask “how can price save the movie industry.” To which he grumpily responds, “you always ask me that question” and the conversation drifts onward. However the last time we had dinner, I mentioned that if he had an interesting story, I’d feature him in my forthcoming book. That got Chris thinking.
Prior to moving to Hollywood, Chris was the head of a national movie theater chain. As you can imagine, Monday nights are slow for cinemas. To boost sales, his theater chain declared Mondays to be “date night” and offered 2 for 1 admissions. As expected, attendance skyrocketed. But what’s interesting is that Chris noticed people were spending the money they had saved (from lower ticket prices) on refreshments that they probably would not have otherwise consumed. So not only was the theater filling otherwise empty seats, but they were also earning profits on high margin concession sales.
I had a similar experience just last night. Twice a year, Boston holds a “Restaurant Week.” Held during traditionally slow weeks, participating restaurants offer three course dinners for $33. Much to my surprise, Olives, one of Boston’s best restaurants, is participating this week. For less than the normal price of an entrée, I enjoyed an outstanding 3 course meal. What a great deal! In the midst of my joy, I found myself ordering upgraded extras (wine instead of beer, cappuccino instead of drip coffee). Surveying the jammed dining room, I noticed others similarly upgrading their dining experience on what otherwise would have been a staid Sunday evening.
What’s interesting is that in both of these cases, consumers aren’t “taking the discount and running.” Instead, they opt to spend some (or all) of their savings on upgrading their experience. Movie goers enjoyed concessions (these purchase were undoubtedly bolstered by the promotion being framed as a “date night” occasion). And in my case, I tasted an interesting Shiraz that I otherwise wouldn’t have tried.
So why don’t consumers just take the discount and run? University of Chicago economist Richard Thaler (who I’ve written about previously) has a theory I believe fits these interesting anomalies. Dick feels that consumers establish mental accounts for specific occasions. If someone saves money on an occasion, it’s hard to mentally transfer these savings to another “account” – so they spend it on the occasion. In my case at Olives, I had a mental account of spending $60 for dinner. So I translated the fact that I got three courses for $33 into having some “house money” to blow on profit laden extras instead of saving the money for another use.
Just to be clear, this idea of mental accounts is different than the concept of loss leaders. Loss leaders use a low price to entice people to come into the store and buy additional items that they need. Mental accounts posit that additional purchases are made because consumers have slotted a fixed amount for that occasion.
So…what mental accounting traps do you fall into?
