Rafi Mohammed

Should Cinemas Raise Prices for Oscar-Winning Movies?

Posted on February 22nd, 2012 (2 Comments)

Reprinted from the Harvard Business Review website.

This Sunday many of us will be watching the red carpet arrivals and cheering for our favorite actresses, actors, and films at the 84th annual Academy Awards. Winning an Oscar not only signals the high quality of a film, but also creates a marketing windfall. Given all of this newly-created value, it's fair for cinemas to consider raising ticket prices for Oscar-winning-or even Oscar-nominated films.

The industry could use the extra revenue. While the movie business is glamorous, it isn't a cash cow. Operating margins, for example, for Viacom's filmed entertainment division (which includes Paramount Pictures) and the Regal Entertainment Group (a large cinema chain) are 6% and 8% respectively. An extra buck or two of margin for select films would be meaningful to both studios and movie houses.

There's an argument that filmgoers are willing to pay more for new bells and whistles. Ticket prices for 3-D films, for instance, average 8% higher than their 2-D counterparts. Since winning an Oscar differentiates a film, there's rationale to charge more.

While I am a big proponent of setting prices to capture value, in this instance I'm wary of raising prices. Consumer sentiment regarding cinema prices is akin to a tinderbox waiting for the spark to flare up. Why? Consumers can easily calculate the premiums they are paying to enjoy the cinema experience. Instead of paying $11 per-person at the box office, they know that in a few months they'll be able to rent the DVD at Redbox for a buck or so. Similarly, they know that concession-priced popcorn, candy, and soda can be purchased for a fraction of the cost elsewhere. A $35 night at the movies can be replicated at home for $5 or so.

Sure, watching a movie at the cinema is a different — arguably better — experience compared to watching at home. What's unique about this scenario is that the prices of a good next-best alternative (watching at home) are so transparent — it's so much cheaper. A dollar or two premium at the box office could be the spark that ignites a "we are being taking advantage of" consumer backlash.

Instead of charging such an overt premium, studios and cinemas have another option. Given that movies often sell out on weekend nights, why not dynamically price movie tickets? Start with a base price and if a movie is close to selling out, charge more. The pitch to consumers is more appealing: "We know that you want to see your favorite movie on Saturday night. But given our limited capacity, our 8 PM showing is close to selling out. By using price to allocate scarce seats, you can still come at your preferred time period for a few dollars more. However, if you want to save money, come to the 6 PM or 10 PM showing."

Dynamic pricing seems fairer to consumers. The price increase is due to capacity constraints — they're not just charging more because they can — and lower priced options are available. This subtle difference in approach to increasing prices is especially important during this time when consumers are quick to vent via social media. Understandable explanations and choices are essential to successfully raising prices. This strategy — as opposed to singling out specific films — may be more beneficial to theaters and cinemas. Prices will be raised when a showing is close to selling out — which can occur for popular films as well as popular time slots (i.e., date nights). This captures the increased value of both the film and usage occasion.

So what do you think? Should cinemas charge more for Oscar winners? Does dynamically raising prices to keep seats available during popular times — instead of selling out at lower prices — seem fair? Do you think cinemas should lower prices on slower-selling films? I'd enjoy hearing your thoughts.

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Readers' Comments on This Blog Entry

From Jeffrey on February 22nd, 2012
For some reason I had a hard time leaving a comment on the HBR site. Why not price the seats like you would for other entertainment? Ideal seats in the center of the screen are more than those on the side or in the front rows. Then you know what you are buying and don't have to get there too early to reserve seats. I think there is a premium charge for the added value. Although I still like your idea of raising prices for scarcity based on time of day. Matinee times are not the end all for discounts, plus they never raise prices for ideal times.
From Jon Manning on March 2nd, 2012
Dynamic pricing in cinema will not happen again. Yes, it has been tried, about 10 years ago, at easyCinema in Milton Keynes, north of London. The reason that this multiplex didn't exist for too long is because the movie studios refused to supply easyCinema A-List films while it charged prices ranging from 50p when booked 4 weeks in advance, through to GBP5 for walk-up traffic.