A light-hearted look at Cinema Pricing

A couple of weeks ago, an article in the New York Times discussed the possibility of changes in cinema admission pricing, where the cinemas move to a variable, airline -type pricing model (which is, by the way, the model increasingly being adopted by railway companies such as GNER & Virgin Trains in the UK, and most recently Amtrak on its high speed, Acela services between Boston, New York and Washington).

Anyway you can find the New York Times article on variable pricing in cinemas here (may require subscription).

Cinema admission pricing is a deeply flawed model. Prices are negotiated between the distributor and the box office, and rarely, if ever, reflect differences in the movie itself, the season, the day of the week or the stage of the movie's screen life. That's why, several years ago, the average occupancy in a UK cinema was a mere 20%.

Putting these (often) predictable drivers of pricing to one side, Jeremy Dauber at, of all places, the Christian Science Monitor, has come up with 10 rules for the variable pricing of movie tickets.....and it is worth a read. 

Value-Based Pricing & Google

Value-based pricing is all about aligning what customers get with what they pay. In the case of Google’s cost-per-click advertising, you only pay if your ad gets clicked on. That’s also when Google earns revenue. So there is an alignment of objectives: the advertiser wants clicks and Google wants revenue.

By the way, value-based pricing is not a new pricing paradigm or methodology. Oscar Wilde famously said that:

“A cynic is a person who knows the price of everything and the value of nothing”

Adam Smith also talked about value as early as page 24 of his 1776 book “The Wealth of Nations”:

“The word value…has two different meanings….sometimes [it] expresses the utility
of some particular object, and sometimes the power of purchasing other goods
which the possession of that object conveys. The one may be called “value in
use” the other “value in exchange”

Anyway, about 11 months ago, I started experimenting with Google’s Cost-per-Click advertising model. I paid my $A10 set-up fee, and over the last 11 months, I’ve been running campaigns using various pricing-related keywords.

I have now received my first charge for the clicks I have received over the last 11 months, and I am pleased to say I have only provided Google with $A3.10 in revenue.

This obviously prompted me to consider whether my campaigns on Google is really worth the trouble and effort. And I recalled some interesting eye-tracking findings I read recently. You can read the stories here and here.

And as you can see from this image, the best place to be in the Google search results is not right-of-screen where their ad-sense listings appear, but in the organic search results.

Now….should I continue with my cost-per-click advertising? Hmmmmm. 

Spare Parts Pricing

• I recently received an email from a friend of mine in the UK (who has a very good website by the way). He'd recently read that a replacement headlight bulb for his recently acquired Audi A2 can cost as much as GBP 66, yet the cost of the bulb is only about GBP 4.
  
  Spare parts pricing is extremely different from the pricing of the products they go with. Here are some of the reasons why:
  
  Spare parts typically have a more complex mix of channels & intermediaries (such as distributors, dealers, wholesalers and consumers)
  
  Spare parts and accessories have different price elasticities (compare the cost of the part vs the cost of downtime )
  
  Spare parts and accessories have different inventory requirements (there are typically 20 times more SKU’s for spare parts compared to the products manufactured)
  
  Spare parts can have a significantly longer or different life cycles. There may be little or no price sensitivity during the warranty period, the lower priced, generic substitutes become popular in the post-warranty period, as repairs & parts cost more than the original good. Then, towards the end of the Product Life Cycle, some parts become coveted, hard to find & can therefore command a premium
  
  If you are in the spare parts business, they can become a ‘gold mine’, but you need to carefully consider the carrying cost of such inventory.
  

Need training in Pricing?

Need training in pricing, or a refresher course on the latest developments in the field?

I will be running a one day pricing workshop in Sydney in May, following a two day pricing workshop being run by Liquid Learning.

You can find further details of the conference and the workshop here, or alternatively, email me for further information.

Who else is unbundling?

I recently commented about the trend toward unbundling, which is particularly widespread in the aviation industry at the moment.

The New York Times recently ran this story (may require subscription) on how car rental companies are now joining the trend. It talks about, amongst other practices, "holding [car rental] customers responsible for "any and all" loss or damage to a rental car resulting from natural disasters", as well as abreviating the grace period for returns from 1 hour to 30 mins.

There is little doubt that this will cause a few headaches for travel-related websites. In 2004, a survey by Travelocity found that customers at a major US airport car rental location were paying, on average, 24.4% more (in taxes and surcharges) than the price they had been quoted when booking a rental car.

As a result, the major travel website were moving towards a concept they called "total pricing". Travelocity would guarantee their quotes would be within 1% of the final price, Orbitz were promising a perfect match and Expedia were heading in the same direction.

The unbundling trend is hardly likely to be good news for such websites.

The Father of Low Cost Airlines

Sir Freddie Laker, perhaps the pioneer of low cost air travel so popular today, passed away in Miami yesterday, 9th February.

For the younger generation who think people like Michael O'Leary (Ryanair) and Stelios Haji-Iannou (easyJet, and my former boss) are the pioneers of low cost travel, you can read obituaries on Sir Freddie from the BBC, The Daily Telegraph and CNN here. 

Ni Hau Ma

You may recall that Disneyland Hong Kong opened its gates in the second half of last year. Not only was the theme park going to appeal to the people of Hong Kong, but also to the hundreds of thousands of increasingly affluent Chinese mainlanders on the other side of the New Territories.

As the New York Times recently reported (may require subscription), the Chinese Year of the Dog started with a bit of a growl at Disneyland Hong Kong. The park had been selling discounted one-day tickets, but their use on certain "special days" was blocked out. The Hong Kong Chinese celebrate the Chinese Lunar New Year over four days, but mainlanders enjoy a week of festivities.

Consequently, the park was inundated for three days with visitors from the mainland, forcing guards to close the gates, as well as halt sales on the Internet.

What should they have done? Several years ago I was in a similar situation: responsible for pricing a new and innovative service, the demand for which was totally unpredictable on an occasion such as this. Should we increase prices? Should we decrease them? In the end, we left prices unchanged for the occasion, conducted a post-mortem analysis of how our demand had been affected on the day, and made sure we adjusted our pricing appropriately when next such a special event or occasion occurred. 

Airlines Continue to Unbundle

Remember the days when an airline ticket was an airline ticket? It included travel for you and your luggage from your origin to your destination, a drink and a meal during the flight, perhaps even a movie or an episode of Mr Bean on a short hop?

How times have changed. Low cost airlines have unbundled the airline ticket described in the forgoing paragraph. Sure your fare still gets you from your origin to your destination, but what about that meal and drink? You’ll have to pay for that – no longer included in the ticket price. And the movie or that episode of Mr Bean? Well you’ve heard of pay-per-view, haven’t you?

Now the low cost airlines are unbundling your luggage from the ticket price. Flybe, a regional UK low cost airline started the trend a couple of weeks ago, and last week, Ryanair announced that it will start charging passengers to check in their baggage from 16th March 2006 (aka price signalling, to see if other low cost airlines will follow suit).

Flybe, is reported as saying it will charge £4.00 per check item, discounted to £2.00 if pre-booked, while reducing its fares by £1.00. It is also increasing cabin baggage allowances from 5kg to 10kg, and check baggage to 25kgs (probably from 20kg?).

Ryanair is reported to be “planning” to lower fares by £2.50 on the same day it starts charging £2.50 to check in a bag. According to Ryanair, 50% of its passengers travel with one piece of baggage and will therefore be unaffected. Overall, the change will be revenue-neutral for the airline.

But low cost airlines appeal to price sensitive passengers. So expect to see more cabin baggage being crushed into overhead lockers and under seats by passengers seeking to pinch every penny they can (especially on Flybe!).

Michael O’Leary (Ryanair’s CEO) has already given away £1 and free tickets (passengers still had to pay taxes and fees), and is on record as saying he believes it is possible for airlines to pay passengers to fly (how many other forms of public transport can you name that pay passengers to travel?). Of course, the way that model is evolving, passengers will still be paying for in-flight entertainment, food and drink, luggage, and anything else that can be monetised. My bet is that it won’t be too long before they monetise the use of the toilets.

Retail Round-Up

The latest edition of The Bulletin (31st Jan 2006, pp20-21) carries a story “Never Ending Store Spree”, which includes a very interesting calendar (shown here).

The article talks about how, as soon as Christmas was out of the way, retailers began stocking Easter Eggs and the like. It also goes on to talk about the rest of the year, and as you will notice from the calendar, there are year-round promotional initiatives planned for all but about three months of 2006.

Such a calendar is bound to get pinned onto kitchen fridges around the country and help condition price sensitive shoppers about the best time to make their planned purchases.

Conditioning shoppers in this way does not maximise revenue. Sure the products on sale/promotion drive foot-fall and act as loss leaders. But the initiatives also ensure that shoppers only buy when prices are at their lowest, and they will hold off making their purchases until such sales or promotions start. Other dangers associated with sales and discounting strategies include:

• Customers’ references prices are lowered;
• Subsequent promotions are not viewed as a "fair deal", making it difficult for retailers to raise prices in the future;
• A return to 'normal' prices starts to look like a price increase to the consumer;
• Reducing prices in anticipation of covering the lost revenue with additional volumes is a flawed strategy, and;

In a typical S&P1,500 company, volumes would have to rise by 18.7% to offset the impact of a 5% price cut.

It is rumoured that one particular retailer has high-profile sales every six weeks or so, because if they don’t there are no customers in their stores.

Another retailing-related story (“Wal-Mart, The Record Label” in the Financial Times, 31st January 2006, p9) also caught my eye recently. I will quote one paragraph in its entirety:

“John Fleming, Wal-Mart’s head of marketing, told analysts last year that they
should expect to see the retailer deepening its relationship with the music
industry, as it pursues an effort to broaden its customer base and to increase
sales of higher-margin goods, including clothes and electronics”

Could this be the start of a shift in strategy for Wal-Mart: a departure from their mantra of Always Low Prices. Always? Given that Wal-Mart is a company with the power to change not only its buyers share price but also the rate of inflation in the USA, this might just be something to watch.

Pricing In the Middle East

I've just returned from Dubai in the United Arab Emirates, where I conducted a three day pricing workshop, my first in the Middle East.

Here are a couple of interesting facts I learned about Dubai along the way:

(a) Dubai, according to the UN, is the fastest growing city in the world;
(b) Water cost 2 dirham a litre in Dubai, Petrol costs 1 dirham, and;
(c) the cheapest room at the Baj al Arab hotel (shown opposite) is $US2,000 a night.

Thank you to all those delegates who attended the workshop.