Episode #0112 - Can pricing save the cinema and movie theatre industry

Pricing College Podcast

Oct 7 2022 • 24 mins

[00:00:00] Aidan: Hello and welcome to another edition of Pricing College with your host Aidan Campbell

[00:00:06] Joanna: and Joanna Wells

[00:00:07] Aidan: Often at Pricing College, we find new ways to show that we live in the past. And so today we are going to talk about cinemas, cinema pricing, and I predict somebody will say movies are not as good as they were in the old days.

[00:00:21] So I'll let Joanna kick-off .

[00:00:24] Joanna: I think we we're talking about cinema pricing, partly as response to that Bruce Springsteen, dynamic pricing scenario that occurred a few weeks ago. I'm sure we discussed it in a podcast few weeks ago, but it's been throughout the press and, you know, it reminded us of, you know, back a few years ago, when cinemas were sort of, I mean, struggling with their business model, less people going, demand for cinema and movies going down, rising of Netflix, all that sort of stuff. But, so they were thinking about, you know, how can we make more money and more margin as a cinema? What new pricing methods could we use?

[00:01:03] And they're really toying with the idea of dynamic pricing. So yeah, when I look at that now, that strategy and you think, Oh, well, it seems to be working in the ticket industry for other entertainments. Why is networking so well for cinemas? Well, partly, I mean, through the pandemic, you know, it's been very difficult for, you know, cinema to even test new pricing methods like dynamic pricing, because simply people weren't going out or allowed to go to the cinema for a long time.

[00:01:37] And still, you know, there's that, that knock on effect, on demand levels, you can see they're dropping. Very few people still going. Before we go onto that, let's think about how cinemas really do make money? How are cinemas still open today, considering very few people go?

[00:01:52] Well, the sales model really is based around the distributors really funding a lot of cinemas. Cinemas pretty much give way about 20. Well, let's say 80% of ticket sales in the first two weeks to distributors for movies. And after that point, they pretty much keep all their sales. So for them movies like Avatar are great because what they can do, they can bring out the old avatar movie, the first one.

[00:02:22] Because they sort of own the rights to that one. Now they don't have to pay the distributors anymore. Well, they don't own the rights of it as well. They've got, they can keep all of the sales revenue from that in preparation and then move on to, you know, forward forecasting for Avatar two.

[00:02:41] And that's a great way for the cinemas to make money, at which point they could potentially use dynamic pricing, you know, as they build demand for that movie, however, the customer experience and demand levels have to be optimised to be able to do that, and I really don't [00:03:00] think at this point cinemas will be able to test dynamic pricing. Hence, it's not really been tested.

[00:03:08] Aidan: Yeah, like I find there's a lot of interesting pricing things we can look at with cinemas. You know, I think there's been an arms race, at least in Australia with the quality of the cinemas themselves, like the actual rooms, the buildings, not so much the locations because they've probably moved away from of market, red carpet style, CBD areas to, you know, malls on the edge in suburban malls.

[00:03:31] But one thing that, you know, we've seen in this Australia Gold class, I don't think there might even be a platinum class, almost like very leather beds. Fully flat seats. It's almost like the peripheral has really invested in that. And usually that's something we really push with or we promote here in Pricing College, talking about the value adds that they offer.

[00:03:51] You know, you're gonna have drinks brought to your seat. Some cinemas will have buttons you can press and a waiter will come up and bring you stuff, which all sounds very luxurious. But, you know, [00:04:00] I think almost can we argue that, And I think I'll be the first one to say that, you know, maybe the core of what they're offering has decreased, you know, the quality of movies, I think a lot of people admit that it isn't as good as it used to be.

[00:04:11] I think the only movies that are selling out now, there seem to be disney style movies or the never ending stream of Marvel, and DC comic sort of action hero movies. But I think cinema in general, you know, the normal cinema goers, I think that market has decreased.

[00:04:26] And to some extent you have to argue that the core value of the cinema, which is the actual movies, you know, there is a real risk there, a real issue there with what's being produced. Obviously the cinema owners don't have an influence on that. So that's the first thing I'll add. Second thing, I just think, we often talk on this podcast about, you know, revenue management and capacity constrained, like, and to a large extent, cinemas are capacity constrained also, there are number of seats watching a screen, but like, I cannot remember ever being in a cinema in the last 5, 6, 7 years and seeing a cinema full or even having difficulty in buying a ticket. So there's [00:05:00] clearly that revenue management aspect isn't been optimised. You know, and we're not arguing that you should be selling those tickets at 1 cent or two 10 cents, but, you know, maybe that is a question people should be asking.

[00:05:11] What is the revenue management model behind these screens? Look, I was at a movie maybe two weeks ago, midweek Thursday night, which used to be regarded as, you know, midweek shopping night. And I think we were the only people in the cinema, and it was potentially a 500 seat cinema.

[00:05:25] So you're really questioning the model there. Another thing I will add is, I think we'll get into a later on this podcast, but some things I'd like to look at are loyalty programs that they have that they try to get you into, you know, the rationale behind that. I'd also like to look at the geographic variation in pricing, where they charge you different to go to different locations.

[00:05:46] And I personally experienced that, which I find a little bit strange. You know, the actual differentiator is huge. And then the third one I think is, sometimes they try to sell you a subscription model whereby you can go infinite times for a flat fee, [00:06:00] which traditionally was in with students and maybe even later school students.

[00:06:04] So those are models that I think are interesting that maybe have they been fully developed and of course the classic of do movies, just, it's more of a conspiracy theory that I personally like the popcorn. Do cinemas favor bad movies in the teenagers because they eat more popcorn than old people. It's an interesting one.

[00:06:21] Joanna: Well, if they look at their sales model, yeah, they really do. That's where they make their profit is. It's on the concessions on the food. It's literally pure profit for them. And I think a while ago there was some price tests being done on dynamic revenue management, on the concessions as opposed to the tickets.

[00:06:38] People didn't like the dynamic pricing on the tickets so much, but they optimised by a few cents on the food, which is already profitable for them. Now I can see, you know, potentially their backtracked cinemas are backtracked from that and they're now utilising more, like bundles using tiered pricing to upsell to, [00:07:00] you know, the large popcorn, based on price, because there's very limited price difference.

[00:07:04] So why not get the larger version and the theater makes more money? That's one that we all know. In terms of that, I just wanted to circle back to the customer experience that we were touching on before. I'm sure, consultants have come into major cinema businesses and said like, really the number one thing to think about before you look at optimising price or testing different pricing methodology is to really work on your customer experience.

[00:07:31] Because that in term will enable you to utilise and test these different pricing models like subscription pricing. The problem is you're not driving enough traffic to the theater and that's feedback from the market has said because we don't enjoy the experience and Aidan touched a point a lot of the theaters got.

[00:07:52] Quite run down and there wasn't enough money being invested into the cinema, the room itself. Some [00:08:00] cinemas got these nice, lovely leather seats recliners, reducing the number of seats in the cinema, thus reducing potential for that capacity constraint idea through dynamic pricing.

[00:08:12] Other cinemas then thought, Well, let's not improve the cinema. Let's look at how we can implement dynamic pricing by potentially looking at when people buy their cinema tickets, if they buy it closer to the cinema. The movie date or time, then we'll charge more. People didn't like that.

[00:08:31] And then really all of those things, if they didn't really help boost the experience, it took it away from the experience. So thinking about customer experience, often cinemas. That do well. And I'm thinking very much like the petrol stations, gas stations, they do well not just cause of, you know, the product or what they're selling in the store. It's actually the site where they are, where they're situated. Are there restaurants nearby? Are there like entertainment late at [00:09:00] night? Aidan made the point of most of the cinemas that are doing well at the moment, it's because they're showing, movies for kids, but potentially if they built a customer experience for adults. And by thinking about, you know, what's around that cinema? Would that actually bring more adults into the cinema because you think, Oh, you know, I'm not just gonna get, you know, I'm not, it's not just a, you know, gonna watch a film cause I can just watch a film at home. I'm gonna, you know, have something to eat.

[00:09:30] I might, you know, have a nice like drink before I go in and not the drink in the cinema. Do you know the gold class membership in the cinema? Rarely see anybody really in there, you know, taking in a nice drink before they go in. People prefer to have a drink with the dinner outside, then come in.

[00:09:48] So maybe I'm thinking here and boosting, you know. The customer experience by thinking a little bit outside of the walls of the cinema. And you know, partnering with [00:10:00] entertainment businesses, you know, partnerships, loyalty cards that look at how connecting, building a community outside of it, you know, that sort of stuff.

[00:10:09] It just requires a bit more creative thinking. And then once that's done, once you're bringing the people that you want to attract into your cinema, then you can start testing pricing models.

[00:10:21] Aidan: I think that's a great point. I'm thinking some of the local cinemas, you know, in my area, and to be honest, they're deserts in the evening time. It's like you'd have to get in a car and drive at least 10 minutes to have a restaurant or somewhere. So the idea of having an evening out. It takes that away. It strips that away and when I think of the more successful ones I know of there's restaurants and some of the more recently renovated Westfield big shopping centers, they do have restaurant options, bar options near the cinema and reducing to be more of a buzz and it can create a date night atmosphere or stuff where people would go for an evening without having to plan a second location. So, you know, that is a big thing. Like the other thing I'd say is [00:11:00] cinemas, they've almost dumbed down.

[00:11:02] Like obviously people's society is dumbed down hugely, but I think with cinema and entertainment, and it is a bit like music. If you all go to the middle and we covered a bit of this in Bruce Springsteen where if you want people to pay top dollar and really be a addicted to watching bands.

[00:11:17] It's because it's not one size fits all. Some people love Bruce Springsteen. Some people love dance music. Some people love whatever rap music, et cetera. It's the same cinema. But in the mainstream cinemas, it's gone towards the popcorn selling, you know, rubbish in the middle spectrum.

[00:11:34] And the more art house or that sort of aspect, there doesn't seem to be appetite forward, or is it just that it's not provided? So potentially that is decreasing the attendance as well. When you minimise the offer. You know, again, in the pricing stuff we talkabout you optimise the tail. I don't see the tale of what's been provided being optimised really.

[00:11:54] And even the peripheral, not just you know, there's a cruise ship element to the cinema of course, too, whereby they've got you [00:12:00] captured once you come in the door, you know you're not supposed to bring in external food, et cetera. There's an opportunity to upsell you clearly. And I don't think the rate that really is developed much in the last, you know, 10, 15, 20 years, and to some extent it's even become more middle of the road.

[00:12:15] It fundamentally is in the main cinemas, it's popcorn, it's a Diet Coke or a Coca-Cola and a large bucket style container, you know, an a limited selection of lollies or sweets. I think even the pick and mix, which kids used to love hasn't really seemed to come back post covid.

[00:12:31] I haven't seen that really. And again, kids used to love that. And that was an element of stuff, but I just feel it's almost like in a shut or a slowdown of the cinema industry, you know, I think there's clearly opportunity for upselling on, you know, more, you've got them captured. So more ancillary services. Clearly you can be provided and creating more of an atmosphere. Building more of a community. Clearly it's like, cinema at least it used to be fans, it used to be, you know, people would [00:13:00] diehard of certain genres, they would go to the cinema on a regular, weekly basis.

[00:13:04] You know, you'd have season tickets, you'd have reduction. I just don't really see that happening. I know Hoyts, one of the cinemas where I'd be most used to going to. They have a loyalty program like that, to be honest, doesn't make a huge amount of sense to me. It almost like, you know, they're giving you a lot of value back immediately just from signing a former pay. I think it's $15 you pay annually and then you see, you know, x percent of every ticket sale. But it doesn't really seem to make a lot of sense to me. It seems to be almost. You know, they just want that 15 bucks up front, and then they're giving you back the 15 bucks immediately. So it's a strange one. And again, I'd be open to people telling me that there is method behind this, but to me it doesn't often stack up.

[00:13:43] Joanna: I sometimes think, people go, Oh, you know, this generation's different. All they wanna do is stay home, watch the screens, and watch Netflix. They don't really wanna go out. It's a bit about the defeat attitude. Like, I'm thinking about this one restaurant. I know it's in the middle of nowhere. It's next to a [00:14:00] lovely beach, but it literallyhas nothing else around it, but they've made this restaurant a destination point in itself. And then after that, people can go to the beach, and it's a new business, right? But prior to them taking over the business, it wasn't at a destination. There was tons of different types of restaurants going in that really hadn't focused on how they could create this wonderful customer experience. So really what they did instead is like, it was an awful experience. People just went and they didn't even go to the beach, even though it's a gorgeous beach.

[00:14:31] They just were like, I just wanna leave. But they did it. And people go and even, you know, millennials and the whole lot of young people, they get out of their bedrooms. They go to this place because it's giving them something in return, right. Cinemas can do the same thing.

[00:14:49] And I do think it's a cop out for business to going, Oh, you know, things are changing. We can't keep up. Yes you can. You just got to think carefully and strategically about [00:15:00] what your customers want, how you can connect and partner with different businesses to correct, create an experience that is worth staying around for.

[00:15:09] You don't just go to the cinema to sit in a lonely, dark, dusty, old room to watch a poor film. And that's where we've got cinemas and distributors in the whole industry have to think differently. Now, thinking about that on the other side, What's happened to cinemas, they've been captured within the Westfield Mall type experience, which, as Aidan was saying, shuts down, especially in Australia at like six o'clock.

[00:15:38] It's a dead zone, partly because Westfield rent is ridiculously high and they can't attract niche and creative businesses in there for a long term before they shut down. So there's something with the whole ecosystem, with, you know, having cinemas in malls and reliant upon landlords who [00:16:00] charge too much, in which in turn negate the experience that bring customers in, because the rent's too high.

[00:16:07] But then they argue, well we need the rent to maintain such a big complex, Well, maybe this is the end of the mall and we know that this is happening in America. . However, what's happening in America isn't great either because that's just breaking down community at the same time. So like, are we going back to the old school way of, you know, high streets, independent businesses just clustered around actual areas that people congregate, they congregate around beaches , in metro city, you know, where there's life, people go, So rather than think we all go where there's life. Let's get into the creative zone and create life and bring traffic to you, rather than the passive reactive. Oh, I'll only go when I know there's a business case to set up a business, and everyone goes to malls. They don't go to malls anymore. It's a dying [00:17:00] business model. I think that's, I don't wanna rent anymore, but I think you get my gist here.

[00:17:05] I think we just gotta think completely different. Get our creative hats on, start to reach out and connect with businesses, not these major malls. That's not the answer anymore. It's the niche players, it's the startups and its partnerships. And from there you can build loyalty plans and pricing plans that are absolutely spot on.

[00:17:28] Aidan: Look, I think we're talking about a creative industry In a previous one. We, we covered that. Like, I think Hollywood often goes through these cycles of, you know, the big corporates, and then you have, you know, the new wave, the French movies where you have even in the seventies where it was like the alternative movies came through.

[00:17:43] And then you had in the nineties where you had like the Quentin Tarantinos and this new wave of directors. Like, I think that's Hollywood's crying out for at the minute. Like, clearly everything seems to be produced by committee and by what do you call it, focus groups, you know, whereby, so you, you get movies that are [00:18:00] basically cookie cutter and that appeals to the middle section.

[00:18:02] But when you appeal to the middle section, you don't get high emotions or you don't get, you know, people going to watch the movie twice or unmissable. There aren't really movies that you cannot miss anymore. There aren't movies that people talk about much, and I suppose it all spreads down from there. You know, at the end of the day, if people aren't overly fostering going to the movie, you know, the paraphernalia around it and all that, it then is a habit that if people are out of that habit, you know, maybe they won't get back into it. So, like, I would argue, you know, there's fundamentally, and you need better movies to be watching is the first thing.

[00:18:34] And secondly, there's clearly a pricing element about the peripheral around that, creating an evening out, creating an experience for people. And then it's trying to somehow charge them by optimising the pricing, which to me, you know, doesn't seem to really be happening. It just, you know, is it like, at the end of the day, if people don't want to see the movie, they're not going to pay less or more depending on the day. So fundamentally, you need the movie first, but then there's gotta be an optimisation process, that[00:19:00] is the ticket too high? Are people not going cause it's too expensive? Or, but at the end of the day, should a cinema be sitting empty, you know, during a peak time?

[00:19:07] And if that's the case, there's a severe issue. And are we facing a blockbuster video scenario where no pricing change? When no pricing strategy change will rescue what is, you know, a defunct business model. I'm not saying that, but you know, I think there should certainly be warning signals that people should be looking at this immediately and asking is the existing model, like, does it work or not?

[00:19:29] Joanna: Yeah, agreed. And I don't think it's a defunct model. I just think they need to do a complete mindset change. There's no point doing tactical price changes, and implementing new methodology. If you just don't have enough traffic to optimise a revenue based on demand, there is no demand. That's because as we were discussing, The whole proximity location is often wrong. There's no experience. There's no connection with other businesses. The movie itself is middle of the road and not drawing in enough traffic in and of [00:20:00] itself, and the experience around the cinema is dull. It's lifeless. The cinema itself is tatty tired. Leather seats will not compensate for that.

[00:20:09] However, the model in itself, the whole industry could be better. We know there have been great movies before which have driven in traffic. We know that when you put a cinema near a great restaurant, people go, Oh, the restaurant's great. Let's catch a movie after that too. It works. It's not rocket science, but you've got to start thinking differently and maybe breaking outside of the Westfield Mall premise, because I think that's capping revenue potential. And people are simply just not going to those sort of things anymore. So yeah, look, fear, like repeating ourselves, I think that's kind of what, what I've gotta say on that. And yeah, really keen to hear what you guys, are thinking about this particular topic. Well, thank you very much for listen.

[00:20:55] Aidan: Yeah, just as a last point, like I wonder is there the opportunity for small, [00:21:00] regional, local, you know, niche cinemas, you know, to restart , it used to be that every major town had 10 or 15 cinemas showing with one screen, showing one movie or one genre, you know, is there room for that again, could you open a cinema in Sydney or Melbourne showing just horror movies, are showing just the latest, you know, international movies or French movies or Italian movies, is there an appetite for that? Would that model work? At the minute it's dominated by the big players, the Hoyts, the events, the major corporations, the Warner Villages. The small operators have left the market. Is there room for, you know, we've seen popup bars reappear to create life again in CBDs. Is there a popup cinema? And I'm not referring to council run open air cinemas showing 1980s movies, see if middle the ground for families. I'm not talking about slightly more challenging, slightly more things that people might, you know, make people think. Is there room for that? But obviously that's entrepreneurial. It takes risk building, it takes love of cinema and I don't know if love of cinema is there at the moment. So that's it for me [00:22:00] today. Have a great weekend.

[00:22:01] Joanna: Thank you. Bye.