The Economics of a Matinee

Willingness to Pay and Customer Segmentation

The value of utilizing Economics in a business to define and understand the factors that create predictable outcomes is immense. Much like Sociology or Psychology the roots of Economics are in understanding what moves human beings to act, especially when incentives are introduced to move the point of equilibrium.

There is a theory in economics called “willingness to pay” which is derived from how much 1 individual is willing to pay for a good or service. When we take this concept and apply it on a broader level and look at a group of individuals it will theoretically create a distribution of purchase preferences that we can then use to make a decision on pricing as a business.

Additionally identifying any sub-groups that may exist and attempting to address them through building incentives can be referred to as a customer segmentation strategy.

Matinees a Model of Applied Customer Segmentation

Movie Theatres had a problem there was a finite market segment at the attractive price point, and a fixed capacity of their theatres; additionally the preferred method of movie consumption was usually directly before or after dinner. All these factors led to crowding during peak times and waste during sub-optimal show-times.

 Let’s take a look at the problem they are facing and see if we can show identify the missed market opportunity.

Assumptions:
The 4pm showing is only 20% full
The 6pm and 8pm sell out capacity.
Theatre holds 200 seats.
Movie cost is fixed.
Preferred movie time by customers is after 5pm.

Audience characteristics

Now as we see from the data we’ve gathered there are only a total of 440 people total that are willing to pay $9, but a total of 600 people who would pay at least $5. There is only capacity to address 200 people per show so our pricing strategy must account for that.

Pricing Option 1: All tickets cost $9
4PM showing: 20% x 200 (40 people) x $9 = $360
6PM showing: 200 x $9 = $1800
8pm showing: 200 x $9 = $1800
Total collections: $3960

Pricing Option 2: All tickets cost $5
4PM showing: 200 x $5 = $1000
6PM showing: 200 x $5 = $1000
8pm showing: 200 x $5 = $1000
Total collections: $3000

Pricing Option 3: $5 matinees and $9 for prime viewing times
4pm Showing 200x $5 = $1000
6pm Showing 200 x$9 = $1800
8pm Showing 200 x$9 = $1800
Total collections: $4600

Looking at our 3 options we see that the current solution while creating some waste is preferred over the price reduction across the board to meet the $5 customer demand.

Looking at option 3 though with the appropriate licensing considerations we can create a strong enough incentive to drive additional consumption beyond what we’re currently experiencing.

Conclusion
While my example is overly simplified and there are some additional factors I left out to keep it simple, this is a time tested method to increase profits. Most products can likewise benefit from careful licensing or merchandising to unlock additional profits beyond what their current pricing model allows for.