Late last month I presented at the Professional Pricing Society conference, along with several other pricing experts and practitioners. During a break, one of the attendees told me his company wanted to move to dynamic pricing, because they had seen very positive results in other companies who have done that. While learning from other companies and industries is always a great idea, it is important to remember that not all markets or situations are alike. Make sure you select a pricing strategy that supports how you compete in your industry and fits your particular circumstances.
Consider three examples in entertainment.
- Last week Walt Disney Co reported record annual profits. Disney includes several different businesses, but theme park results drove much of the profit increase. Over the past two years, Disney parks have expanded their use of dynamic pricing, raising prices on the most popular days and lowering them on other days. The results have included increased overall attendance and higher average ticket prices.
- SeaWorld Entertainment also reported improved profitability, by capitalizing on a very different pricing strategy. SeaWorld lowered prices, which increased attendance and increased spending on ancillary products.
- MoviePass began in 2011 as a subscription-based movie ticketing service. In what seems like an attempt to compete with Netflix, MoviePass offered unlimited movies for a flat monthly fee. Unfortunately, the company has been hemorrhaging cash and had to change their plan, limiting customers to three movies per month with blackouts on the most popular films.
Let’s look at some of the factors to be considered and why certain strategies succeed in some markets but not others. The first question is do you have fixed capacity? When the answer is yes, prices can be used to allocate that capacity. In the three examples, Disney and SeaWorld each have fixed capacity in a limited number of parks. At first blush it might seem like MoviePass is like Netflix with almost unlimited capacity, but on high-demand nights and for high-demand movies there are limits.
A related question is what is your current capacity utilization? Disney found their parks completely full on certain days, with lower attendance on other days. That can be a perfect situation for demand-based pricing. On the other hand, SeaWorld rarely operated their parks at capacity, so trying to shift demand to slower days with dynamic pricing would likely be unsuccessful. Conversely, by offering unlimited tickets, MoviePass encouraged customers to go more often to high-demand movies on the busiest days.
The second question is what are the incremental costs of providing additional products or services? Incremental costs on under-utilized days at SeaWorld and Disney are labor, power, and maintenance, which are relatively low compared to the costs of the parks. Increasing traffic on those low-utilization days would be profitable. Unfortunately, MoviePass would experience relatively high incremental costs for each additional movie a customer sees, because the company must pay the theater for each incremental ticket. So, encouraging their customers to attend more movies actually costs them money.
Another question is can you capture incremental revenue and profit with ancillary items? In the case of Disney and SeaWorld, the answer is a resounding yes. Charging for parking plus selling additional food, beverages, and souvenirs brings substantial additional revenue and profit in the door. At Disney, when they are at capacity, increasing attendance would likely make the food experiences worse, but increasing attendance on slower days just brings additional profit. On the other hand, the ancillary sales at SeaWorld make it profitable to increase attendance on all days, since they were not at capacity. In contrast, MoviePass could not capitalize on any ancillary sales, since all that money goes to the theaters.
The next question is how will customers react? All these examples are B2C situations, in which demand is expected to fluctuate with prices; however, that is not always the case. In most B2B situations, demand for a product or service is derived from the demand for whatever they are selling. That means lower market prices are unlikely to increase demand overall. So, the SeaWorld pricing strategy to capture additional demand with lower prices, would really be an attempt to take market share from a competitor. On the other hand, using prices to allocate electric power, highway lanes, and labor according to specific days of the week and times of the day can be successful in B2B markets.
The last question is how are competitors likely to react to your pricing strategy? If you are simply trying to take market share from your competitors, you should expect them to defend their business by matching your pricing. If you are using your pricing strategy to capture more customer segments, increasing overall demand or improving profitability with existing demand, competitors are likely to copy you without leading to a price war, much like airlines have done.
Although Disney and SeaWorld have competitors, they are not really trying to take market share from competitors. They are using different (and appropriate) strategies to increase the average spend per customer and increase overall spending. Those will not lead to price wars. MoviePass is trying to expand demand for entertainment, but their approach will not improve profitability, so competitors will likely ignore it.
There are many more potential examples that would illustrate the importance of situations and market structures in selecting a pricing strategy. By all means look at others to see what works for them, but don’t assume you can just copy the latest innovation. Study the structures of the other markets and the reasons those pricing strategies work. Make sure you select a strategy that fits your circumstances and will increase your profitability.
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