How to turn a Multiplex Silver Screen into Gold

Catching a movie is a pricey exercise, especially for Australians who pay a lot for tickets compared to cinema-goers in the US or New Zealand. With a standard ticket at around $20, and a requisite trip to the candy bar, a night out for two is at least $60. If it is a family outing, the price is well over $100. Alternatively, for less than $10, rent a movie online, buy some microwave popcorn and enjoy the movie from the comfort of your home and pocket the savings.

Is the current business model for multiplex cinemas sustainable?

Multiplex cinemas are in the mature phase of their life cycle and use tactics such as demand management pricing (cheap on Tuesdays), quantity discounts (e.g. through social clubs), loyalty programs, non-linear pricing (candy bar sales), and segmentation pricing for premium experiences such as IMAX® – but this comes at even higher prices.

ticket pricing a

Current ticket prices at Hoyts multiplex cinemas

Despite these tactics, according to Screen Australia, attendance at cinemas is declining. The proportion of Australians that had attended a cinema in the past 12 months has stayed flat for years (~68%), but the frequency of attendance has been steadily declining, from 11.3 times in 12 months per person in 1996 down to 6.8 times in 2014.

kid in cinema

This decline is not surprising given the high ticket prices and the elastic demand of a discretionary purchase such as going out to a movie. Price sensitive customers are turning to substitutes such as watching movies online or buying or renting the DVD.

The fixed costs for a multiplex are huge, including high rents, fit out costs for special cinemas and the royalties paid for licensing technology such as 3D IMAX®.  Cinemas are also constrained by the films ‘viewing policy’ requiring that they show a film for a number of weeks, regardless of attendance.

The biggest variable cost is the film company fees, which start at 55% of gross ticket sales in the first week decreasing to about 25% in the fifth week of showing, which is when cinemas start to make a profit from the sales. Other variable costs per movie are relatively small with popular movies requiring more staff to service, and more food to be prepared.

Cinemas need to be smart and work the profit equation:profit calca

Assuming supply is constant (no new screens are built and frequency of screen usage is already high), cinemas can increase demand for ticket sales using their current film-screening model, show movies where the film company cut is lower (art-house, old favourites), or increase candy bar sales.

Currently cinemas make around 25%-30% of their revenue from your secondary purchases at the candy bar. Marginal costs for candy bar items such as popcorn are extremely low, and marginal revenue of selling another unit is extremely high, with a margin of around 85%.

popcorn

Hoyts is currently making $5 per customer from the candy bar. Multiplex cinemas such as Hoyts should move right on the demand curve and decrease ticket prices to increase sales volume, translating to bigger revenues at the candy bar and increased profits.

Researchers from Stanford and the University of California agree. The US model decreases the price of the primary product (ticket) to help entice price sensitive customers into the cinemas and increases the price of the secondary product (candy bar), resulting in better margins.

But there are risks associated with this strategy: cinemas would need to be careful not to be accused of predatory pricing, using low ticket prices as a ‘loss leader’ to bring in customers to drive out competing cinemas; and increased revenues may take some time to generate as film companies would still demand their takings, potentially increasing the % fee per ticket.

Multiplexes would be smart to act now, before their cinemas become a relic of the past.

– Jill Allen (ajildeakin)

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