At the start of this year the Walt Disney Company has announced that they are moving their parks to demand-based pricing for single-day tickets. The price differential between price tiers is as high as 20%. The change has created a stir and some media sources have even accused Disney of ‘surge’ pricing tactics. Disney has explained that the decision was driven by an attempt to manage high attendance by giving an incentive to visit the parks off-season.
So how does it work now? So each year is divided into value, regular and peak days, so it is cheaper to visit Disney parks on value days (week days in winter, e.g.), but most expensive to do so on peak days (Christmas, Easter).
What is the basis for this approach? It is a price discrimination and it is not the only type of it employed by Disney parks. There are three types of price discrimination (first, second and third degree) and Disney employs various types of second and third degree.
IT IS CHEAPER TO BUY IN BULK
In Disney parks a single-day pass is more expensive than multiple days pass per day, which is example of second degree price discrimination based on volume of purchases. Disney parks also employ “bundling”, when two or more products are sold together for a single price as a package. You can purchase Disney passes allowing entry to more than one park.
IT IS ALL ABOUT CUSTOMERS
Disney also divides its market into customer segments and charges different price to each segment (lower prices for children, local Florida residents), employing what is known as third degree price discrimination.
Recent movement to dynamic price system for single day tickets is also a type of third degree price discrimination.
SO WHY PRICE DISCRIMINATE INSTEAD OF SIMPLE FLAT RATE FOR ALL?
Disney theme parks have high fixed costs/low variable costs, so marginal cost of any additional customer is insignificant. Increasing total sales by attracting dormant and price sensitive customers by providing more affordable options contributes directly to the bottom line of Disney parks.
With economies of scale, it is rational for Disney to price discriminate in order to maximise its profits.
WHY DOES IT WORK?
The answer lies within buyers’ demand elasticity. Elasticity of demand can vary with time or type of the customer group. Some are prepared to pay a lot for a one off experience of Disneyland, some not so much. In theory, for customers:
PRICE MATTERS: For price sensitive customers lower price options can be an entry point.
CHOICE MATTERS: Customers like to feel in control of their choices. Various price options give customers a choice, but instead of choice between Disney and any other entertainment, choice between Disney options.
VALUE MATTERS: Customers want to know they are getting value for their money. Providing an opportunity to choose out of a range of options at various prices creates an illusion of maximized value.
Hence, price discrimination can be a win–win situation. The variable pricing allows visitors to choose options they can afford or are convenient for them.
However, dynamic pricing is still a sensitive and bold operational choice. Utilising dynamic pricing without lowering prices for off-peak tickets do feel like an abuse of power. Research suggests that consumers tend to understand price adjustments and even agree with them as long as they get a much better experience as a result. So there’s a question whether Disney park visitors will have much better time at higher prices.
But at the end of the day, it is important to remember that price discrimination is only possible in the situation of the monopoly. And indeed there is no place like “the place where the dreams come true”.
Posted by Katerina King, ID: 214229162 (WordPress name: kkin108)