Advanced Pricing Strategies From Hollywood
Content on this site often references examples of pricing strategies used by Hollywood and the movie business. The reason is simple - they are great innovators and for a great reason: they have to be.
In the eighties people said the VCR would kill the movie business. Nowadays almost anyone with an internet connection and some persistence can steal their product. And if you are patient and can wait a few months you can enjoy their product, almost for free, through legal streaming services. But they keep making money, and smart pricing is a big part of it.
They Always Let You Pay More
Some people might bristle at the cost of a movie ticket but there is always somebody willing to pay more, and Hollywood gives you that option. You can see the movie on the regular screen for one price, pay more to see it in 3D, and still more to see it in IMAX or IMAX 3D.
Same thing with DVD releases – you can buy the regular DVD, Blu-Ray, DVD + Blu-Ray combo pack, combo pack with digital version, 3D version, special edition, etc. It’s all essentially the same product (a feature film on optical disc) with minor differences in attributes, but the price differs wildly. It’s not uncommon to see slightly different versions of the same movie selling for between $17.99 and $34.99. People that really value the product can spend almost twice as much.
Even on pay per view there are options – standard definition at one price, and higher definition at a higher price.
They Use Hurdles Effectively
Discounted Tuesdays are one of the most effective hurdles ever employed. It lets price-conscious customers enjoy the product at a discount, but only if they are prepared to jump a significant hurdle – they have to watch the movie with a bunch of teenagers that talk throughout. Nobody who is willing to pay full price would endure that, so Hollywood does not cannibalize sales of their product at full price.
People who belong to loyalty programs can save money on tickets, as can people that pre-pay for tickets by buying passes at Costco. All of these things let Hollywood selectively discount to people who are serious about saving money (and are less inclined to pay full price).
Time is another hurdle. Ticket prices are highest when a movie is first released and playing at first run movie theatres. They soon move to second run theatres that charge less for admission.
After moving to optical disk (a cheaper way for a family to enjoy the move than going to the theater), and the pattern repeats. The movie starts off at a high price that continues to lower until the movie is in the discount bin. Alongside this discounting the movie is released on pay-per-view, then move to services like Netflix. Eventually they can usually be seen for free on network or specialty channels, as long as you don’t mind jumping hurdles in the form of sitting through commercials and possibly watching an edited version.
Great Use of Anchoring
Hollywood uses the anchoring effect to establish a high value for their product that frames the value of lower priced versions. The $19.99 IMAX 3D prices makes the regular price of $12.99 seem like a good deal. The $35.99 price of the special edition with DVD, Blu-Ray and digital copy makes the $19.99 price of the standard Blu-Ray seem like a value.
But it doesn't stop there. At most video stores the price tag further exploits the anchor effect by showing a high regular price, alongside a discounted "limited time only" price. The truth is that the price of the movie is going to just keep getting cheaper, but this trick helps motivate the buyer.
The video store also uses some neat tricks to help stream buyers based on how they value the product. The alphabetized rack usually contains movies at one price – movies that can often also be found in the discount bin at a much lower price.
The product is identical (it's not a different format or edition; it is the same version) but the price is 1/3 to 1/2 the price of the one in the alphabetized rack.
Why? The vendor knows the customer who chooses from the alphabetized rack likely came in looking for that movie, and likely places a high value on it.
The discount bin targets a very different kind of buyer – the one that idly flips through the discount bin while waiting to check out, and is motivated to buy primarily by price. This approach generates more sales and larger profits than treating all buyers the same.
The movie business is great at pricing to generate the most sales and largest profit. They have a price for almost every customer, and just keep making money.