The Way Markets Work - a Look at Why Popcorn Costs More at the Theatres - Essay Example

The Way Markets Work – A look at why popcorn costs more at the theatres We all wonder from time to time why certain products or priced the way they are. This is a question, that’s often boggled the mind of an average consumer. On the other hand an armchair economist would try applying different ideas, to reach some kind of conclusion, as to why a particular product is priced, the way it is. Reasons given could be ... to attract customers, cover costs and so on. If you want to understand the real reason, you need to look into the psychology behind the whole scenario and this will give you the key to the pricing decision… Sounds complex doesn’t it, well it really isn’t! Let’s take the simple example of going to the movies. When you go to the movies, you are going to pay for watching the movie. Additionally, you will be indulging in snacks such as popcorn, chips and so on. Taking one favorite snack as an example, what you would have noticed is that, the popcorn at the movies, costs a lot more than what you pay, for the same quantity when you buy it, outside the theatre. Of course, we all would rather pay the same price, we pay when we buy popcorn from outside, after all the quantity given is the same! Well, if all things were the way we wished……. Getting back to the point of pricing. Why does popcorn at the movies cost more than it normally does? The obvious answer would be … it costs more because the theater owner has to cover the cost of running the movie-theatre. This includes employing people who would keep the rest room cleans, electricity and so on. Well, this is not the answer. Surprised? Another logic as to why popcorn costs more at the movies is that the theatre owner has the monopoly in the situation, so what he charges is what you have to pay. This is very similar to a situation where there is only one department store in town and so you land up paying whatever the department store charges. If this were true, in the case of the movie theatre, you would have to pay a price for using the rest room, for the seats and so on, not just for watching the movie. Well this is also not the right answer. Would it be better if popcorn was priced lower, even closer to the cost of making popcorn, at the theater? This will definitely induce more people to buy popcorn. The lesser the price of popcorn, the more the number of people who would buy popcorn. Well, the same person would be interested in buying two cups of popcorns. This would mean more money for the theater owners. Well if this is so, then why has it not happened? One explanation is that the theatre owner is not aware of this situation. Rethinking once again, it’s not the theatre owner who is unaware; it is we who are unaware of the psychology behind the pricing decision! If theater owners were to slash the price of popcorn, this would not really mean more money for them, but infact, it would result in less money from people who are willing to buy popcorn. This is because they would have to increase the price of the tickets, because they lowered the price of popcorn. If the prices of the tickets are high, it would not be attractive for people to come to the movies and the result is lesser and lesser people at the theatres, which is bad business for the theatre. If people do come, out of them there will be some who like to buy popcorn and this number would be far too less, for the risk of rising ticket prices and lowering the price of popcorn. Well, the real reason as to why the popcorn in theatre is priced high is that people who like popcorn are willing to pay a high price for what they like to have, when seeing a movie. Let’s take the situation this way. What if, the theatre risked charging very less for popcorn, but charged very highly for the tickets? Those who feel like having popcorn would buy more popcorn. In the end these people would not mind paying a lot of money for the ticket to eat popcorn which is priced very low. This sums up to the same thing, people who buy more popcorn at a low cost are people who don’t mind to spend money because they like what they buy. If the number of people who buy popcorn increases in the theatre, the sale of popcorn in the theatre goes up. This trend is reflected in the graph below. The above figure shows the sale of popcorn increasing as the number of people who like eating popcorn increase in the movie theatres If you are ready to pay less for popcorn, to buy more popcorn, you are also ready to pay more for popcorn, because you are a person willing to spend and it is this concept of willingness to spend that sets the price of a product. Taking stock of this entire situation, you will find that movies theaters is not about the business of movies or selling popcorn, it about an evening at the theatre at the expense of the movie-goer. Cheap tickets, expensive popcorn means more expenses for people who are interested in buying popcorn. This concept works because of the people who are ready to pay high prices for popcorn because they like to eat popcorn. This is the same thing that happens when you buy car. When you go out to buy a car, the car salesman asks you how much you want to pay for the car. The real answer is nothing at all. What he really means is that how much are you ready to pay for the car. A customer may be ready to pay $2000 for a rear spoiler, when buying a car which costs 30,000, even though a total price of 33,000 (car plus rear spoiler cost), is rather overpriced for the car. The same concept goes for the price set for Polaroid camera. The customer, who feels that taking snaps only with a Polaroid is the best way to take snaps, is willing to pay the price for it. So, high prices or price above what is the average level are set for people who are interesting in indulging money for that particular product or service even though it means they have to pay more for what is actually less. Let’s take the reverse situation. Look at the discount coupon in the supermarket. Why should a supermarket put out discount coupon? Well, it is because, the discount coupon would definitely attract more customers to buy the product…Right?, Wrong guess!.. The discount coupons are intended to lure a certain class of customers who would shop elsewhere, in the absence of coupons. It’s what induces or motivates a customer to buy a product and most importantly the willingness of a customer to spend on a product that determines or sets the price of a product or service in the market. This is what ultimately constitutes the psychology of the costumer and it is harnessing this psychology that is the real tactic in stimulating sales. Targeting particular class of customer help a company to care a niche for themselves in catering to that particular segment of society. Take for example, the price of a first class airline ticket or the price of an expensive wrist watch or the price of a first class suite at a luxury hotel. You can get the same service elsewhere at half the price, but still these businesses do not run on the concept that they may be over taken by businesses which operate at lower cost. This is because they are specifically established for people who can spend money and want the luxury of the product of service they desire even through they have to pay more for it in acquiring it. Thus the concept of marketing strategies is not just ads, promotions and campaigns, is about how consumers basically think when they want to get something. This want could be something as simple as popcorn or something as big as a luxury room in a hotel. It all means the same thing, the consumer is ready to pay for such a cost and so the product is priced at the level the consumer is ready to pay, even though it may seem a little unreasonable, when the same thing is available elsewhere, at a lesser cost. If big businesses are ready to invest money in infrastructure and other expenses to put forth a product which is priced high such as a Polaroid camera, then this concept proves to actually work. Take the example of the first class seats in a flight. This is a classic example of a business which is thriving purely at the concept of the customer’s choice to spend money on a first class flight ticket. The fact that first class tickets are set aside for business executives or travelers, who have money to spend and who are willing to spend their money on the first class ticket, and this concept is what sells such tickets. They could very well opt for an executive class or an economy class ticket, but since they are interested in enjoying the comforts of first class travel, they are ready to pay the price for it. That is the reason why the concept of using the willingness of the customer to set the price of a product has been implemented successfully and this is seen in the fact that customer are paying the prices as charged and this payment help to run the very business that’s charging so highly. There is not much risk in not getting customers because the price is set for customers who are ready to pay the price. Using the willingness of a customer to set the price of a product is an incredible marketing strategy that seeks to use the intent of the customer in determining the price and not just the demand and supply aspect to determine the price. Taking the situation of discount prices and sales prices or slashed prices, these marketing strategies are aimed at that class of consumers, who want to strike a bargain. It is the bargain which appeals to them. So, when they see a discount coupon, they do not throw it away, they use it immediately. They buy products, which regularly put forth discount or sales and are attracted to such offers. Here, the concept of using discounts is not to attract a whole lot of consumers, but to attract those classes of customers who want to buy only at a discount price and will therefore look elsewhere when it is not available. When a business does not take advantage of this class of customers, through discounts and sales, they are in fact losing them. What is to be concluded from this entire study is that customers are the basis of price set up and not just demands patters or supply-chain or ads, promos and so on. Touching the instinct of the customer is what work and what will always work. This is the key to an effective marketing strategy and the force that determines what should be really done, when trying to achieve business goals and objectives when catering to a particular market. Works cited The Hollywood Economist, The Popcorn Palace economy Money, markets & the economy, Making Markets Work Oxford Business School, A Fresh Look at how markets work and how new industries and technologies emerge, How does the market work? Read More