Revenue Management
Building Blockbuster Business
Can revenue management land a starring role in the movie theater industry?
By Robert Oberwetter
The time is right for the movie theater industry to adopt revenue management as a core business practice. The Internet has caused many businesses to reconsider their current business models and evaluate how to capture potential revenues online. Utilizing the Internet for ticket sales is a dramatic and obvious opportunity for the move theater industry, but the true revolution will come from the introduction of revenue management.
Pioneered by the airline industry nearly 20 years ago, revenue management is a way for companies to maximize capacity and profitability by balancing supply and demand through price management. Revenue management enabled airlines to take a mainly homogeneous product and maximize revenue and profits by stratifying and segmenting the market. Originally known as yield management, revenue management has been successfully adapted to numerous industries in recent years, including utilities, cruise lines, trucking, amusement parks, hotels, rental cars and others. The movie theater industry, with its limited capacity and perishable product, makes it an ideal candidate to join the list.
Revenue management, as it relates to service industries, is defined as the process of allocating the right type of capacity, to the right kind of customer, at the right price, in order to maximize revenue or yield [2]. The objective is to balance capacity in relation to demand, while maximizing the sales price for each unit. The right price, and reservation capability, is the key mechanism.
Many companies practice aspects of revenue management intuitively. For example, movie theaters often have reduced prices for movies shown before 6 p.m., and restaurants have reduced prices for meals at lunchtime. Both of these are intended to stimulate demand during lower demand times. They cannot be said to be practicing revenue management, however, because they do not utilize an integrated, continuous and systematic approach to maximizing revenue through the manipulation of price in response to forecasted patterns of demand correlated with actual demand [3]. They need a cognizant, organized approach that manages demand and price in order to maximize revenue. Often, the calculations are so intricate, and the data so voluminous, that sophisticated computer systems are required.
Product Characteristics
The application of a revenue management system is not appropriate for all industries. The following six characteristics can be used to determine whether revenue management is appropriate for a particular product or service [4]:
1. The product or service is perishable. This means that, at some point, the product becomes worthless because it can no longer be sold, and it cannot be held in inventory for future demand, generally because the time of its availability has passed. For example, once the previews are finished and the movie starts, most people won't buy movie tickets. Once an airplane has taken off, the empty seat in it cannot be sold.
2. Capacity of the product is limited. A fixed amount of product is available, and additional inventory cannot be added without a long lead-time, a significant amount of capital or both. For example, a hotel has a certain number of rooms and more cannot be added without costly, lengthy construction. For the movie industry, a new theater can't be built to satisfy demand without a long lead-time. However, within a cineplex, you can adjust which movies show in the larger and smaller screens, and you can add the same movie to multiple screens within the cineplex. This is similar to airlines, for example, that move planes around to different routes temporarily when there are periods of high or low demand.
3. Market segmentation. The nature of the product is such that it can be priced to appeal and target different market segments. It is important that there is some service or purchase characteristic that the customer can understand as the reason for the price differential [5]. The time of purchase is often used to segment markets [6]. Based upon the time remaining until the product can be consumed and other demand factors, it can be priced to appeal to different market segments.
The airlines are a prime example of market segmentation. An airline seat on a given flight within the same class is the same as any other, but the airlines have implemented a meaningful segmentation strategy that differentiates customers who are willing and able to pay higher prices from those who are willing to change their behavior in exchange for a lower price [7.8]. In other words, if you are price sensitive, you book your ticket well in advance of the flight; if you are not price sensitive, you wait until it is convenient for you to book your ticket. Movie theaters could do the same thing. Currently there are special prices for children, early shows, students and seniors, but if combined with revenue management technologies, there is even greater potential to segment the market, especially using time and ticket packages.
4. The product or service can be sold in advance. Often this is done through reservation systems which, when combined with other technologies, enable a system of forecasting and control to manipulate demand and pricing. Some theaters have advance sales today, but the number of days you can buy the ticket in advance is limited, you have to go to the theater to actually purchase the ticket, and there is no price difference for buying the ticket in advance.
5. The variable costs of the product are low. An incremental sale does not cost the vendor much, but enables the product to be sold at a wide range of prices rather than letting it spoil and go unsold. For example, a hotel operation has high fixed costs and relatively low variable costs. Therefore once the break-even point has been achieved with respect to the fixed costs, any revenue generated in excess of the variable costs would go towards profits. The main movie variable costs are for staffing of the concession stands, the box office and for cleaning up after a showing. If a seat is sold that would otherwise have gone empty, then there is additional revenue gained that goes directly to the bottom line.
6. Demand for the product varies over time. Revenue management can help to smooth the demand curve by stimulating demand during low demand times and increasing revenue during high demand times. Demand for movies certainly varies. Many factors are involved in the demand for a particular movie, on a particular day, at a particular time. Factors include, among others, the weather, special events in the town, holidays, day of the week, time of the day, quality of the movie and length of the run.
At the Movies: RM Opportunities
Typically, companies that have adopted revenue management as part of their corporate culture have seen their revenues increase from 3 percent to 7 percent a year, with 80 percent of that going directly into profits [9]. In the movie theater industry's case, there is opportunity for even more revenue increase because of increased concession sales that accompany attendance increases.
With the Internet and its impact on the business model of many companies, it is only a matter of time before movie theaters start selling tickets on the Web. The movie industry needs to embrace this change and make it work to their advantage. The way to do that is by implementing revenue management technologies to enable more market segmentation combined with reservation and Web sales systems. The potential is enormous, and the first company to do this will gain a significant competitive advantage.
Advance Sales. Advance sales are the first hurdle for a successful revenue management program in movie theaters. Movie theaters can sell tickets in advance by utilizing sophisticated reservation systems, such as those used by the airline and hotel industries. By selling tickets in advance, movie theaters can develop different market segments, increase demand in low demand areas and greatly increase revenues, all while increasing customer satisfaction.
Reservation agents should not handle ticket sales; rather they should be sold through the Internet by credit card. Through Web-enabled ticket sales, theaters can have sophisticated revenue management engines on the backend, feeding ticket sales pricing and market segmentation information. Tickets can be sold days, weeks, maybe even months in advance. No more waiting in line to get a ticket. No more going to the theater wondering if you'll get into the showing you want.
Selling tickets through the Web would mean a change in the way tickets are handled at the movie theater. Mailing the tickets won't work because of the added expense and the uncertainty and difficulty of getting the tickets to arrive in time for the movie. So, what do you do? There are a number of approaches.
The simplest would be simply to produce a list of customers who bought tickets and grant admission based upon the display of a driver's license or some other identification. Movie theaters would be able to log into the reservation system and produce a list of customers that could be checked off as they gained admission.
Alternatively, the theater could use an old-fashioned approach and have a "will call" window where the moviegoer could pick up the ticket. This could be used while other methods are being developed. The customer could also receive and print out a confirmation form. This could be a "ticket" that they could use to gain admission. It would have a confirmation number on it, which could be read by a bar code reader to authenticate the "ticket" and confirm attendance.
The best approach might be free membership in a "frequent moviegoers club." The membership cards could be given out at movie theaters and customers could sign up and validate them on-line. They would use their membership number during the ticketing process. Upon arrival at the theater, the bar code on the membership card would be scanned to authenticate the "ticket" and confirm attendance.
Market segmentation. At the moment, market segmentation for moviegoers is minimal and can be summed up as follows: 1. tickets for reduced prices before 6 p.m., 2. children tickets; 3. senior tickets, 4. student tickets, and 5. full-price tickets.
Under revenue management, the moviegoer market could be much more segmented. Because of the advanced Web sales, all kinds of market segmentation opportunities are available. An approach just like the airlines could be utilized where there are multiple price segments. In addition, specialized multiple ticket market segments could be developed to complement the usual approach.
The airlines present a great example of what the movie industry can do for market segmentation. Just as the airlines have multiple flights to the same and different locations throughout the day, the movie theaters have multiple screens showing the same and different movies at multiple times during the day. Multiple price segments can be utilized in the movie theater industry. Minimally, there would be discount and full priced market segments. As time progresses towards the show time, the discount priced market segments would be automatically opened and closed based upon an analysis of the current demand in relation to the historical sales figures and other factors. The system needs to sell the ticket at the maximum price the market and customer will bear. If a seat will go empty, then it should be sold at a discount. But we don't want to sell it at a discount if someone later will buy it at a higher price. Revenue management systems do that kind of analysis.
Additional segmentation could be created selling multiple tickets for a show. Examples:
- Double Date. Four tickets to the same movie showing for a reduced price.
- Repeat Date. Two tickets, two nights in a row.
- Family Outing. Four tickets, popcorn and drinks on a low demand night.
- Movie Weekend. Tickets for Friday and Saturday night for movies experiencing low attendance or late in their run.
An even more dramatic change, which is done in some parts of Europe, would be designating certain areas of the theater with different values. The lowest priced zone would be the front rows and the side seats. The middle price zone could be the back rows and the highest price zone would be the middle rows and middle seats. Obviously this would be quite a dramatic change for the American moviegoers and would have to be carefully considered.
Another extreme change would be reserved seats. This is done in some European countries, like Austria, and is perfectly accepted there. In fact, in Austria you can call the day of the movie and make a reservation for a particular seat. Each seat is priced according to the zone it is in. You receive a reservation number and then go to the theater at show time to purchase your ticket. With the reserved seat approach, the quality of each seat could be factored in the revenue management system.
The Frequent Moviegoers Club (FMC), mentioned earlier, provides significant opportunities beyond merely being a mechanism to enable Web sales. For example:
1. Ticket purchase and use. It certainly simplifies ordering of tickets and the admittance to the theater. The membership number would be used at ordering time via the Web and then the bar code would be scanned at the theater to validate admission.
2. Membership tracking. By tracking movie attendance we can offer special deals to frequent moviegoers. Just like a frequent flier club, the FMC can encourage loyalty from the moviegoer toward the company's theaters because they can get free tickets by doing so.
3. Marketing opportunities. Since we know who is going to which movies, we can market to them directly. For example, a person could be contacted via mail or e-mail regarding a movie or special they might be interested in. The e-mail could include a link to the ticketing system that would know about the special offered to that person.
4. Moviegoer profile. Over time, movie attendance habits of individuals would be collected. This, in itself, will be valuable, but it can be combined with information from other sources for an even more robust profile of customers.
RM Computer Systems
The main parts of revenue management computer systems are the reservation system, the forecasting and pricing engine, and the revenue management decision support system. The pricing and forecasting engines are sophisticated computer systems that help determine the right price and restrictions based upon the current situation. Huge databases of historical and current information are used in part to forecast demand. The forecast is combined with advanced mathematical formulae to determine how much inventory to make available to each market segment and when. The analysis of the revenue management system is used by the reservation system to make the product and sales units available to the customer. For a revenue management program to be successful, there must be a melding of the computer systems, combined with forecasting, probability, statistics, operational management, and business experience and knowledge [5].
Final Reel
Revenue management for the movie theater industry is all about selling movie tickets at the right price to the right customer at the right time. The industry needs to develop market segmentation and reservation systems that are driven by revenue management technologies such as forecasting and dynamic pricing to maximize revenues. All of this is complemented by the inevitable sale of tickets via the Internet. The Internet has provided an opportunity for movie theater companies to reconsider how they do business. Tremendous profits await the company that gets their first, with revenue management assuming a starring role.
References
- Kimes, Sheryl E. (1989), "Yield Management: A Tool for Capacity-Constrained Service Firms," Journal of Operations Management, Vol. 8, No. 4, p. 348-363.
- American Airlines Annual Report, 1987, "The Art of Managing Yield," p. 22-25.
- Jauncey, S. and Slamet, P, (1995), "The Meaning and Management of Yield in Hotels," International Journal of Contemporary Hospitality Management, Vol. 7, No. 4, p. 23-26.
- Kimes, Sheryl E. (1989), "The Basics of Yield Management," Cornell Hotel and Restaurant Administration Quarterly, Vol. 30, No. 3, p. 15-19.
- Lieberman, Warren H. (1993), "Debunking the Myths of Yield Management," Cornell Hotel and Restaurant Administration Quarterly, Vol. 34, No. 1, p. 34-41.
- Weatherford, Laurence R. and Bodily, Samuel E. (1992), "A Taxonomy and Research Overview of Perishable-Asset Revenue Management: Yield Management, Overbooking, and Pricing," Operations Research, Vol. 40, No. 5, September-October 1992, p. 831-844.
- Relihan, W.J. (1989), "The Yield Management Approach to Hotel Room Pricing," Cornell Hotel and Restaurant Administration Quarterly, May 1989, p. 40-45.
- Hanks, R.D, Cross, R.G., Noland, R.P. (1992), "Discounting in the Hotel Industry: a New Approach," Cornell Hotel and Restaurant Administration Quarterly, February 1992, p. 15-23.
- Cross, Robert G., "Revenue Management Hard-Core Tactics for Market Domination," (New York: Broadway Books, 1997). p. 179.
Robert Oberwetter (oberwetter@yahoo.com) is the Applications Development Manager at Tokyo Electron America, a global technology leader that manufacturers and services computer chip-making capital equipment for companies like IBM, AMD, Motorola and Intel. He maintains the Web site, www.abovetheweather.com, which is an independent site dedicated to the sharing of information on revenue management.
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