Supply Chain Management

Monday, November 10, 2014

Inventory (Empty Seats) Management for Movie Theaters

image source: http://screencrush.com/amc-theaters-reclining-seats/

For years, movie theaters have struggled to fill their seats. In the wake of movie-watching substitutes, such as Netflix and VOD, it has become an increasingly large challenge for movie theaters to get people to leave the comfort of their homes to watch a movie.

It is estimated that “$40 billion dollars are spent every year on movie tickets, popcorn, and soda, but 88% of movie theater seats still remain empty. An even bigger problem: 95% of seats are empty after opening weekend.”¹

Every seat unsold at a movie theater is lost revenue, how do all movie theaters fill their seats and stay in business? One of the most important tasks that inventory managers have to do is to understand customer demand and develop a strategy to meet that demand. Listed below are some different approaches that different movie theaters take to respond to the various things that movie watchers desire.

Price & Convenience

One way is to charge lower price and offer more convenience to the customers. It is now common practice for movie theaters to partner up with third-party ticket sellers to get rid of any unsold tickets before an airing. An example of this is Dealflicks. In addition to movie tickets, customers can also order other concessions online at a discounted price, 24/7/365 with no convenience fees.²

Center Theatre Group’s partnership with Goldstar – a primary ticket seller that operates with a membership model – is another example.³ Here, Goldstar takes all the unsold tickets from the movie theater, sells them at half-price, and gets paid a service fee and sales commission. In addition, sales can be processed up to noon on the day of a performance.

Both of these examples highlight some movie theaters’ strategy to compete against substitute services, such as Netflix, in terms of lower prices and greater convenience.

Amenities & Price Conditioning

Another way that movie theaters try to fill more empty seats is to simply have less seats available to be filled. Although this may sound paradoxical, this approach can potentially allow theaters to increase sales in the long run. Given that it is difficult to fill every seat in a theater in the first place, this strategy instead focuses on attracting fewer customers with more comfort and a better viewing experience. The higher costs associated with better amenities can be offset by charging higher ticket price in smaller increments over time, after most of the customers have become used to their new experience (and therefore will choose it over other substitutes).

One perfect example of this is AMC’s decision to switch to fewer, but more comfortable reclining seats in its theaters.⁴ According to AMC’s strategy, it will first keep the ticket price unchanged while letting movie viewers enjoy the comfort of the new seats. Once they are used to this perk, AMC will increase its ticket price by $1 to $2 later. Now, the choice is up to the customers, on whether or not they are willing to pay a small extra amount for a better viewing experience.

While competing against substitutes in terms of comfort and convenience, this strategy also seems to focus on augmenting a differentiated product (or service in this case). One of the main reasons many people go watch a movie is for the atmosphere in the theater itself; sitting in a movie theater watching a film just feels different than watching the same thing at home. By offering better seats and other amenities, movie theaters can make viewing comfort a less compelling factor in customers’ decision on whether to watch a movie in theater or at home. Instead, the value tradeoff will be more on small price increase versus enhanced movie theater atmosphere.

Closing Remarks

Both kinds of strategic approaches mentioned above can help better manage movie theaters’ inventory (unfilled seats). Although they seem to focus on different aspects, such as price and convenience versus customer experience of the service, they are fundamentally similar in the sense that both take customers’ demand into consideration and target at specific areas that customers desire from their movie watching experience. Having a solid understanding of this will provide movie theaters new insights to help reduce uncertainty and increase accuracy in their inventory management.

Having said all that, what do you value most in your movie watching experience? Do you value ticket price more than viewing comfort and atmosphere, or vice versa? How much more are you willing to pay for a better experience in a movie theater? Lastly, do you think it is possible for movie theaters to adopt both strategies described above?