Monday, August 23, 2010

Simon-Kucher and Partners Industry Pricing Series

This article is one of a long series of pricing articles that have been running in the Monthly PPS Newsletter. Called the "Industry Pricing Series" by Simon-Kucher & Partners, these articles offer numerous pricing strategies that, although explained in the context of specific industries, can be applied in pricing practices across multiple specialties and practice areas.

Introduction:

Ever wonder how Disney pricers think? In this article, the authors explore the top four challenges faced by pricers in the theme park and travel industries, as well as steps that pricers in these and other industries can take to effectively manage their pricing in challenging environments. Damien Robert is the Director in charge of Leisure & Tourism for Simon-Kucher & Partners and former Head of Pricing of Disneyland Resort Paris. Guillaume Alexandre is a Senior Consultant at Simon-Kucher & Partners. Both can be reached at www.Simon-Kucher.com.

Theme parks are exciting places for all who visit them, but the opportunity for thrills isn’t just reserved for the customers. Behind the scenes there is just as much to keep you occupied and for the head of pricing there is no exception. Pricing for a theme park is a challenging endeavour; it is a key revenue driver and the variety of problems puts it high on the CEO agenda. The top four on the list are:

  • The accurate measurement of willingness to pay for different segments… to avoid the inefficient 3% price increase rule

  • The stimulation of demand by creating urgency to visit and increasing the repeat purchase rates... without losing customer trust

  • The constant adaptation of price offers to fully capture the willingness to pay of each customer segment... while keeping your offer simple and clear to everyone

  • The temptation to make easy "on-site" profits... that can impact overall experience perception


1. The accurate measurement of willingness to pay for different segments… to avoid the inefficient 3% price increase rule

In many companies, the overall pricing strategy is driven by company financial targets, which are themselves derived from the mid-term plan and the decisions to invest in new rides. Yet for theme park activities the quality and accuracy of price management can be considered particularly important. There are two main reasons for this: the cost structure and the market demand elasticity.

Firstly, the small variable costs that each additional customer incurs can typically be more than compensated by the additional profits these customers will bring with on-site expenses such as food, beverages and merchandise purchases. When this is the case, ticket price drops can be profitable, even with “limited” price sensitivities.

Secondly, the total market size is not defined for such leisure activities. In many industries, a price drop would only allow a company to make short-term profits, since competitors would quickly react and all the market players would still have to share the same overall demand. But theme parks are pure leisure “nice-to-have” activities and a simultaneous price drop of all players can sometime result in an overall significant increase of demand and of industry profits. Conversely, a systematic price increase could be a very big mistake which may kill your business.

However, price increases may be necessary to fund investment for new attractions. These are often a good way of increasing volume capacities, duration of stays and frequency of visits. Thus, to achieve this without risking a park’s total demand, price decisions have to be based on an accurate measure of price sensitivity by customer segments.

A park, with a natural customer portfolio composed of mainly international and distant customers, has thus been able to make additional profits from a new product range dedicated to the local demand. The population living in the area was interested in coming but the entrance ticket price was a much higher barrier to visit than for international tourists. A significant (more than 40%), structural but fenced (not accessible to other customer segments) price decrease has generated new local demand flows without lowering the revenues made with other customer segments. The lower price ticket range was not available on high attendance days and sales and communication actions were not very visible to other customers. (For example, ticket prices were made accessible online only after postcode identification and advertising done through local radios and panels.)

This kind of segmented pricing is essential for profit growth but requires in-depth customer surveys with very solid business casing.

2. The stimulation of demand by creating urgency to visit and increasing the repeat purchase rates... without losing customer trust

Why should customers come to your park? Proactively stimulating the demand is a necessary job when you are selling "nice-to-have" products which are not essential to your customers.

In the leisure industry, many businesses play with customer behaviour by laying special emphasis on unique events and highlighting the risk to miss an opportunity that may never appear again. Unique concerts or major sport competitions are indeed "perishable" opportunities for customers who rush towards booking channels and outlets. How then to turn a theme park entry ticket into a perishable opportunity?

More than ever, parks are creating marketing events, seasons and anniversaries to suggest that visitors should come more often. However, the core offer of a park is generally not perishable. Disneyland Park in California is now more than 50 years old and the rides are only changing incrementally. This does not justify monthly visits for customers.

With nothing perishable to offer, playing with pricing tactics may be an alternative. Promotional offers and innovative multi-visit products can help to drive customer behaviour and generate new visits. This is not something that easy.

To launch the appropriate pricing initiative and really get money out of it, knowing the current customer mix and understanding the purchase behaviour of visitors is key. Experience shows that not all companies succeed in implementation.

A water park in Northern Europe launched an annual pass at three times the price of a single ticket, with only the knowledge that the standard average number of visits to a water park was 1.2. Sales clearly hit the roof, but it destroyed the experience and the revenues. Indeed, a very quick “customer survey” at the entrance of the park later showed that 50% of the total attendance was already driven by people coming more than six times per year and that these people had found in the new product a very good way to save money... Such breakthrough product launches require detailed customer insight and financial modelling. Furthermore, international leisure companies should be aware that each destination has to face specific customer behaviours and that nothing can be “copy-pasted” without taking serious risks.

Far better results were achieved by another leisure company who sent free nominative invitations to targeted customer families. The free invitation was only given to one family member and it had to be used for specific dates only. The letter was packaged in a premium way. The promotion was thus creating a unique event for the family who had to balance the pain of losing this perishable present with the cost for all other entrance tickets. On-site customer surveys helped to measure the impacts and to calibrate future promotion campaigns.

In conclusion, promotions can be a very powerful tool to stimulate the demand, but only on the conditions that the behaviour of customers is carefully analysed and that the promotion is kept simple. It is really important to focus on key offers and not to blur customer perception with very different messages coming from hundreds of small tactical actions. Otherwise, all promotion efficiency is jeopardised and customer trust is gone.

3. The constant adaptation of price offers to fully capture the willingness to pay of each customer segment... while keeping your offer simple and clear to everyone

Who is it that goes to Disneyland Resort Paris? Possible answers include families wanting activities that appeal to the whole group, those that are seeking thrills from the more extreme rides and those that buy into the fantasy aspect of the Disney characters. The customer base is thus very wide and within it there are very different income profiles, ranging from famous international soccer players to teenagers of Paris suburbs.

Therefore, one of the most important price management challenges is to develop and price all the offers that will capture the full willingness to pay of each customer segment.

Building and displaying a wide range of offers with increasing value and price levels are essential for two reasons. Firstly, it allows any customer to find an offer which corresponds to the price he is ready to pay. Secondly, it becomes easier to up-sell as you always have something slightly more attractive and expensive to put forward. To succeed, the value gaps between the price points must be really tangible, otherwise smart shoppers will systematically go for the less expensive offers.

For instance, seating categories are natural differentiators for sports events or concert tickets and allow the exploitation of different levels of willingness-to-pay. In the case of leisure parks, the differentiated range of offers is instead developed through additional activities like shows, food, beverages and merchandise. It is possible to have lunch in Disneyland Resort Paris from 9.95€ for a quick-service menu to a full experience with Princes and Princesses dancing around you for 55€ per person. Similarly, one can exit the park with a simple Disney pen as a souvenir or a Chrystal Castle.

4. The temptation to make easy "on-site" profits... that can impact overall experience perception


Once a visitor is in a park, sports arena, or movie theatre complex, the temptation is high to leverage this captive audience with aggressive pricing. However, numerous surveys have shown that some exaggerated prices were clearly impacting the intention to visit again and to recommend to friends the activity or the destination.

Again, a deep understanding of customer purchasing behaviour will help to limit the negative impacts. On-site visceral factors come into play and customers are ready to make additional expenses they may not have been prepared to before coming. But their price sensitivity is likely to increase if they perceive a loss of freedom. It is important to understand what is accepted by the customer and what is not.

Generally speaking, all the “need” expenses are very sensitive, while the “chosen” expenses are less problematic. For “need” expenses, a progressive range of value and price levels can reduce the negative perception. Consequently, theme parks should be able to provide low price alternative offers for lunch, but can try to extract more from the merchandising products.

Taking the right pricing decisions towards on-site spending requires having a global pricing team optimising those decisions, which is often not the case with BU centric price optimisations.

Conclusion

Pricing is a key element of the revenue optimisation for theme parks and leisure activities. It can only be achieved with intensive customer surveys and strong analytics. Pricing in leisure parks is really fun and exciting, but can turn to a nightmare if you do not have the proper tools and knowledge.

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