One Viewer’s Opinion

There has been a lot of discussion lately as to why many of the recent motion picture releases coming out of Hollywood have been underperforming. Now, I’m sure you’ve already heard all of the commentary on the dumbing-down of America, the competition from other forms of entertainment, the threat of illegal file sharing and DVD piracy, and the difficulty in marketing successfully to an increasingly saturated consuming public. You’ll be relieved to know that I don’t really have much to add to any of those points; I’m going to come at this from a much more basic level. A business level, in fact: I would like all of you to consider for a moment that the problem facing the movie business these days is simply one of Price Point.

For anyone not familiar with the idea, the price point is the price level at which the highest profit can be made on a given product. As the price of a product rises, the seller’s profit per unit rises, but the number of units sold drops. A product that sells 100 units when the price is $1 might only sell 80 units when sold for $2, and might only sell 10 units when the price reaches $5. If the product costs $.50 to make, then we make $50 selling it for $1 ($.50 per unit profit x 100 units = $50) and $120 selling it for $2 ($1.50 per unit profit x 80 units = $120), but only $45 selling it for $5 ($4.50 x 10 units = $45). That’s right; we can actually make more money selling this product at $1 each than we can selling it for $5 each; and we can make a lot more selling it for $2. If you plot the sales and profits of ANY product or service against bottom-line profit on a graph, you will eventually find the point where the profits are the highest – the price point.

Of course, in real life, there are a lot of factors that go into how many copies of a given product will sell at any given price level. The existence of competitors will be a factor; value will be a factor; prestige associated with the product and status conferred by ownership will be a factor. If your customers are not aware of your product they won’t think if buying it, and if they can’t obtain it easily they may not make the effort to do so. Setting the price point is a complex science, and many large companies employ teams of researchers full-time to work on this one topic. Which makes the movie studios’ apparent disregard for this issue seem a bit naïve…

Clearly, there is a limit to how much anyone is going to pay for two hours of entertainment, especially when there are many other options available. Paying $5 to see a movie might seem reasonable; paying $11 seems considerably less so, especially when you can rent a DVD for $4. Paying $44 for four movie tickets, plus another $5 or $10 for parking, to take a family of four to see a movie does not compare well to $4 for a DVD rental, and it does even worse when we factor in weather, inconvenience (driving and parking), uncomfortable viewing environments, crowds, and really bad movies.

And that brings me to the point. When the only entertainment choices available were live theater (expensive and hard to obtain), radio (not very visually interesting) and the movies, the studios could charge a lot and not really concern themselves with product quality. In a world with home video games, DVD movies (especially with big-screen home theater systems), hundreds of channels of cable and satellite television, elaborate pay-per-view services, and the endless entertainment possibilities of the Internet, it’s just not reasonable to expect people to pay as much for a night at the movies. And that doesn’t even take the quality issue into account. The bottom line is that the folks in Hollywood can blame video piracy all they want to, but this will not change the fact that they are pricing themselves out of their market. They must make some effort to either lower prices or find some way of adding value to their products…