Beyond Cost Plus Summary: October 2015

Oct 30, 2015

 

A look at how attractions offer diminishing marginal utility, and how pricing them can involve anchors, bundles and discounting.

 

The new posts this month were focussed on the pricing of tickets to attractions. It's delicate – we're talking about non-essential discretionary items (nobody has to buy them) that are highly perishable (if you don't sell every tee time on your miniature golf course today you had inventory spoil, and you can never get it back). Succeeding in the attraction business depends on really smart pricing.

The first step is understanding the diminishing marginal utility of the product. The historic ship tours in Baltimore get this. They understand that visiting one of their four historic ships is very appealing, and they charge a relatively high price for the privilege. Touring all four can start to feel a lot like work – each ship provides a little less utility (in this case pleasure) than the one that came before it. This is the very definition of diminishing marginal utility. As a result they discount additional tours aggressively – seeing all four of their ships costs less that 40% of what it would take to purchase four individual tickets.

The people in charge of this attraction also understand the idea of surplus utility. The four ships in their collection are all very different, and are unlikely to appeal equally. The bundle price (for admission to all four ships) makes the ships someone is less interested in seem like a better deal because they choose to assign a higher value to the ships they are interested in.

This is also understood by the operators of attractions in Niagara falls who have gathered together to offer bundles for multiple attractions. Again that people will value their attractions differently. They also understand that (for example) the members of a family will value the different attractions differently, and that even those valuations may change depending on the weather, crowds, etc.

By selling multiple attractions together as a discounted bundle they definitely see less revenue than if everyone consumed the same amount of attractions at full price, but they also see more actual revenue (and greater profits) as people would simply consume much less at those higher prices.



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