Sun 12 Feb 2006

Anyone who has visited the cinema will know that however good or bad the film there is one feature, which is always the same. The popcorn is expensive. Why?
The answer to this question exposes the deficiency in the charging methods generally used by professionals.
The key points to note are:
Ø    The price of cinema popcorn is not related to the time it took to produce.
Ø    The price is not calculated by taking the price of production and adding a predetermined profit margin.
In order to grasp the logic behind the cost of cinema popcorn it is necessary to appreciate the concept of value and pricing services according to the value, which the client places on them.
The cinema knows its cost base and what income it needs in order to cover its costs and break-even. Above this, cinema ticket prices are not calculated by adding on a profit margin. They are calculated by assessing the value that people place on the experience of going to the cinema and translating that value into the admission price.
The cinema owner knows that if the prices are set too high less people will visit the Cinema. This can be used to control demand.
Experience and experimentation will establish the optimum pricing level to get the desired number of people into the cinema and optimise the income.
This is not the end of the story. What cinema owners know is that some people who visit the cinema are prepared to pay more for the experience than others. How do they capitalise on this? How do they introduce price discrimination and extract extra revenue from those prepared to pay more for the Cinema experience?
Enter the popcorn. The highly-priced popcorn gives the opportunity for those who want spend more on a visit to the cinema to do so whilst not penalising all customers.
Everyone is happy. The customers who just want to pay the bare admission price can do so. Those willing to pay more can invest in expensive popcorn. The owner extracts the most income from the most customers.
Professional services firms and their clients could be happier too.
Firms should began to think more about pricing their services according to the clients perceived value of the work done. Beyond that they should look for opportunities to discriminate on price where in a given situation a client is prepared to pay more than the standard fee.
Firms would be happier because they would be maximising their income stream. Clients would be happier because they would be paying for services in a way, which is proportionate to the value they place on them.
What is the difference between professional services and cinemas?
Cinemas can make more profit and have happier customers.
Popcorn is not peanuts. Popcorn should be food for thought.

© Phil Jepson 2002