Going to the movies is an American pastime that many of us hold fondly in our hearts. Boxes of candy, massive sodas, and most importantly, buttery popcorn, is just as vital to the experience as the movie itself. But there's just one thing: movie popcorn isn't cheap.
A small popcorn at the movie theater costs $5.59 for seven cups, about $0.81 per cup. The medium, just $0.50 more, gets you an additional seven cups at about $0.07 each. Relatively speaking, this is an amazing deal as it represents a discount of over 90% on the extra cups.
Spend another $0.50 for the largest size, which includes a free refill, and you get an additional 26 cups at just under $0.02 each. An even more remarkable deal, this represents a discount of more than 97%. What gives?
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Why The First Few Cups Are So Expensive
It’s simple – supply and demand. For many people popcorn is part of the movie-going experience. It is almost impossible to resist the smell of fresh popcorn and melted butter.
Meanwhile demand is very limited. If you want the hot fresh popcorn that smells so good and brings back so many memories there is only one place to get it – the concession stand, and they can charge a very high price.
It’s worth noting that candy is a different situation. It would be difficult to buy a cheaper bag of hot buttered popcorn from an outside vendor and sneak it in, but it’s very easy to sneak in a bag of licorice. As a result theaters generally price candy much more competitively.
Why The Larger Sizes Are So Cheap
One factor is the high initial margin. It’s only because the margins are so enormous that such aggressive discounting is possible. But the margin is more about how they can discount like this, not why they choose to do it.
Perishability is another important factor. Movie theater popcorn has a very short lifespan – you can’t buy a large and spread it over three visits so they don’t have to worry about cannibalizing future sales.
More importantly movie theaters recognize the “diminishing marginal utility" of their popcorn. Each unit consumed provides a little less (diminishing) utility (in this case enjoyment) than the one that came before it. The first few mouthfuls are great but the enjoyment quickly tapers off. Few people could finish a large bag, let alone the free refill.
Something like gasoline is very different. The utility of gasoline does not diminish – the first gallon gets you as far as the last – so there are no volume discounts.
But each additional unit of popcorn is worth a little less to the consumer and the theater addresses this by discounting them. Imagine a graph that showed pleasure on the vertical access and units consumed along the horizontal. The enjoyment of popcorn would show a line that started high on the left (lots of pleasure from the first few cups) and nosedived as it moved to the right (less pleasure from later cups).
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The theater is trying to align the pricing with the pleasure the product provides. They know you won’t enjoy the last few cups as much so they are willing to give you a great deal on them.
The practice of understanding customers' perception of product value and aligning prices is known as revenue management. The movie theater bases their pricing on the strong demand for some popcorn and the much lower demand for a lot of popcorn.
The theater doesn’t know if or when you will be back and buying popcorn. The goal is to generate as much profit as possible from the current opportunity, and they will sacrifice significant margin in order to secure a larger profit.
Many businesses don’t want to recognize the diminishing marginal utility of their products and discount accordingly. Failing to do so can sacrifice profit in favor of margin.