Question

If the Disney reduc their products prices. How this will effect them and why?

Answer 1

No one likes price hikes, but in the case of dynamic pricing, demand-based price lifts and dips could give you more bang for your buck.

Walt Disney Co. DIS, -7.80% announced in a blog post on Saturday that its seasonal pricing plan for one-day tickets would go into effect on Sunday. Popularity of franchises including “Frozen” and “Star Wars” have increased the parks’ already overwhelming demand. The new dynamic pricing strategy increases ticket prices during peak visitor times, like school holiday breaks and summer weekends, and drops prices during low-traffic times like weekdays. At Disneyland in Anaheim, Calif., regular tickets — most regular weekends and summer weeks — are $105, off-season tickets are $95 and peak demand tickets are $119. For the Magic Kingdom park at Disney World in Orlando, Fla., ticket prices range from $105 for low-traffic periods, $110 for regular demand and $119 for peak.

Experts say such a strategy opens up the market to more price-sensitive consumers on the lower end, and helps manage demand — effectively reducing crowds and time spent in lines — on the higher end.

Disney raised base ticket prices in October for lower-tier annual passes at Disneyland and Disney California Adventure, as well as its bi-coastal pass that is accepted at both Disneyland and Walt Disney World.

Rafi Mohammed, a price strategy consultant and founder of consultancy firm Culture of Profit, says peak pricing is an effective way to motivate consumer behavior.

He says that Disney’s rollout of a peak pricing strategy has been successful thus far because of its focus on consumer benefit and open communication with customers through things like surveys. The change has been marketed as a way to give more consumers access to the park, rather than boost Disney profits, since offseason prices would make it more affordable for lower-income consumers and higher prices would discourage overcrowding during the peak seasons.

“Price can destroy reputation very quickly,” Mohammed says. “Any time you do a pricing change it’s important to have communication with customers.”

Despite the potential benefits of modified behavior, consumers typically denounce the practice as a way to favor those with more disposable income. And those with higher incomes can also arguably enjoy more flexibility when it comes to dates to go to the park. For example, peak pricing would presumably be in effect during times like Christmas when kids are off from school, while lower-income consumers could be restricted to less convenient times.

The idea that adjusting prices to consumer demand is harmful fails to take into account the value of other factors involved, like time spent waiting in line.Detractors of dynamic pricing tend to focus on the high-price aspect and miss the benefits of the lower prices.

The Walt Disney Company is reportedly considering implementing surge pricing at its various theme parks. Admission to Disneyland in Anaheim, CA, for instance, is currently $99 for any day of the week. The rumored pricing plan involves offering Gold ($115), Silver ($105), and Bronze ($99) ticket options that are priced based on anticipated demand. Gold would be good for admission any day of the week; Silver ($105) would be for off-peak weekdays and weekends; Bronze ($99) would get you in on select off-peak weekends.

Implementing demand-based pricing strategies at Disneyland, or any theme park for that matter, simply makes sense. Raising prices during popular times such as Fourth of July weekend capitalizes on higher consumer valuations. Is this gouging? Some observers think so, and companies such as Uber have faced criticism for so-called “surge pricing.” But if customers are willing to pay more in certain instances, I vote for accepting this “free money.”

One refinement I’d consider making to the rumored Disney pricing plan is reducing the lowest Bronze plan price. It’s worth investigating whether a significantly lower price can activate “dormant customers” to fill the park on otherwise sparse days. By dormant customers, I mean those who are interested in coming to the theme park, but haven’t done so because the price has been too high. By offering deeper discounts on off-peak days, customers who otherwise would not have enjoyed Disneyland could now do so. This would result in growth. Since theme parks are high fixed cost/low variable cost entities, revenue from discount-enticed new customers is virtually all profit… free money. These newly activated “dormant customers” would also likely show up hungry and snap up souvenirs… more free money.

Using discounts to activate dormant customers can be highly effective. Randy’s Car Wash, located across the street from the Harvard Business Review’s office, offers a $5.99 wash special on Tuesdays. Shazam: demand is so strong on some Tuesdays that a police officer has to direct traffic. The upside of discounting for Randy is…free money.

Having a lower price option – as part of a surge pricing strategy – provides a great rebuttal to potential pushback on premium prices: “Yes, we’ve raised prices on popular days, but you now have the option to visit at a much lower price on certain days.” Framing pricing options in this manner makes a price increase more palatable. Instead of forcing a “take it or leave it” decision, customers tend to feel better because they’ve chosen to pay more: “I had the opportunity to get a lower price, but I decided to pay more because that option was more convenient for me.”

There are plenty of other industries–such as restaurants, barbershops, and health clubs–that can also benefit from surge pricing. Surge pricing has typically been used in industries with perishable goods (e.g., hotel rooms), but it can be used any time when demand varies. Should beer prices at the TD Garden be higher at a rowdy Boston Bruins game than when a traveling circus is using the arena? I think so.

Another instance when surge pricing can be used is in cases of fluctuating supply. Restaurants, for example, often charge “market price” for seafood entrees to reflect varying supply conditions. Uber argues surge pricing increases the supply of its drivers (attracted to the opportunity to earn more money), which better serves customers. I visit a neighborhood where four gas stations are located in close proximity and compete vigorously on price. However, only one of these stations is open 24 hours. Should the all-night gas station raise prices every evening between 11 PM – 6 AM when its competitors are closed? Yup, I think so.

Managers are often wary of raising prices during times of high demand because they fear a consumer backlash. It’s a fair concern, but it’s worth noting that consumers are becoming desensitized to surge pricing – high/low pricing is being used more often in more industries. If well-known companies that are fiercely protective of their brands–such as Disney and Major League Baseball teams–are contemplating (and using) surge pricing, other companies are probably good to go. And of course, another way to view this strategy is instead of raising prices, you are offering discounts during low-demand periods.

Back in economics 101, we were taught that every company faces a demand curve for its products and services. The reality is this demand curve is not static: there are times when demand is higher and other times when it is lower. Surge pricing enables companies to capture additional profit when demand is high and just as importantly, provide discounts to generate growth during off-peak periods.

The Walt Disney Company’s commitment to environmental stewardship goes back to our founding more than 60 years ago. Walt himself said that “conservation isn’t just the business of a few people. It’s a matter that concerns all of us.” We’ve taken that message to heart and act on our commitment in big and small ways around the world.