Tuesday, May 15, 2018

econlife - Those Subscriptions That We Love to Buy (and Barely Use) by Elaine Schwartz

MoviePass subscribers can see up to one movie a day. They just go to a theater and use an app that sets up the ticket payment. While a subscription used to be $50 a month, now you pay a jaw dropping $6.95 for 30 movies. The catch? You have to pay for a whole year upfront and add a $6.55 processing fee.

This is the story and then some economic insight…

The MoviePass Subscription

Soon after you sign up for MoviePass, a debit-like card will arrive in the mail. Then, you use their app to select a film and to check-in. At that point, they transfer the price of the ticket to your card so you can use it to pay as you enter.

This person used his app to see Dunkirk. “Success” meant the money had been transferred to his card:



The Numbers

MoviePass is very aware that the average moviegoer goes to a theater just 4.5 times a year. If their subscribers went daily, the firm would be paying an average of $8.97 a ticket or maybe $270 a month per person (unless it had a special deal with the theater). And if we are in a big city like New York or San Francisco, the ticket price soars to $16.50. But MoviePass does not have that problem. A whopping 88% of its subscribers underuse their MoviePasses.

And that takes us to behavioral economics.

Our Bottom Line: Mental Accounting

Nobel Laureate Richard Thaler explained seemingly irrational consumer behavior through mental accounting.  The following example is somewhat comparable to the MoviePass people who underuse their subscription. It is about Thaler’s friend at a department store quilt sale:

“The spreads came in three sizes: double, queen and king. The usual prices for these quilts were $200, $250 and $300 respectively, but during the sale they were all priced at only $150. My friend bought the king-size quilt and was quite pleased with her purchase, though the quilt did hang a bit over the sides of her double bed.”

As Thaler described, assigned to specific “mental account,” a purchase gets a reference that lets you know if it is cheap or expensive. Not only did the (mental) account for the quilt benefit but also the woman enjoyed an elevated transactional utility from the cheap purchase. Similarly, once MoviePass lowered the monthly subscription rate below $10.00, people’s “mental account” or imaginary bucket for entertainment got a bargain. And like the king-size quilt, the transactional utility of the purchase created a pleasure that far outweighed the reality of using it.

At this point we might even throw in the optimism bias from another economics Nobel Laureate, Daniel Kahneman. Defined as the difference between an expectation and its outcome, I wonder if the optimism bias (typically applied to risk taking), also explains why MoviePass buyers thought they would attend far more performances than they realistically would be able to fit into their lives.

So, returning to where we began, we have a lower MoviePass price that appeals to our mental accounting and takes advantage of our expectations bias.

My sources and more: This NY Times article on MoviePass started me thinking about the concept. From there, my investigation led me to The Hollywood Reporter  and BusinessInsider. and the perfect complement, Richard Thaler’s mental accounting paper.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.