Movie Theaters: how do they make their money? What does that imply about movie distributor contracts with theaters?

On the contrary to popular conception, the movie theaters themselves rarely make any money of the tickets of the movies that they are showing inside the theater.  So how do theaters make their money?  Concession Margins.  Most of the theaters’ money comes from concessions.  Theaters can stay in business because the profit margins on drinks and food is so high.  Fountain drinks cost pennies to make, including the cup/lid/straw, so profit ratio is massive.  Popcorn is likewise really cheap, and they also charge a huge markup for it.  Their fixed costs with employees also leads to zero marginal costs for movie theaters in regards to selling concessions.  As Time magazine puts it in 2009, “Movie Theaters make 85% profit at concession stands”.

Looking at the price discrimination graph below, Movie theaters markups in their concessions are reflective of second degree price discrimination, meaning that the theaters charge a different price for different quantities.  This applies for movie ticket sales/food quantity.  Price discrimination is the action of selling the same product at different prices to different buyers, in order to maximize sales and profits.   The tickets are a form of price discrimination as well for their are different ticket prices for certain age demographics.

In the case above, the seller charges a higher per-unit price for fewer units sold and a lower per-unit price for larger quantities purchased (hence why theaters still implement family deals to attract customer initiatives.  The seller is attempting to extract some of the consumer’s surplus value as profits with residual surplus remaining with the consumer over and above the actual price paid.  Thus, high margins under a movie theater framework.

In movie distributor contracts with theaters, the movie studios leases a movie to the the local theater for a set period of time.  Movie distributors make deals with the theaters in regards to tickets, and there are several terms that are agreed to: Set figure negotiated by the theater to cover basic expenses each week, percentage split for next box office is set (amount of box office left after the deduction of house allowance), percentage split for gross box office is set, length of engagement set.

For example, I pay $10 to go see La La Land at my local theater in their opening week, in which the the first week or two of the showing the theatre itself gets to keep only 20-25% of that $10 per unit.  As the theater moves into the third and fourth weeks of release, the percentage starts to swing anywhere from 45%-55% that the theater gets to keep.  Usually towards the end of the movies lease, the audience number starts to really decrease and the higher percentage allocation towards theater at that time means really little.  More often than not, the theaters itself are willing to lose money in the first week or two of a popular movie opening (giving distributors higher percentages) so they can generate higher volume in  people going to the concession stands, where the margins are high and they keep 100% of the profits.

Different films make different deals with theaters, so the exact percentage is different from film to film, but it always involves theaters agreeing to a small cut at the start and an ever growing percentage over time.  Ultimately, the real money for theaters comes from their concession stands, despite their actions to generate revenue from ticket sales.  For movie studios, they are more concerned with revenue maximizing rather than profit maximizing based on the structure of the studio/theater arrangement.

 

Sources Consulted:

Movie Theaters Make 85% Profit at Concession Stands

http://www.themovieblog.com/2007/10/economics-of-the-movie-theater-where-the-money-goes-and-why-it-costs-us-so-much/

http://entertainment.howstuffworks.com/movie-distribution2.htm

10 thoughts on “Movie Theaters: how do they make their money? What does that imply about movie distributor contracts with theaters?

  1. As I read your blog post, I was very much reminded of my hometown movie theater. After buying a ticket, customers walk into a large room, most of which is occupied by a concession stand. Two small hallways on either side of the concession stand lead to the actual theaters. When customers walk into the area with the concession stand, they are met with large, colorful displays and no easily accessible exit. In this way, the theater is almost forcing customers to contemplate the process of buying a snack or two to accompany their film, which reinforces the information you give above explaining how theaters make the majority of their profit.

  2. It is interesting to me how many movie theaters are willing to operate at a loss to increase ticket sales, in order to make as much of a profit as they can on solely their concessions. As the theaters continue to raise their prices on concessions, I am curious on what will be the highest price consumers are willing to pay for concessions before they forgo the process of buying concessions completely.

  3. I have never seriously thought about the process of how individual movie theaters gained the ability to show certain movies. The current leasing method between theaters and distributors must put a pinch on theaters to make profits in other areas (i.e. concessions). But my real question is how do movie theaters who are not owned by larger groups, such as Regal or Carmike, stay in business? The costs incurred by these types of theaters must chip away at profits much faster than the larger theater chains.

    • You ask an economies of scale question. What are the advantages of being part of a larger group? Can you lease a film at the group level, rather than the individual location level? Are there real estate management and other operational benefits?

      You could surely interview the owner of the State Theater downtown (though he’s not been there on my last couple visits) and I can introduce you to Board members of Hull’s Drivein, it’s a non-profit.

  4. Given the fact that theaters make most of their revenue from concessions, it is puzzling why they steadily raise ticket prices. Wouldn’t it behoove them to keep ticket prices down in order to fill the seats with customers ready to raid the concession stand? Perhaps the distributing companies force them to charge a certain level for tickets because that is how they get their share of the revenue in this industry.

  5. As Jordan mentioned above, it is interesting to see how movie theaters are willing to operate at a loss in order to increase ticket sales and generate more profit from concessions. It was touched on a little bit in the blog post, but I’d like to know more about how much of a loss the theaters are willing to take for the promise of increased concession. Additionally, how much money do theaters lose on average from goods smuggled into the theater to avoid the prices at concession stands? There are so many factors that affect this model, and I think it could definitely be explored further in future blog posts.

    The movie theater situation reminds me of amusement parks. I used to go to Kings Dominion, an park just north of Richmond, as a kid. My dad used to always tell me, they break even on ticket sales but make all their money in concessions. A season pass that comes with unlimited visits costs about $100, yet a day pass is about $50. It makes sense to me now, because even though a person with unlimited visits may come ten times during the summer, Kings Dominion wins, because it means extra visits in the park where a person is likely to buy food, merchandise, and participate in arcade games. Even though those visits mean the person will ride more rides, the rides are there regardless, and so those extra visits might mean some extra maintenance costs. Thus, each extra visit stands to benefit the company tremendously.

    • Jargon: zero marginal costs unless you’re the only one on a ride. At some point there are congestion costs, but season passes help there. When I would go with Scouts it was a big deal, we’d aim to be there when it opened to try to get a few rides in before the crowds arrived, but we’d stay the whole time. Locals can go for two hours and leave when the crowds arrive, and come back another day…

  6. I know we touched on this in class but are individual movie theaters subject to restraints on how expensive they can make their concessions relative to ticket prices? It would make sense that movie distributors might be able to have some say because it would be mutually beneficial for the ticket prices and concession prices to be competitive relative to other theaters. Otherwise theaters I imagine could slash ticket prices and raise concessions in order to maximize profits.

  7. A couple of you have touched on the tradeoffs in prices, in particular movie distributors don’t want ticket prices to be too low, and they may want there to be a maximum on concession prices. As I understand the post, there’s a two-part pricing scheme: a fixed cost [base lease] and a marginal cost [share of ticket revenue]. The fixed cost means theaters have to think about average ticket revenue and can’t price too low. Otherwise they’d be happy to price tickets really low.

    Do theaters have time-of-day or day-of-week discounts? When a new Star Wars comes out, is the midnight opening showing the same price as a regular one?

    In addition, do they price lower in the 3rd week?

    I don’t know, I don’t see movies often enough, and I don’t go to Roanoke to a multiplex.

    Now I have heard that the multiplexes may have luxury seating replete with wine brought to your seat…again, no personal experience.

  8. A movie theatre near my house underwent renovations a couple years ago. It was a pretty regular complex, with many different theatres, within each one they would try to maximize the amount of seating. After the renovation, though, they have reduced the amount of theatres and have tried to replicate a more home theatre experience. This leads to several less seats and therefore fewer max ticket sales. The amount for the seat is more (probably about 20% more than a regular large movie theatre). I would be curious to see how they have done since. As their strategy seems to almost run backward to the strategy discussed in this blog.

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