Why Destructive Value Capture?

by Zvi Don't Worry About the Vase3 min read18th Jun 201813 comments

40


Previously: Front Row Center

I got a lot of push-back from suggesting that there was a way for theaters to improve their customer experience and value proposition at low cost (get rid of the seats that are so close to the screen they cause neck strain), and that theaters should do that.

The push-back didn’t argue that the method wouldn’t improve the customer experience at low cost. There were a few who suggested an alternate high-cost solution that improves the experience more (use high-quality and assigned seating at a substantially higher price point), and which some places have implemented. No one argued that, where the higher-cost solution didn’t make sense. my incremental suggestion wouldn’t improve the customer experience versus status quo, at relatively low cost.

They also didn’t raise the reasonable argument that getting people to do things at all, especially slightly non-standard things that might look bad on superficial metrics during the pitch meeting, is hard. People don’t think about things, they don’t do things, they don’t optimize, and so on. One could reasonably argue this isn’t worth the effort.

Instead, everyone argued that, unless they were forced to do so, theaters shouldn’t implement the suggestion. Because it would cost them money – they couldn’t sell those few terrible seats, and forcing people to come early increases ad and concession revenue.

That’s interesting. And weird.

The proposition creates value. One comment from Quixote estimates $1.67 in customer time-value is saved in exchange for the loss of $0.10 in ad revenue.

The proposition improves the customer experience. It generates movie-going habits, loyalty and goodwill.

Not implementing the proposition is a destructive value capture. In order to get a little revenue, an order of magnitude more value is destroyed.

Destructive value capture is normal. In order to capture value, some value is typically destroyed. But when you’re destroying most of the value you withdraw from the system, you should be suspicious mistakes are being made. At a minimum, it’s worth asking on a deeper level why this is happening. What could justify it? What failure mode are we in? How does it come to be, why does it persist, is there a way we can solve it or minimize it? We shouldn’t shrug and mutter something about capitalism. We should treat this as a major failure, and brainstorm potential barriers even if they don’t apply in this case.

Can’t Raise the Price

If you’re charging $15 to see a movie, then destroying $1.50 in value to generate $0.15 in additional income, why aren’t you just not doing that, and instead charging $15.25 to see the movie?

What might stop this from being a good solution?

What if movie was free? Moving from free to not free is a huge change, even if the additional cost is small. This could drive people away and be hugely value destructive.

What if this introduced an additional collection point? You’d need to ask someone for money an additional time to make up the additional cost, and that could be value destructive.

What if this disrupted a standardized price or crosses a key threshold? Suppose everyone knows that movies cost $15, and there would be a strong reaction against a price of $15.05, because it’s different, or because it makes it hard to give exact change.

What if the market encouraged sorting purely by price? Imagine a world like with plane tickets, where you go to Kayak or Orbitz or what not, and there is strong default pressure to buy the cheapest tickets without noticing extra charges.

What if regulation prevented higher prices? That which is forbidden is not allowed. Price controls often cause perverse reactions.

Those would be good reasons. All clearly do not apply. Movies aren’t free (or if you have MoviePass, they would stay free). Movies have a collection point. Movies don’t have a standardized prices or a strong price-sorting search mechanism, and prices are rarely at a key threshold.

Other reasons might apply somewhat, but still seem weak.

What if this would be a price increase and that would be bad? Thus, the bad event of ‘prices went up’ could matter even if the new price isn’t much different from the old price, so you can’t do that often. A tiny increase might be impractical.

That’s fair. But the increase could be put into a later, larger increase, or if that’s too big a burden, one could wait on implementation until the next price increase.

What if higher prices decrease customer experience, so they’re more expensive than they look? 

I grant this is likely true for some, but the effect size should be small.

What if this is a pure bad when demand is low, such as at a matinee, and complexity cost prevents price discrimination? 

Again, this seems true but effect size is small. Some places price discriminate by time but the complexity cost stops the majority. So even though removing the seats costs nothing when demand is low, raising the price at those times is net bad.

Would a price increase send the wrong message? Would people then worry about the health of your company, or your industry? Would it thus push down stock prices or reduce your ability to raise money?

It might, indeed. It also might do the opposite. I don’t think this is what’s going on here.

All of that is seeking solutions to the easy out: raising prices. Or, if prices are already higher than they should be, lower them to where they should otherwise be, then raising them back.

Let’s take away that easy out, and say one of the good reasons applied. You can’t raise the price and demand exceeds supply.

This is pretty terrible even if you don’t then do value capture. Destructive value allocation is bad enough, via making people wait on lines or make commitments or virtue signal or what have you – anything where the auction involves incinerating rather than redistributing the bids, often all-pay auctions at that. One can think of this as balancing supply and demand by making quality of the supply sufficiently worse. 

Thus we have two mostly distinct problems. We need to pay for the creation and maintenance of nice things without destroying what makes them nice. And we need to do efficient allocation of those nice things, that balances supply and demand and gets the product to the right people.

Letting the price float is the best way to do both, but what happens when you can’t do it? Are we now stuck with terrible seating and massive deadweight loss? What about other situations where the price is stuck? A life lived under advertising’s increasingly long and intrusive shadow? Or worse, the evil bastard children of microtransactions and free to play games?

We seem to be headed that way. I think there are promising answers, which I hope to explore further. That starts with defaulting to price adjustment, and finding creative ways to do price adjustment, and viewing destruction of value as a failure rather than normality or ‘the way of business.’

 

 

40