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March 16, 2009

6-4-3

Why Youve Paid It

by Gary Huckabay

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About ten years ago, I did some really cool and fun research for one of the large casino resorts on the Las Vegas strip. It was a rather long engagement that lasted over a year total, and involved both qualitative and quantitative research. It was good work, too, because it was interesting, and the client was serious about doing what was necessary to act on the results.

That kind of follow-up is quite rare; a lot of times, you come up with a good plan of action plan, but the client doesn't respond, for whatever reason, be it a change in management philosophy (or management, for that matter), a lack of funds, or just too many other balls in the air at the time. It happens, so when you get a client that's willing to keep at the learning process, despite the costs and the questions, and is serious about taking advantage of the work you're doing, it's very satisfying. One aspect of the research involved trying to figure out the value of the retailer deals that the casino was working on. As anyone who goes to a casino, or for that matter to a baseball game knows, partnerships, co-marketing deals, and licensing are a big part of the mix when it comes to revenue.

One thing that I took away from the conversations keeps popping back into my mind whenever I fork over a ton of dough for something at a movie theatre or some rodent-infested theme park. It was said in passing by one of the execs during a meeting when talking about pricing at one of the planned stores associated with the casino. He said, "They'll never make the kind of volume they're forecasting unless they charge a lot more than that."

I didn't say anything at the meeting, but it stuck with me. I'm a somewhat secretive, heavily quantitative guy, and I work hard to be rational. So I figured it was a short-term calculus-the quantity would remain high for the short term, but in the longer term, the quantity would fall in line with my neat little assumptions. And, being annoying and working on a deliverable that required buy-in from approximately nine million people, and that had massive Excel-based financial models, I followed up with the exec, to absolve myself from any responsibility about the assumptions therein.

The assumptions I was ordered to use showed no reduction in sales volume due to the high price. In fact, the sales volume calculation was not driven by price at all. I wasn't supposed to even use it in the model. I was told that I didn't get it, that hospitality and entertainment ventures spend more money and time understanding their customers than any other industry. (I don't know if that's actually true.) All of the marketing people had the behavior of their customers burned into their heads. And, above all else, the product had to be great, and the product was the escape. You don't rationally walk into a casino; no such behavior exists, outside of a very few. People want to escape. What do they want to escape? I can't provide the numbers, but here are some of the survey items from one of the market research surveys performed during the engagement:

  • Stress (Sources:)
    Financial
    Parents
    Kids
    Spouse
    Job
  • Monotony
  • Responsibility
  • Quiet
  • Boredom
  • Obligations
  • Weather
  • Commute

Over the coming days, I spent a fortune paying for lunches for all sorts of marketing people from among the ones that I was working with. If economy is psychology writ large, then is individual consumer behavior simply a matter of cognitive psychology? We suck at making rational decisions; it's just an electrophysiological fact. Or, let me rephrase-we suck at making the decisions we're faced with most often in a highly evolved and technical society. Baring your teeth and ferally growling at your boss is not likely to be received well if you work at, say, GEICO. Most immersive entertainment ventures know this institutionally, the same way that the US collectively knows that capitalism is considerably more desirable than despotism. It's built in.

When someone walks into a casino, or a water park, or a ballgame, they generally don't want to deal with the crap that they have to deal with on a daily basis. They don't want to worry about how much a f---ing Coke costs. They're escaping, and entering a kind of role playing. A very sizable chunk of the population wants to pay $550 for the distinctive blue bag that says "Tiffany & Co." on it, and a sizable chunk of the population, you and I included, will make purchases, and many other decisions, in spite of rationality, not because of it.

Is this a long-lasting effect? Well, does it really have to be? You read Baseball Prospectus, so I know enough about you to know you're not a middle-of-the-distribution baseball fan. How many games did you attend last year? I can't go into the distribution of how many people attend how many games, but run through some scenarios in your mind. What's the learning or memory curve on pricing for concessions or parking? How many replacement products are available, and what's their effect on how much you enjoy the game? If you see your friends once a month, and you can work a grill, you might want to tailgate, right? In many cases, seeing your friends is far more important than the actual game, and that means parking, right?

Think it through. We've paid it because ultimately, we want to. Did you imagine, twenty years ago, that'd you'd pay $1.39 for a pint of bottled water? The fact of the matter is that you're paying for the value chain, and it's a question of how much the seller can get you to lay out. By presenting the product at the best possible time and in the best possible circumstance set, the seller can get the buyer to cough up at the time when their perceived utility for the product is the highest. That bottle of water is cold, so you didn't have to worry about refrigeration. It's there right now, at the time when your caterwauling three-year-old is thirsty. It's where you are, so you don't have to drop everything, get out of the checkout line, and find some nasty water fountain guarded by a homeless ex-linebacker with hepatitis B. You didn't have to haul around a backpack to carry a thermos, which you also didn't have to wash. So you pay the $1.39 for the Dasani or Aquafina while surrounded by hordes of red-and-khaki go-getters around the fubar checkout at the local Target.

And you pay the $925 for the .0025-carat diamond nose ring at the Bulgari attached to the Ostentatia-Vegas casino resort. Not to mention the $20 to park to see a mid-season baseball game. Or the $6.50 for the Souvenir Cup Dr. Pepper. The key is the creation of the proper circumstances. You pay it, because under those carefully-crafted circumstances, you want to.

Well, at least you did, which we can cover in more detail next time.

Gary Huckabay is an author of Baseball Prospectus. 
Click here to see Gary's other articles. You can contact Gary by clicking here

23 comments have been left for this article.

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