Why Destructive Value Capture?

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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.’

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