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-1057275-112712500to:Robert Iger, President and Chief executive officerfrom:Burrows & Hoffman, PEAK entertainment consulting firmTHRU: Kevin Mayer, Executive Vice PResident, Corportate Stategy and Business Developmentsubject:power of BUYERS IN disney theme parksdate: CREATEDATE \@ "MMMM d, yyyy" \* MERGEFORMAT July 12, 2014Since the Themed Entertainment Association began publishing data in 2007 on global and regional theme park attendance, the Walt Disney Company’s parks have dominated every market in which they operate (2007-2013). A large part of Disney’s success is due to its strong position within the five market forces as described by Michael Porter (2008). Porter asserts that a successful company must constantly analyze these forces and either influence them or position itself within them accordantly. Burrows and Hoffman (B&H) Peak Consulting analyzed the first of these forces—the power of buyers—in relation to Disney admission tickets and the theme park industry. Overall, buyers of the Disney theme park experience do not possess much power in the buyer-seller relationship, giving Disney the opportunity to influence its consumers toward particular behaviors. Determinants of the Power of Buyers. The Disney consumers, called “guests” by the company, have very little ability to collectively influence Disney parks and resort prices. The following factors all contribute to the consumer’s lack of power in the industry. Product Standardization. When measuring product standardization and available substitutes, B&H Peak Consulting typically analyzes the industry as a whole. Similar products within the industry act as substitutes for each other, and buyer power is greatest when the buyer can use different variations of the same product interchangeably. This gives the buyer opportunity to exchange an expensive product for a cheaper product while maintaining the same level of satisfaction, which in turn drives industry prices down. Disney, however, controls such a large portion of the theme park industry that it does not have any significant substitutes. The six most-visited parks in the United States, as well as the eight most-visited parks in the world, are owned and operated by Disney CITATION The13 \l 1033 (Themed Entertainment Association, 2013). There is substantial research that attributes this control to Disney’s long-standing “theming” approach CITATION Bry99 \l 1033 (Bryman, 1999). Disney consumers are not just looking for a theme park experience. They are looking exclusively for a Disney experience, which means there are no acceptable substitutes available to them. Disney strives to standardize within its own parks and the resulting consistency works not only to obtain a high quality product, but also to remove substitute potential between the Disney parks. These factors combine to give the customer almost no control over price. Therefore, due to the market percentage that Disney controls and the standardization within Disney parks, the Disney experience does not have any close substitutes that give the buyers bargaining power.Price Sensitivity. One of the most important determinants of buyer power is price sensitivity, or the degree to which buyer behavior is affected by price. Entertainment markets often have high elasticity, meaning that consumers are very sensitive to price changes and will quickly cut entertainment services from their budget as prices rise CITATION Agu08 \l 1033 (Aguiar & Hurst, 2008). Disney, however, has continued to see increasing attendance despite price increases as seen in Appendix A, which implies that the demand for Disney tickets is relatively inelastic over this price range. There are three main factors that could influence this own-price elasticity: available substitutes, time, and expenditure share CITATION Bay13 \l 1033 (Baye, 2010). As previously discussed, substitutes are not a sizeable threat to Disney parks, which helps explain admission inelasticity. Without substantial substitutes, time is not particularly significant because consumers do not need extra time to search for alternatives. Expenditure share, defined as the percentage of one’s income spent on a particular commodity, also helps explain the inelastic demand of Disney admission. Because vacation and travel expenditures are only 3% of an average American’s annual budget CITATION Spo10 \l 1033 (Bureau of Labor Statistics, 2010), consumers are not as sensitive to vacation price increases as they would be for goods on which they spend a higher percentage of their income. Aside from own-price elasticity, income elasticity of demand can also explain Disney consumers’ price insensitivity. B&H Peak Consulting analyzed this income elasticity and found that many Disney theme park consumers are not significantly affected by income changes. Using the data from Appendix A and the following formula CITATION Bay13 \l 1033 (Baye, 2010), B&H Consulting calculated the income elasticity of demand from 2009-2012: EQx,M=%?Qxd%?M=72,247,000-69,508,000$112,403.33-$105,878.17=0.64. Disney demand is a normal good, and if average income were to drop by 10%, Disney demand would also drop by about 6.4%. Although income does affect the consumer demand in this situation, 3.6% of consumers would still make their Disney vacation a priority. A possible explanation for the customer’s insensitivity to both price and income changes is Disney’s reputation for quality. As Porter mentions, quality can have a large role in price sensitivity CITATION Por08 \l 1033 (Porter, 2008). Disney's effort throughout the years to advertise a unique and quality experience has significantly reduced its consumer’s buying power with respect to both price and income changes.Buyer Volume Concentration. Buyers have the potential to influence prices in any industry if they are small in numbers and concentrated enough to organize and negotiate with the sellers. Because the theme park industry has a large and dispersed consumer base, Disney has yet another significant advantage over the customer when setting prices. The domestic Disney parks had almost 75 million visitors from all across the globe in 2013 (Themed Entertainment Association). These visitors do not communicate with each other prior to planning vacations, so they are not organized or concentrated enough to drive down prices. This results in a vast and unorganized market that is not capable of negotiating lower prices with Disney. Disney may continue to set its prices at what it determines is the fair market value without being concerned about severe buyer pushback.Imperfect Information. Another important advantage for Disney is that consumers do not have enough information to make truly rational choices. Because it controls such a large portion of the theme park industry and many customers are looking for a particular Disney experience, Disney does have a monopoly-like hold on the market. Without a close substitute for comparison, Disney consumers do not have a way to validate the reasonability of admission prices. Without perfect information, consumers lose their ability to determine fair prices and therefore forfeit much of their buying ernment Regulation. It is important to note that there are currently no government-imposed pricing regulations for theme parks, meaning that the industry can operate under free market conditions. As long as the demand continues to increase, Disney can continue to raise prices until they reach free market equilibrium, (i.e. where supply equals demand).Considerations. The relatively low buyer power of Disney consumers led B&H Peak Consulting to explore other ways that Disney could potentially maximize revenue.Like many industries, the theme park industry has certain seasons and holidays when guest volume is higher than normal. There are also slow times of year, when travel is light and the parks are emptier. Most theme parks use these fluctuations to their advantage and seasonally price their tickets (Heo & Lee, 2009). Disney, on the other hand, does not adjust ticket prices seasonally, keeping a flat rate all year. This would make sense if demand was relatively stable throughout the year, but theme parks, including Disney, do not have stable demand. During peak seasons, the Disney parks often have to close their gates early in the day when they hit capacity. Closing a park due to capacity limitations is an indication that tickets could have been priced higher that day. There is a shortage of admission supply relative to demand, which indicates that the price is too low. Conversely, not hitting capacity on a particular day indicates that prices were too high. The goal should be to hit equilibrium every day, where the capacity equals the quantity demanded. The more price sensitive customers would be more likely to postpone their vacation to a time when ticket prices were less. Disney analysts may want to consider seasonal pricing in order to reach equilibrium as often as possible in order to avoid shortages and surpluses and therefore deadweight loss. Conclusion. The consumers of Disney admission tickets have very little buying power due to a lack of available substitutes, price insensitivity, lack of concentration, imperfect information, and lack of government regulation. All of these factors work in Disney’s favor and could be further exploited to implement seasonal pricing. This could potentially increase revenues and reduce supply and demand imbalances. Appendix AAdmission, Attendance, and Income DataYearAdmission Price (U.S.)Disney Attendance (U.S.)Average Income (U.S.)2009$ 79.0069,508,000$ 105,878.172010$ 82.0069,344,000$ 104,027.002011$ 85.0069,930,000$ 109,971.502012$ 89.0072,247,000$ 112,403.332013$ 95.0074,841,000Data not availableNote: Data for admission price from Bay News 9 (2014), for Disney attendance from Themed Entertainment Association (2009-2013), and for average income from the U.S. Census Bureau (2012). Appendix BTop 20 Theme Parks in North America (by Attendance)Note: From TEA/AECOM 2013 Theme Index & Museum Index: The Global Attractions Attendance Report, Themed Entertainment Association, 2010, p. 29.ReferencesAguiar, M., & Hurst, E. (2009). A summary of trends in American time allocation: 1965–2005. Social Indicators Research, 93(1), 57-64.Baye, M. (2010). Managerial economics & business strategy. New York, New York: McGraw-Hill/Irwin.Bryman, A. (1999). The Disneyization of society. The Sociological Review, 47(1), 25-47.Bureau of Labor Statistics. (2010). What portion of annual household expenditure is spent on data [para. 5]. Retrived from , C. Y., & Lee, S. (2009). Application of revenue management practices to the theme park industry. International Journal of Hospitality Management, 28(3), 446-453. Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 25-40.Themed Entertainment Association. “AECOM. 2007 Theme Index: The Global Attractions Attendance Report.’ Economics Practice, AECOM, TEA (Themed Entertainment Association) (2008)Themed Entertainment Association. “AECOM. 2008 Theme Index: The Global Attractions Attendance Report.’ Economics Practice, AECOM, TEA (Themed Entertainment Association) (2009)Themed Entertainment Association. “AECOM. 2009 Theme Index: The Global Attractions Attendance Report.’ Economics Practice, AECOM, TEA (Themed Entertainment Association) (2010)Themed Entertainment Association. “AECOM. 2010 Theme Index: The Global Attractions Attendance Report.’ Economics Practice, AECOM, TEA (Themed Entertainment Association) (2011)Themed Entertainment Association. “AECOM. 2011 Theme Index: The Global Attractions Attendance Report.’ Economics Practice, AECOM, TEA (Themed Entertainment Association) (2012)Themed Entertainment Association. “AECOM. 2012 Theme Index: The Global Attractions Attendance Report.’ Economics Practice, AECOM, TEA (Themed Entertainment Association) (2013)Themed Entertainment Association. “AECOM. 2013 Theme Index: The Global Attractions Attendance Report.’ Economics Practice, AECOM, TEA (Themed Entertainment Association) (2014) ................
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