Case 5 – Hyrule Cinema

1ZM11 - Marketing and Innovation, Group 12

Ezgi Akduman (1030608)

Lina Weinmann (1223975)
Henrik Danin (1224037)
Sebastian Blank (1224509)
Lokesh Ronanki (1030546)

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Table of contents

Abstract ................................................................................................................................................... 3
Background - problem statement and decision to be made ..................................................................... 3
Required Information and analysis of information ................................................................................. 4
Attributes ................................................................................................................................................. 4
Results of Van Westendorp Analysis - new price decision for tickets and popcorn .............................. 6
Ticket Price Premium when moving to the mall or plaza ....................................................................... 8
Carmichael’s Daily Profit ........................................................................................................................ 9
Conclusion ............................................................................................................................................. 11
Learnings ............................................................................................................................................... 12
Reference List........................................................................................................................................ 13
Table of Figures..................................................................................................................................... 14

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Abstract
Hyrule Cinemas faces the situation to go bankrupt because the company’s growth rate started
to decline. The case delivered customer feedback which we used to apply a Conjoint analysis
to reveal customer preference and later on a Van Westendorp analysis to identify an acceptable
price range. We combined those findings and calculated profits for different scenarios. Analysis
showed, that a change to a mall is no option because profits are lower than before. A change to
the plaza may be relevant in the future. Our recommendation is to stay at the current location
and decrease the prices.

Background - problem statement and decision to be made

Bob Carmichael is owner-operator of Hyrule Cinemas. The establishment consists of four

movie show rooms and each month the four most popular movies are shown. The business was
not going as well as expected. Over the past five years Hyrule Cinema´s growth had decreased
from 10 per cent to 2 per cent. If this continues the company will go bankrupt within the
following five years. The average attendance was 150 customers per day and approximately
100 people bought one bag of popcorn. According to a customer-survey the price of the tickets
and popcorn were too high, which led to fewer visits. Carmichael needs to decide the right
strategy (Porter, 1980) to make sure Hyrule Cinema gains competitive advantage and doesn’t
go bankrupt. At the moment Hyrule Cinema’s strategy follows the differentiation focus because
they just show the popular movies, targeting a segmented group in a unique environment, see
Figure 1 (Porter, 1980).

Figure 1: Porter’s (1980) three generic strategies cost leadership, differentiation and focus

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During this report the decision that needs to be made is if Hyrule Cinema should stay at the
current location and adjust the prices for the tickets and/or the popcorn, how many movies
should be shown or if they should move to a new more attractive location to get more customers
and increase in size. By deciding Hyrule Cinema´s targeting strategy the right marketing
decision can be made to avoid bankruptcy.

Required Information and analysis of information

The required information for,

The Mean-End Chain and Conjoint analysis,

 Customer preferences of different attribute combinations.

The Van Westendorp analysis and calculation of price premium,

 The customers’ price preferences of the tickets and popcorn.

 The different locations and the effects of changing the location.

The profit calculations,

 Expected number of customers, including the probabilities.

 Expected number of customers buying popcorn
 Costs e.g. rent.
 Distance from the standalone location to plaza and mall

For further statements, we would need informations about

 Further costs to calculate the actual profit (e.g. costs of labor and acquisitions of
movies).
 Cost of increasing the size of the cinema in the different locations.

Attributes

From a customer-survey feedback was collected and an analysis is performed to bring up a

solution that responds to the customer expectations of Hyrule Cinemas. Based on Woodruff’s
(1997) the Mean-End Chain model attributes such as size, location and movies etc. could be
mapped, see Figure 2. This theory tries to connect a bundle of attributes to find the terminal
goal for customer satisfaction which is in our case “entertainment”.

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 Figure 2: The Mean-End Chain of Hyrule Cinema

In the customer-survey we observed the influence of the attributes size, location and movies on
the customer preference. The customers were asked to rate a certain mix of these attributes and
assign a value in the range from 1 to 10. This data collection allows us to proceed and apply a
Conjoint analysis with the goal to obtain the most important attribute(s) (Lilien et al, 2013). In
the first step we perform a multiple-variant linear regression using excel. ‘Small’ (size), ‘mall’
(location) and ‘all movies’ (movies) are used as dummy variables. This analysis will yield the
coefficients of the regression which are equal to the part-worth utilities of the attributes. We
plotted the results in Figure 3 below. The preferences for the price attribute are also shown in
Figure 3. The highest price of the acceptable price range ($11) equals the part-worth utility of
0, whereas the lowest possible price ($7) goes with the maximum of 0.7.

Figure 3: Customer preferences on different attributes

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From this multiple-linear regression analysis, we conclude that location attribute, standalone
has the worst impact on the customer's preferences and a cinema located in a mall has the best.
The second attribute is size, which has a more positive impact on the customer’s preference if
it is large. The cinema’s who show all movies respond best to the customer’s preferences.
Finally, a customer wants the price of the ticket to be as low as possible. From this data the
most important attribute could be analyzed through a bar diagram, see Figure 4 below.

Figure 4: Bar diagram of the four attributes

In the Figure 4 the movies and size attribute are the ones that respond best to reach customer
satisfaction and entertainment. Showing all movies is the most important attribute.

Results of Van Westendorp Analysis - new price decision for tickets and
popcorn

The application of the Means-End Chain model allows us to identify attributes influencing
customer perception of Hyrule Cinema. In the following chapter, we will use this results to
determine in which range the prices for tickets and popcorn can vary. We will use the data from
Exhibit 1 and 2 and the Van Westendorp analysis to derive the boundaries as suggested in Van
Westendorp (1976). The decreasing functions ('too low', 'low but ok') correspond to the columns
1 and 2, the increasing one's ('high but ok', 'too high') to the columns 3 and 4 in the data. The
following Figures 5 and 6 represent the results of the analysis.

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 Figure 5: Optimal ticket price range calculated with van Westendorp analysis

Figure 6: Optimal popcorn price range calculated with van Westendorp analysis

The intersection point between the function 'too low' and 'high but ok' represents the lower
boundary of the acceptable price range. The upper boundary is represented by the intersection
between 'low but ok' and 'too high'. The optimal price point is the point where 'too low' and 'too
high' intersect. In Figure 5 we analyzed the acceptable price range for ticket prices. Our analysis
reveals that Carmichael should set the price not lower than $7 and not higher than $11. In
addition, we find an optimal price range between $8 and $9. The same amount of customers

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will purchase a ticket at the price of $8 and $9 so the price will be set at $9 which leads to
higher profits. The price we recommend is less than the current price of $12 and the price of
the competition $10.50. The decreased price for movie tickets will increase the attendance in
the theatre by 30 per cent. Figure 6 shows the results for the popcorn prices. The acceptable
price ranges from $3.75 to $5.80. The current price for popcorn, $4.50, is lower than the optimal
price point of $5 we identified. Based on Carmichael’s experience he can adjust the popcorn
price to $5 without any consequences. If he sets the price at 4$, so 1$ less than the optimal price
point of 5$, then Carmichael assumes every customer will buy a bag of popcorns.

Ticket Price Premium when moving to the mall or plaza

We will continue and identify how we can combine the results of the Conjoint analysis with the
findings of the Van Westendorp analysis. As described in the former chapter, the price utility
range equals 0.7. We assume that the lowest utility goes with the highest price. In our case, this
means that the price of $11 corresponds to a utility of 0. Whereas the lower boundary of the
price range, $7, corresponds to a utility of 0.7. We will now try to figure out how much the
change of the location will influence the utility. Based on the resulting differences in utility we
will investigate how much we can increase the price to reach the same total utility as in the
stand-alone location. Afterwards we will compare these prices with our optimal price point of
$9. The difference is equal to what we call price premium. The following Equation (1) shows
the utilities of the current price and the different locations.

(Equation 1)

This means the utility of the plaza is higher than the utility of the standalone location. To reach
the same utility level as in the standalone location we need to increase the price to reduce the
utility by 0.19. The following Equation (2) shows, that we can decrease the price utility to 0.16.
This value is lies in between the utilities of $10 and $10.50, but closer to $10. In the end, we
can summarize that for the plaza Carmichael can fix the price to $10, which leads to a price
premium of $1.

(Equation 2)

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If we apply the same logic to calculate the mall’s price premium, it reveals that we can increase
the price as well. The difference in utility between the two locations equals 0.59. Based on our
optimal price point our calculations suggest, that we increase the price to the upper boundary
of the acceptable price, $11. This price equals a price premium of $2.

(Equation 3)
We will proceed and use the influence of the price adjustment on customer attendance following
chapter, when we examine profits in the different locations.

Carmichael’s Daily Profit

In this chapter, we calculate Carmichael’s profit per day at the current location with the current
prices, the profit at the current location with the adjusted prices for popcorn and tickets
according to the van Westendorp analysis, the profit at the plaza with the adjusted prices and
for the mall with the adjusted prices. According to the text, Carmichael assumes that if he shifts
the popcorn price down $1 so from the optimal price of $5 to $4, every visiting customer buys
a popcorn bag. If the popcorn price is $5 only two-thirds of the visitors buy a bag. In our
calculations, we consider both popcorn prices. For the ticket price, we assume for every $1 of
decrease from the starting $12, ten per cent more customers additionally to the customer base
of 150 customers will visit. That means for the plaza for example with the new ticket price of
$10, we have 20 per cent more customers which results in 150*1.2 = 180 customers. As we
cannot exactly forecast the correct number of customers, we assume two cases: the worst-case
scenario for the new locations plaza and mall and the scenario where we take the probabilities
into account. On top of the customer base of 180 in the plaza we need to include the customers
which visit because of the location change. For Case 1 we assume the worst-case scenario that
means we have 180+50=230 customers. For Case 2 we took the probabilities of 50 per cent
(100 new customers) and 50 per cent (50 new customers) and calculated the average of both
that means we get 180+0.50*100+0.50*50 = 255 customers. Finally, we also need to deduct
the customers which we lose because of the location change. Per 2 minutes we lose 8 customers
with a 40 per cent chance and 12 customers with a 60 per cent chance. We have again Case 1
for the worst case where we get 230-12*5 = 170 customers and for Case 2 we get 255-5*12*0.6-
0.4*8*5=203. We did the same calculations accordingly for the mall. Figure 7 and 8 below
show our results, where the x-axis shows the prices within the acceptable price range ($7-$11)

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and the y-axis is the daily profit. WC means worst-case scenario, EV is expected value where
we take the probabilities into account and Pc marks the popcorn price.

Figure 7: Daily profits (expected value scenario) at different locations with different popcorn prices

Figure 8: Daily profits (worst-case scenario) at different locations with different popcorn prices

To sum it up, we get the highest profits in the current location with the adjusted price for the
ticket of $9 and the popcorn price of $4. The mall has in both cases the lowest profits and in the
worst-case scenario even losses. Compared to the current situation ($12 and $4.50) price
adjustment in the standalone location leads to higher profits for both scenarios. In the expected
value scenario, the plaza with popcorn price of 4$ and ticket prices above $7.50 would also lead
to higher profits than the current situation. These are the two possibilities which need to be
discussed in the following conclusion. Finally, we do not consider other costs like labour cost
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or movie acquisition cost. For a more precise calculation this also needs to be taken into
account.

Conclusion

According to the Conjoint analysis the location that delivers the highest value to the customer
is the mall. Our results show that a change to a mall will not increase profits. We also found,
that the value of a cinema at a plaza is higher than at the current location. The following figure
shows the optimal profits of Hyrule Cinema of these two locations for the different scenarios.

Figure 9: Results of the two possibilities which lead to higher profits

At this point in time it’s important to not go bankrupt so Hyrule Cinema should stay at the
current location with lower prices which leads to the highest profit. After a time of stabilization,
the next step should be to focus on the size of the theatre and the movies which are shown in
order to attract more customers. We are aware that both steps will demand an investment. At
this time Carmichael should collect information about how high such an investment will be in
the current location and in the plaza. We think that a plaza may offer better opportunities to
increase in size, because you can rent existing rooms, whereas in the standalone location it may
be necessary to build a new house. But as this is just an idea it requires further examination.
Based on this our recommendation is to stay at the current location and decrease the ticket price
to $9 and the popcorn price to $4.

If we have a look on Porter’s generic strategies (1980), it means that the strategic focus moved
like shown in Figure 10. Hyrule Cinema will aim for a cost-leadership-focused strategy instead
of a differentiation-focus. By investing in a bigger cinema and thereby be able to show more
movies, Hyrule Cinema could better respond to what the customer values, see Figure 4.

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 Figure 10: Porter’s (1980) three generic strategies cost leadership, differentiation and focus

Learnings

1. The theory of Mean-end Chain. Understanding to interpret expressed customer’s values

and from that information make decisions. To go from a bundle of attributes to a
solution, which respond to the customer satisfaction.
2. Performing Van Westendorp analysis to understand how customer price perception and
to use this knowledge to increase profits. Even sample size is small in this case, it
provides customer involvement while deciding a company strategy.
3. Performing a conjoint analysis, with sufficient customer survey data. Conjoint analysis
is a trade-off analysis which provides several additional perspectives to current the
situation, including some parameters.

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Reference List

 Woodruff R.B., (1997), Customer Value: The Next Source for Competitive
Advantage, Academy of Marketing Science, 25;2, 139
 Lilien G. L. et al, (2013). Chapter 5: Forecasting. In: Principles of Marketing
Engineering, 2nd Edition, Decision Pro, Inc
 Westendorp V., (1976), A new Approach to Study Consumer Perception of Prices,
139–167
 Porter M. E., (1980). Competitive Strategy: Techniques for Analyzing Industries and
Competitors. New York: Free Press

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Table of Figures

Figure 1: Porter’s (1980) three generic strategies cost leadership, differentiation and focus .... 3
Figure 2: The Mean-End Chain of Hyrule Cinema .................................................................... 5
Figure 3: Customer preferences on different attributes .............................................................. 5
Figure 4: Bar diagram of the four attributes ............................................................................... 6
Figure 5: Optimal ticket price range calculated with van Westendorp analysis ........................ 7
Figure 6: Optimal popcorn price range calculated with van Westendorp analysis .................... 7
Figure 7: Daily profits (expected value scenario) at different locations with different popcorn
prices ........................................................................................................................................ 10
Figure 8: Daily profits (worst-case scenario) at different locations with different popcorn
prices ........................................................................................................................................ 10
Figure 9: Results of the two possibilities which lead to higher profits .................................... 11
Figure 10: Porter’s (1980) three generic strategies cost leadership, differentiation and focus 12

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