Walt Disney’s (DIS) theme parks in California and Florida are so popular – prepare to pay more if you go when everyone else wants to. Disney is the latest company to adopt pricing that rises during the most popular times, a trend likely to continue.
The giant entertainment company Sunday launched “demand pricing” where one-day ticket prices rise if you visit during seasons the park is most crowded. The surging popularity of Disney parks on both coasts is giving the company the pricing power to raise prices without hurting demand – a classic example of what economists call “inelastic demand.” Attendance has soared 10% at the company’s U.S. parks last quarter – highlighting the unprecedented demand that only intensifies as the company adds new attractions.
The stakes are big. Adopting price hikes – in addition to opening a new park in China – could allow Disney’s parks business to eclipse its ESPN sports network in terms of profit in just two years, according to data from market research firm Trefis.
Shares of Disney rose 21 cents to $95.52 Monday – the first day of trading after the changes were instituted. Analysts think the move is bullish for the profitability of the parks. “Given a high fixed cost base, I think it’s obviously something that should foster continued margin expansion for the domestic parks – which also depends on the how long those price increases might be sustainable,” says Tuna Amobi, analyst at S&P Global Market Intelligence.
Depending on when they go, customers will either pay the “value,” “regular” or “peak” day prices. Peak days include those times when the parks are the most popular including most of December and also spring break and weekends during most of the summer. Value days fall mainly between Monday and Thursday during months the park is less busy.
Prices can swing faster than the Mad Tea cups based on when you go. On peak days, one-day admission for both parks in Anaheim, Disneyland and Disney California Adventure, will rise 20% to $119 for adults. One-day tickets had been $99 before the change. Going during “value” days cuts the price 4% to $95 and regular days go for $105.
The ticket price hikes are similar in Orlando. If you visit Florida parks during the peak times, the one-day price jumps to 18% to $124. Regular days cost $110 and value days go for $105 – which had been the previous price of tickets.
Demand pricing – already common in the airline and hotel industries – has become more expected as online services like car-sharing firm Uber become more mainstream. Users of Uber are charged a higher fare to be transported by drivers when the number of people requesting rides is highest. To be clear, Disney is charging higher prices for days in seasons that are most popular, and are not adjusting prices during the day as Uber does. But overall, companies that flex prices to charge most during peak periods are able to add 3% to 7% in organic revenue growth, wrote Matt Busch, partner at Revenue Analytics, a firm that helps companies implement such strategies in a note to clients.
Consumers are increasingly accustomed to the idea they should expect to pay more for something when it’s in most demand. Demand pricing also is somewhat of a return to Disneyland’s early days, when visitors would pay more to ride the most thrilling and grand attractions by purchasing “E” tickets, which cost more than “A” tickets for the smaller rides.
Savvy investments in Disney’s theme parks continue to pay off handsomely for the company. Disney’s Parks & Resorts business is now 32% of the company’s revenue, says Trefis. That’s up from 29.5% in 2011. Parks & Resorts’ revenue should hit 36.4% of Disney’s total revenue by 2020. Disney reported total revenue of $54.3 billion in its most recent fiscal year ended Jan. 2, 2016.
Disney’s ESPN unit still contributes more of the company’s earnings before interest, taxes, depreciation and amortization – a rough proxy for cash flow. Last year, ESPN accounted for 33.8% of Disney’s EBITDA, beating the 28.7% contribution from Parks & Resorts, Trefis says. But price hikes and expansion could flip-flop this by 2018. Trefis expects Parks & Resorts’ EBITDA to exceed ESPN at 32.4% by that year.
It’s only a matter of time before more companies try charging more when demand is high. “Organic revenue growth is derived from surge pricing. What company would pass that up?” Busch wrote.