Should Walt Disney Co. Charge Demand-Based Prices at Its Parks?

Disney has steadily raised its theme park ticket prices over the past several decades. Ten years ago, a one-day pass to Walt Disney World cost $59.75, or $71.65 adjusting for inflation. Today, a one-day pass to the Magic Kingdom costs $105, while tickets to the other parks cost $97.

Regular visitors are accustomed to near-annual price hikes, but the House of Mouse is now considering a model of demand-based pricing for its domestic parks, according toThe Wall Street Journal. This means that like hotels and airlines, prices would decline in the off season and rise during the high season. That strategy could help the park attract more visitors during slow days and prevent overcrowding during busier ones.

Source: Pixabay.

Why this approach is smarterWalt Disney Parks and Resorts chairman Bob Chapek told the Journal that the company must "look at ways to spread out our attendance throughout the year" to "accommodate demand and avoid bursting at the seams." Disney's parks tend to be the most crowded during spring break, summer vacation, and the winter holidays.

This wouldn't be the first time Disney has offered demand-based pricing. It introduced tiered pricing at Disneyland Paris last year, charging $64 for a low season adult ticket and $94 for a year-round one. Tokyo DisneySea also offers cheaper tickets for visitors in the late afternoon and evening.

Comcast also uses a form of tiered pricing at its Universal Studios theme parks. On top of regular theme park tickets, visitors can buy separate "Universal Express" passes to access its "fast pass" system for attractions.

Understanding Disney's theme park businessIf we look at the operating income growth at Disney's theme park business over the past four quarters, we can spot the seasonal fluctuations.

Source: Disney quarterly earnings.

These bottom-line fluctuations are caused by several factors. First, Disney adjusts prices for its theme park tickets, resorts, food, and merchandise in accordance to visitor volume. This strategy helps the unit consistently offset higher operating costs from labor and cost inflation. Price hikes at Disney's domestic parks are also used to offset higher operating costs at its overseas parks and the impact of a strong dollar.

Disney doesn't simply raise prices because it can "get away with it," ascritics often claim. The primary goal is to stay ahead of inflation. As I noted earlier, the inflation-adjusted difference between a Walt Disney World Magic Kingdom ticket in 2005 and 2015 is about $33, not $65 as historical charts suggest. The secondary goal is to balance out operating costs within the unit.

Disney certainly won't stop raising prices as long as attendance stays robust, but it's critical to stay connected with middle-class families, who might not be willing to pay over $100 per person to visit "The Happiest Place on Earth." Disney needs these families to keep visiting the parks, which serve as the physical sandboxes which promote all of its top franchises.

Why the sandboxes matterIt's important to remember that Disney's theme parks only brought in 30% of its revenue and 21% of its operating income in the first nine months of 2015. The rest of its business comes from movies, TV shows, cable networks, games, and consumer products.

To nurture growth across all those segments, Disney expands top franchises like Marvel, Star Wars, and Frozen across as many properties as possible. That's why we're seeing more Marvel tie-in shows on TV, and new Star Wars and Frozen attractions at its theme parks. Drawing more visitors to theme parks reinforces awareness of these franchises, which casts a halo effect on its movies, TV shows, games, and toys.

Disney's upcoming "Star Wars Land." Source: Disney.

Disney is aware that overcrowding and long wait times can ruin that experience. That's why it introduced the Fastpass system in 1999 to help visitors see more attractions within a day. That's also the reason it recently introduced My Magic Plus wristbands at Disney World to let visitors reserve times for rides and meals prior to their arrival. The bands have reportedly boosted the Magic Kingdom's overall capacity by 5,000 people.

The key takeawayI believe that demand-based tickets complement Disney's Fastpass and My Magic Plus systems fairly well. Disney would balance out its attendance levels throughout the year and visitors could see more attractions.

With more predictable attendance levels, Disney can worry less about raising or lowering prices of hotel rooms, food, or merchandise every quarter. As long as Disney doesn't raise the high end of the demand-based ticket prices too dramatically, I expect this to be a win-win strategy for both Disney parks and its visitors.

The article Should Walt Disney Co. Charge Demand-Based Prices at Its Parks? originally appeared on Fool.com.

Leo Sun owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.