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The paradox of choice and the cannibalization phenomenon

A larger variety can often result in less sales or at best, a cannibalization of revenues.

In a classic mid-1990’s research experiment, grocery store shoppers were offered the chance to taste a selection of 24 jams while another group was offered a smaller selection of only 6. The greater variety attracted 60% of the store’s shoppers to sample the jams, but only 3% ended up buying a jar. By contrast, although only 40% of shoppers stopped to taste the lesser variety of six jams, 30% ending up buying a jar. The group seeing the smaller selection was six times more likely to buy jam.

Social scientists call this phenomenon the paradox of choice, when less is more. Its application at entertainment centers is no different than at stores. Generally in most situations, once the choice goes over 10, people start to get overwhelmed and stressed out and start making bad choices or none at all.

Most location-based entertainment center and family entertainment center operators think more is better, especially when it comes to the gameroom. The myth is that the more games there are, the more game revenue there will be. Yes, a larger variety probably gets more people to stop and look, no different than what happened with the larger sample of jams. But it does not increase overall sales. In fact, as with the jams, an overwhelming choice of games could possibly result in less revenue. In a best-case scenario, what happens is cannibalization. The more games, the less revenue there is per game. Add a new game to the gameroom and sales won’t go up (unless of course the selection was so old and out-of-date no one wanted to originally play games). What happens is the new game cannibalizes sales from existing games. Total game revenues just get spread around differently among the greater number of games.

Overall game revenues are governed by attendance multiplied by what each customer is willing to spend on games (again, assuming there is a decent selection). Per capita sales are not a function of the number of games. Think of it like the cereal aisle in your local supermarket. A larger number of cereal varieties doesn’t make you buy more cereal. In fact, as the variety goes up, research shows it’s likely to make you shy away from experimenting with a new variety as you become overwhelmed by the selection process, so you just stick to buying your old favorite. Another example is a restaurant. A larger menu doesn’t make you buy more food.

There are an optimal number of games that will maximize both revenues and return on investment. Once the number of games surpasses the optimal number, revenues will stay flat while the total investment in games goes up, resulting in a lower return in investment.

Cannibalization also occurs with attractions. If a family entertainment center has four attractions and adds a fifth, it won’t increase how much each customer spends on attractions. Some of revenues will just shift from the four attractions to the new one. However, at least temporarily, adding a new attraction that gets publicized can increase overall attendance, resulting in greater revenues.

The cinema industry learned about cannibalization the hard way when they built large megaplexes with as many as 30 screens. The 30 screens surpassed the optimal number, so the overall return on investment in the theatre wasn’t as high as they desired since too much was spent on a building that was larger than it needed to be to attract the same revenue. More choice resulted in a lower return. Since then, the industry has learned to build with fewer screens to achieve a higher return on investment.

Optimizing return on investment in a location-based entertainment center such as an FEC requires understanding the paradox of choice and cannibalization phenomenon. The number of games and attractions must be carefully balanced with potential revenues.

To learn more about choice, check out the book, The Paradox of Choice.

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