Opting for R-rated: One way to draw more customers is to lock out others

It happens all the time, according to the lead author of a new and interesting study. Companies sell expensive bottles of wine at prices that only a few can afford. Others produce items in limited amounts to generate publicity and increase interest from fans.

In their research, the team provides evidence for a similar but distinct practice: demand lockout. They demonstrate how pushing away one group of customers can ultimately increase profits.

What the researchers say: “On the face of it, it doesn’t seem like a rational thing to do,” the lead researcher says. “If somebody is willing to pay us money, why are we saying we don’t want you to buy from us? The key underlying rationale is an economic and marketing concept known as signaling. It’s a mechanism that allows companies to convey the quality of their products when consumers are skeptical about it.”

When traditional signals such as brand, price, and advertising aren’t helping — because competing products have similar features and prices — excluding customers can send another kind of signal: that a product or service is special or different from others in the marketplace.

The research paper examines a pop-culture example of demand lockout: R-rated movies. Why do studios seek R-ratings, knowing they reduce the overall audience by preventing younger moviegoers from seeing them?

One obvious answer was that many movies do not have a choice. The core theme might be violent or sexual in nature.

However, in many cases, studios do have a choice. By adding certain scenes and dialogue, they can draw an R-rating, for mature audiences only, from the Motion Picture Association. By cutting certain material, they can earn PG-13, for wider audiences.

That offers a way to differentiate a film in the marketplace, the researchers say. By releasing it as R, a studio signals that it may be more realistic in terms of violence or sexuality. Among some filmgoers, that can sell more tickets.

The lead researcher also reasoned that the better the film, the more of a boost it might get from an R-rating. Positive critics’ reviews and word-of-mouth could offset ticket sales lost by excluding families.

To test their theory, the researchers used machine learning algorithms to analyze subtitles in tens of thousands of movies. These algorithms rated on a scale from 0 to 1 each film’s level of inappropriateness for young viewers. The higher the rating, the less appropriate the movie.

They focused on 1,502 movies on the borderline between PG-13, for a wider audience, or R, for audiences over 18 years of age. Each had comparable levels of inappropriateness, averaging about 0.7, meaning that editing choices could tip them toward either rating.

The researchers also looked at the first five weeks of box office receipts for each film to assess how ratings might affect revenues.

They found indicators that R-ratings did indeed send signals to potential audiences. Among their findings:

• Regarding quality, movies with better overall critics’ reviews were more likely to be rated R.

• Regarding revenue, R-rated films with high ratings by viewers brought in more money than comparable PG-13 films did.

• An R-rating boosted revenue only for high quality films, the lead researcher notes. For lower quality films, it didn’t increase sales.

The upshot is that an R-rating can help an exceptional film attract an audience, he says. “A high-quality movie produced by a nonmajor studio with relatively few reviews benefits particularly from this signaling.”

He cites the 2006 Academy Award winner “Little Miss Sunshine,” which was centered around a child but had adult themes. With different editing, he says, it could have been rated PG-13. By seeking an R-rating, the studio and director were able to lean more into its thematic material. Made for $8 million, it earned $101 million worldwide.

While Rao’s findings show the value of demand lockout in cinema, he says the theory also can be applied to other areas. For example, the streaming audio service Spotify built interest early on by offering free accounts by invitation only.

His findings might also help explain why some activist CEOs exclude some customers by being vocal about their political leanings. By making their politics clear, he explains, they may attract new customers.

“There’s just all kinds of places where it has surprising implications,” the researchers explained. “Managers need to consider the signaling effects of serving specific segments or refusing to serve certain segments. We show that locking out potential demand can convince consumers of a product’s quality.”

My take: What this research shows is the obvious advantage of marketing to “tribe.” What unites a tribe is a culture based on a range of commonalities. In turn this leads to mutual support and belonging, these are the strongest drivers in all human decision making and behavior.

By limiting the availability of a product or service you create commonality among those who are actually targeted. People buy the product or engage the service in order to become members of the tribe, to belong.

It may seem a stretch between an R-rating and a tribe of people, but it’s not. Going to the movie creates commonalities (being over a certain age, reading certain reviews etc.) which people can talk about and in that discourse discover other commonalities. The more commonalities’ people have—no matter how trivial—the more people feel that they belong to a certain exclusive group.

They will seek to deepen their membership by buying other goods and services that they perceive would enable them to become closer to that group, to be more valued by the members of it.

Of course, real support will not come directly from other R movie patrons as a whole, but the mutual appreciation of certain films or types of film will lead to the discovery of other commonalities with individuals which will eventually lead to real social and, perhaps, other support—and hence a sense of increased safety.