Thursday, June 3, 2010
Bending the Demand Curve
The national conference season is officially in full swing. Right now, I am in Washington, DC participating in the annual meeting of the Association of Arts Administration Educators while my partner, Jill Robinson, heads to San Diego for the California Arts Presenters annual Artist Information Exchange conference. By the end of this month, my colleagues and I will have participated in ten conferences so far this year.
At almost every arts industry conference, Demand Based Pricing has been a ubiquitous topic – nearly as popular as the sessions about the importance of social media. If you know TRG well, you are aware that we’ve been preaching the message of fundament change in ticket pricing for more than a decade. It’s strange to suddenly find oneself at the center of a debate about a topic that for years was too geeky for most arts industry conversations.
There are many organizations using the techniques TRG pioneered back in the early days of the last decade. TRG’s demand-based pricing strategies date back to a project with our brave friends at Pacific Northwest Ballet, whose first effort grossed a whopping $1,500 in incremental revenues. (Subsequently, PNB has annually generated six-figure income improvements from demand pricing tools.)
Those earliest techniques have become the standard for many who wish to dynamically change prices as sales progress; that is: when seat sales hit 75%, raise prices by $5. What was true a decade ago is true today. If you dare to raise prices for hot performances, you will make more money. And, the tiniest bit of care prevents complaints from those paying the higher prices. The real change? Today, you can do dynamic pricing yourself. You don’t need complex ticketing systems or consultants to figure out how to make this method work. It really is that simple.
Simple, indeed, and there’s a big “but.” I’m observing – and commenting as frequently as possible – that dynamic pricing misses the larger point. When done well, dynamically changing prices is like the icing on your favorite cake. While great, the icing works best if it sits atop a perfectly prepared cake. The problem with dynamic pricing, as practiced by the newly converted, is that the approach is almost exclusively limited to tickets at the top of the price table and for top-selling attractions. Incremental revenue benefits are limited to a relatively few tickets and performances in the season schedule. That’s why it has always been TRG’s contention that dynamic pricing is a tactic that works best when combined with broader strategies for sustaining revenues across an entire season .
In TRG-speak, optimal pricing is all about "getting to the middle." By this, we mean the middle of your price table. It’s easy to sell through the most and least expensive seats in any house. The middle is where success or failure lives. How one manages the middle determines the outcome of per capita revenues for every performance. Managing the middle means purposely creating opportunities to “bend the demand curve,” purposefully creating increased demand and higher revenue for seats in the middle range price points.
The key metric that should drive every pricing decision is per capita revenue; or the average price per ticket paid by the patron. If faced with the choice of making an extra $5, $10 or $25 for a few top priced tickets or boosting the per capita revenues across the house by $5, I would take the latter option every time. Why? Simple arithmetic. An extra $5 for every ticket in the house is almost always more money – a lot more money.
For the Denver Center for the Performing Arts, this boost in per capita results contributed an incremental $3.2 million in revenue this year. In one year. What did DCPA do? They created a cutting edge scale and inventory management plan that correctly predicted the order of sale (by section), the velocity of inventory sell-through rates and a pricing plan that maximized per capita revenues across the entire pool of ticket inventory. This scale and inventory plan (using static, rather than dynamic pricing models) created about $2.2 million in price variance during their subscription campaign. The remaining $1 million jump came from dynamically adjusting single ticket prices, using the subscription results as a springboard. Without the subscription scale and inventory plan, the results of dynamic changes to single ticket prices would have produced much more modest success.
What does this say about the Broadway house, orchestra, opera, theatre or ballet company that focuses obsessively about their top price point? In TRG’s experience, a fixation on top prices (especially if it’s the only price offered) almost always means that little or no attention is being paid to the middle. And the middle is where winners make the big bucks.