Tuesday, June 29, 2010
Demand vs. Loyalty – No Contest
Based on the reports of my TRG colleagues, our recent blog posting on Demand Based Pricing prompted questions and conversations at recent national service organization meetings (Theatre Communications in Chicago, League of American Orchestras and Chorus America in Atlanta, DanceUSA in Washington, DC and Professional Association of Canadian Theatres in Cow Head, Newfoundland). Discussion revolved around how arts managers should reconcile potential revenue growth from Demand Based Pricing against long term goals of enhanced Patron Loyalty. The FAQs? Are these two concepts mutually exclusive? Do techniques designed to squeeze the maximum sales revenues for tonight’s performance come at the expense of the need to develop lasting relationships with our patrons? Do higher prices negatively impact giving levels?
My simple response is that price does impact patron loyalty. Why? Because everything impacts patron loyalty. The quality of the performance, the selection of seat location, the perception of box office success, the level of service offered by venue staff, the convenience of parking, the service and quality of the pre-curtain dinner at the restaurant across town – everything impacts the quality of the patron experience and therefore patron loyalty. Some of these issues are within our control. Others not.
Within this context of total experience, it stands to reason that patrons’ perceived level of fairness of price is an essential consideration. But, how do we measure the “fairness” of price for a ticket? Pricing textbooks aren’t much help. There we find pricing theories that argue for “odd-number pricing” or “even-number pricing.” But “just” or “fair” pricing? Conventional wisdom holds that consumers (like markets) make rational decisions. No consumer knowingly pays what they believe to be an unfair price for anything.
I can’t speak for other products. I do know that savvy marketers can promote irrational patron behavior by enticing the shrewdest of consumers to make illogical purchase decisions for tickets to highly desirable events. Witness the prices paid for tickets in the secondary ticket market to any Super Bowl, major concert artist, Final Four basketball game, selected Broadway shows or World Series. Irrational is the only word that comes to mind when trying to explain the willingness of some to pay hundreds, if not thousands, of dollars for a ticket. Does that football fan feel somehow cheated if their prized $5,000 ticket results in a losing score? Does this fan become more or less loyal over time? Sports data is remarkably consistent. Winning seasons promote sales growth (and fan loyalty) the following year – regardless of price.
The price only becomes “unfair” if the experience fails to meet expectations. That shining new car on the lot is terrific until it becomes a “lemon” that spends more time in the shop than on the road. Sports marketers confirm that a sports ticket becomes a bad deal only when the team no longer has a "realistic chance” of being competitive – a chance of winning against most any opponent. And even then, the loyalty for some teams defies all logic. How long has it been since the Chicago Cubs won a World Series? (1908!) Yet, have you seen the price for a prime seat location at a Cubs game?
Our recent blog post described how the Denver Center for the Performing Arts adopted the principles of Demand Based Pricing and generated remarkable financial success. By any measure, revenue growth of $3.2 million in a single season is amazing.
So, what is the other side of this story? Recent conference debate raises a mix of caution and doubt, suggesting that such huge growth in earned income must have negatively impacted contributed income at DCPA. There is, some would argue, only so much money in any community. Moreover, some would assume DCPA’s fans came away from the pressures of the subscription renewal or acquisition campaign feeling somehow cheated or abused by a set of strategies that unfairly exploited the popularity of the season. Or so the argument would go.
Here’s what actually happened: Using the same data-driven strategies that fueled DCPA’s subscription and single ticket campaigns, the total dollars raised for the annual fund grew by 20%. In a single season. Improving per capita revenues does not mean that patrons will become less loyal – or less likely to write that donation check to support the mission of the organization. Patrons buy more, pay more, give more because the love what is put on stage.
Demand Based Pricing is all about improving per capita revenues – the average price paid for a ticket. Typically, this involves the construction of an integrated set of scale-of-house, inventory management and pricing strategies before the season begins and deploying those relatively static strategies throughout the season. Most buyers – especially the most loyal patrons – see or feel minimal impact. The Dynamic Pricing plans that adjust prices after tickets go on sale and when demand exceeds expectations typically impact the most transitory of audiences – the last minute buyer who has no idea of or interest in the range of prices previously offered. And, TRG’s research indicates that these folks are likely to never be seen again – regardless of the price they pay. (In fact, many walk away without a trace, never having been asked for contact information, which is another issue for another day). For these buyers, the price is simply what they agreed to pay, fair – or not. And rational or irrational, they make the same judgment that all of us make every day as we move through our consumer driven society.
So – does price impact loyalty? Of course it does, although not in the simple tactical sense that some might argue it does. Smart pricing plans improve both the perception of success for the organization and generate more revenue – which creates more stable business models. I’ve raised money for financially strong and financially weak companies and my experiences have been consistent. Donors respond to the legitimate needs of successful companies with the eagerness of a fan – not dread.
And, perhaps more importantly, Patron Loyalty impacts price. Loyal audiences assist our efforts to manipulate inventory and prices to encourage the kind of behavior that benefits box office and long term financial success.
Expect more on this topic from TRG. We will continue grinding through our data to see what else the numbers tell us.