Thursday, November 8, 2012

Dynamic Pricing Blind Spots

Photo via flickr
Unsupported Dynamic Pricing -- a condition that exists when the results of dynamic pricing mask the broader weaknesses of an organization’s prevailing and inadequate pricing strategy.

Dynamic pricing is so simple anyone can do it, right?  When sales hit a pre-determined target point, prices for the remaining ticket inventory move up by five or ten bucks. 

Best of all, its success can be proven.  From sales reports, it’s easy to calculate a “price variance” that represents the extra money dynamic pricing generated.  And typically, there are no complaints from the ticket buying public to diminish the upside of incremental revenue. 

This set of operating assumptions finds its way into the executive office and the boardroom.  Touting dynamic pricing results becomes a badge of honor demonstrating that one’s organization is truly maximizing revenues for each performance on the schedule. 

Deeper probing, however, shows otherwise.

In TRG’s analysis of sales outcomes, we find that dynamic pricing practiced in isolation allows arts leaders to be convinced that their pricing strategies are working well while huge revenue and loyalty opportunities go unrealized with most every performance.  We call this condition “Unsupported Dynamic Pricing.”

Allow me to illustrate.

One of the first things TRG examines in sales history data is the relationship between the sales volume for each performance and the corresponding per capita revenues – or the average revenue yield per ticket sold.  Poorly scaled and priced houses produce very specific markers that demonstrate lost opportunity for revenue and loyal patron behavior.

Our recent work for a theatre company provides a good example.  TRG analysis divided the company’s performances into quartiles based on unit sales results, from the Lowest Sold to the Highest Sold performances.

As you can see from the accompanying table, per capita revenues do not consistently rise as they should with unit volume sales success. The poorest selling performances produced $44.51 per ticket.  The next best selling group of performances (Low-Mid) produced some upward improvement to $45.53.  However, better-selling performances (the High-Mid Sold group) saw per capita revenues fall by 8%, from $45.53 down to $41.96.  Then, like magic, per caps rebounded to $44.93 for the best selling performances.  All that said:

This company’s top-selling performances produced only forty cents – 1% – per ticket more than the worst-selling shows. 
When we examined sales for each ticket type, we found that subscription sales, group sales and discounted single tickets all had declining per capita revenue as sales volume grew. The current scale-of-house was working against the interests of this theater.

Full-priced ticket sales told the most compelling part of the story.  Here, we found a clear and steady decline of sales across the bottom three-quarters of all performances.  And then, per caps took off, growing at an erratic pace upward for the best quartile of performances.

All of this was happening while this company’s management believed that they were successfully implementing a state-of-the-art dynamic pricing program.  And their dynamic pricing success validated their belief that their entire set of pricing strategies was working quite well.

On one count, they were right.  They got the mechanics of dynamic pricing right.  When demand exceeded expectation, they raised the price.  They could prove that the tactic was making incremental money.

What they failed to notice was the immutable fact that almost everything else related to their pricing strategy was wrong.  The easy money generated by dynamic pricing created a blind spot.  They were unaware of the much larger sums of money that could have been made from the majority of performances that did not sell out.  Additionally, they did not even begin to contemplate how scale-of-hall decisions can and should create incentives for loyalty.

TRG experience on this point is consistent.   Money left in the market for the larger number of mid-selling performances is always significantly more than the potential of dynamic pricing alone. 

Failure to get prices right diminishes the potential upside from dynamic pricing tactics.

Are you a victim of Unsupported Dynamic Pricing?

Hear more about dynamic pricing done right—and how pricing impacts loyalty in TRG’s webinar, “Dynamic Pricing or Patron Loyalty? Do Both in 2013-14.” Watch the recording here.

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