You are on page 1of 4

artsknowledge

PO Box 5362 Portland, ME 04101 artsknowledge@gmail.com 415-283-9096

Can You Use Dynamic Pricing?


Dynamic pricing has already spread from airlines to the arts. Kara Larson cuts through the jargon and explains how some arts organizations are making it work for them. Dynamic pricing (also known as yield management) simply means changing prices to reflect levels of demand. Airlines are the most familiar users of dynamic pricing. But the whole concept of raising prices when demand grows is taking root in other sectors too: car rental companies, hotels, utilities, online retailers and now theatres. Setting prices at appropriate levels before tickets go on sale is fundamental to maximizing revenues. But to do this, we need to know enough to accurately predict demand for tickets, and this may not be as simple as it sounds. For example, our projections of ticket sales volume for a particular production may well be based on not exactly comparable events. We may be obliged to set prices a year or more in advance of performances and things can change in the intervening time. Dynamic pricing offers the opportunity to re-set pricing to react to errors in our predictions or unpredictable changes in the marketplace. Many theaters discount tickets for performances that arent selling well, adjusting prices to meet demand (or, in this case, a lack thereof). Thats dynamic pricing. But if were willing to lower our prices when demand is low, why are we unwilling to raise them when demand is high? I have worked for presenters who were delighted to sell out some performances months in advance, but from a revenue perspective, selling out isnt good news. If all the tickets sell out months in advance, it tells me the price was too low. The practices (and results) of five typical US companies that currently use dynamic pricing are illustrated below. Their schemes have several things in common: These companies dont publish prices (other than on their websites, which are constantly updated) They rarely raise the lowest available price They report few or no patron complaints They have weekly reviews of sales and pricing They report total season revenue increases of up to 4% AND they differ in a number of ways: Some companies apply small price changes broadly across many performances, while others impose quite large changes infrequently Some organisations spend just an hour or two a week reviewing pricing, while others have staff managing prices nearly full-time Some adjust prices for specific seats or sections, others for all unsold seats.

Pacific Northwest Ballet, Palm Beach Opera, San Diego Opera Whether they came to it through the advice of a consultant or discovered it on their own, all three of these companies use nearly identical dynamic pricing schemes. They seek to top up revenue by using total sales as a trigger to raise prices in small increments. When a predetermined percentage of total tickets have sold for any given performance, prices are raised by a small amount. Most commonly, when 80% of any performances tickets have sold, the price of all remaining tickets is raised by $5 (at 90% an additional $10 is added). Outcome: this adds 1.52% to total season revenues. Pittsburgh Opera Similarly, this opera company uses total percentages of house sales as triggers for price changes at 60%, 70%, 80%, and 90% of total house sold the price rises 1015% across all available sections. Outcome: this adds 11.5% to total season revenue. Carolina Performing Arts a university-based multi-disciplinary presenting series. Carolina Performing Arts uses dynamic pricing to correct mis-pricing, but tries to do it sparingly, for only those performances where initial prices or projections were significantly wrong. Theyve built projecting models that incorporate speed of sales curves for a variety of comparable performances. When the real sales curves begin to differ dramatically from the expected, they adjust prices until the curve comes in line with expectations. Outcome: when dynamic pricing was implemented for four high-profile performances in summer 2009, this added 11% to revenue for that event, and 2.5% to seasontotal revenue.

Alvin Ailey American Dance Theatre Three seasons ago, Ailey worked with a consulting firm to rescale the house and implement a battery of revenue management schemes, including dynamic pricing. Uniquely, they build their seating for each season, reserving rows of each price section off-sale. After a period of sales reveals trends in demand, these rows are priced according to response, either as part of the lower-priced seating block or as part of the adjacent higher-priced section, depending on which price band is selling faster. Outcome: The impact of dynamic pricing revenue is reported separately, but revenue has risen sharply in the past two seasons and managers estimate that a big chunk of the difference is attributable to pricing. Chicago Symphony With an extraordinarily strong subscription base, this orchestras goal is to make extra revenue while ensuring that subscribers get the best possible prices. As patrons understand that prices may rise in future, they have even more incentive to subscribe early. Subscription sales are used to build projections of single ticket sales, and regular evaluations of remaining capacity reveal performances and sections where price rises are indicated (the amount of the rise is based on the managers intuition). Outcome: this adds 1.52% to total season revenue.

Can You Use Dynamic Pricing? Arts Knowledge, llc

by Kara Larson PO Box 5362, Portland, ME 04101

2 artsknowledge@gmail.com

Practical Considerations
When to Re-Price Although imposing price increases when a set percentage of the house is sold can result in some extra revenue, I would argue that it looks a lot like locking the barn door after the horses are gone. If there is genuine excess demand (economist-speak for buyer enthusiasm) for a performance, youve let 80% of your tickets go at a too low a price. You could have sold all (or most) of those tickets at the eventual higher price. So how do we go about capturing the value of ALL the seats? One way is the method Ailey uses (above). It allows seats to be assigned to prices as they sell. The drawback? Its fairly labor intensive to set up and manage, and assumes a very flexible box office and venue set-up. Alternatively, I recommend building sales curves or charts of sales for comparable performances. Taking a historical look at the speed of ticket sales in the run-up to performances will generally reveal patternsset up the charts to record T minus x days (or the number of days in advance of the curtain) and set T to 100%. Overlay several comparable performances and you will begin to understand how your current sales compare. The advantage to this method? I have caught over-performing events at 30% or less of the house sold, and been able to ratchet prices up to match the curves to normalcapturing extra revenue on most of the house. (It has also revealed under-performing events long in advance of a crisis point, which is also useful.) What Your Patrons Think Many companies that have imposed some version of variable or dynamic pricing (I use variable here to describe pricing that changes from the base price and dynamic to describe pricing that changes specifically in response to demand) report that they have had NO complaints from patrons. My experience suggests that this may be overly hopeful. In many companies, the decisions about dynamic pricing are made at some remove from the box office personnel who answer the phone. Patron comments and complaints often dont trickle up far enough to become part of the conversation. I have found two common responses to pricing changes: 1. Patrons can be anything from disconcerted to angry that prices dont appear in the brochure. Many of us offer multiple performances at multiple prices, and our patrons often want to plan their purchase at leisure using a price chart. Some comment that they cannot easily access the web site and dont want to talk to a representative to find prices for everything they might be interested in. 2. And patrons who plan in advance often find that todays price is not the same as yesterdays price for instance, they checked the price before they had lunch with the companion they always bring, and now several days later, the prices have changed. In the change to dynamic pricing, we often treat patrons as the people who should be the last to know. We hide our prices and expect the box office to provide information that many patrons prefer to read at their leisure. What should we do?

Can You Use Dynamic Pricing? Arts Knowledge, llc

by Kara Larson PO Box 5362, Portland, ME 04101

3 artsknowledge@gmail.com

Transparency Is Key
In Print Big brochure mailings should include price chartsbut they shouldnt be permanent pages of the brochure. Instead, prepare an initial price chart on a flimsy sheet, smaller than the finished brochure. It can be blown or bound into the initial distribution. It MUST say, in glaring letters somewhere, something along the lines of prices guaranteed through DATE X only. For each successive round of distribution, a decision can be made whether to include, update or skip a price chart. Your own campaign calendar will dictate the whens & hows. You will add work and some expense at the mail house, but you retain the flexibility to change prices as needed. In Person Box office personnel should be prepared to be transparent about pricing, too. They may not know in advance when or whether prices will change, but they can explain to patrons that prices are subject to change, and that to obtain the best price its best to order now. Most patrons understand that the flexibility to wait until the last minute to buy tickets comes at a pricebut ONLY after we explain it to them. We need to explain that the high prices we charge late-comers to popular shows enables us to present the art we put on stage, and allows us to make tickets available at lower prices to students, the under-served, the unemployed, or other groups we make allocations for.

Someday we may live in a paradise where art doesnt need to be paid for. Until then, on those occasions when we are fortunate enough to offer unexpectedly popular performances, fair and above-board dynamic pricing can help close the gap between costs and revenue.

Author: Kara Larson, founder & principal, Arts Knowledge, llc

Kara Larson is a seasoned arts marketing professional with a long track record of creating stable and sustainable growth in revenue and audiences. Prior to founding Arts Knowledge she served as marketing director at Carolina Performing Arts, the performing arts presenting series at the University of North Carolina at Chapel Hill. Previous positions were at San Francisco Opera, the Glimmerglass Festival, Sarasota Opera, and The National Folk Festival.. She has also served as a Marketing Mentor in the Kennedy Centers Arts in Crisis mentorship program, assisting troubled performing arts companies with their marketing needs.

Can You Use Dynamic Pricing? Arts Knowledge, llc

by Kara Larson PO Box 5362, Portland, ME 04101

4 artsknowledge@gmail.com