The Demanding World of Dynamic Pricing

If airline flight prices change daily, why is it that theater ticket prices are fixed? And why do we issue a zillion discount codes? Isn't there a better way?

"Dynamic Pricing," "Demand-Based Pricing," and "Variable Pricing" are all words that describe the notion of changing ticket prices day by day, like the airlines do. This concept has cropped up on a regular basis over the last few years in the arts, and it seems to be happening with increasing frequency. As a check on the state of the industry, I attended a session dedicated to this topic at a ticketing conference in January. Given that the room was packed with hundreds of attendees, it seems like dynamic pricing is the "it" topic across sports, live music, and the arts. And, as I found out, for good reason.

Before I went to this session, I thought that dynamic pricing was simply some new technology that automatically changes ticket prices in relation to demand from consumers. I thought dynamic pricing was a feature you could buy, as a new way to optimize theater pricing using a sophisticated technique to eke out every extra penny. While that's sort of true, it somewhat misses the point. Dynamic pricing is actually a good deal more complex than that.

Let's start with the facts. Dynamic pricing in the live-event world is still in its infancy. There are few if any fancy software systems in general use that are designed to handle dynamic pricing, and even large and well-respected venues such as the New York Philharmonic are only now dipping their toes in this water.  

Before we talk about dynamic pricing, it helps to review some general philosophy. First let's look at the notion of pricing itself. Setting prices for any product is perhaps the hardest aspect of any business, and in the live-event business, it's even harder. In my view, it is certainly is most underestimated and under-appreciated of any of the tasks of a marketer, and one that we spend disproportionately little time on relative to its ultimate impact. I've been in those pricing meetings, and if the ones you sit in are like mine were, pricing decisions are typically based on "gut feel" and/or comparisons to last year, and are driven mainly by one goal: to achieve budget. The problem is that none of those approaches has the customer's needs front and center, nor will they necessarily help you arrive at the best pricing scheme. 

And what's really frustrating about pricing is that you can't ask your consumers and get a reliable answer. If you research consumers and ask them what they would pay, you will get a different answer from what they actually do pay.  

 Now, an economist would have you set prices using a classic demand curve. The place where the two lines meet is the exact price you should charge to optimize your results.

But what would it take to understand the exact consumer demand for a single performance during a run of a show to create this demand curve? Well, you would have to consider all of the outside factors that come to bear in the decision-making of your target audience. You've got the particular performance on the stage (the art itself), the day of the week, the stars of the show, the weather, the venue. And that's just what you know before the show opens. Then you've got "stuff that happens," like traffic patterns, holidays, road closings, mass transit problems, and news. All of these things matter—even what's on television that night, such as the Olympics! 

If you magically had perfect information, you'd hit the demand curve, price perfectly, and sell out the house and maximize your potential revenue. The odd but unassailable logic is that in this case, dynamic pricing would not be necessary at all! Of course, the problem is that you never have perfect information at the time you price the show. Thus the need for something else.

Here's an analogy that might help:

Think about a pilot trying to land an airplane. He or she has a lot of technology, software, and guidance systems, as well as the window out front, to help aim the plane down a very narrow runway. The pilot makes mid-course corrections while descending 30,000 feet to the ground in about 20 minutes, based on a lot of variables including the wind, the temperature of the air, the weight of the airplane, crosswinds, and the length of the runway. As the pilot is descending he (and the computer) are making minute adjustments along the way. 

Let's superimpose this concept onto pricing. In a fixed-price world, you're like a pilot who sets the flaps and the rate of descent before before takeoff, and that's it. You just hope for the best. I wouldn't want to be on that plane!

Historically, we've printed the ticket price on the ticket, advertised that ticket price, and we're done. We are, very much like in the example above, stuck with what we've decided on before we even start. So no matter what the variables are, we end up steadfastly sticking to our initial guess, even if it's clear that we're way off course. And if we run into problems with too few tickets being sold, our current method of solving this is issuing discount codes, which are a crude way of lowering prices along the way. While discount codes can work, they only work in one direction—down!

Now imagine the opposite approach. It starts with the notion that you are going to sell tickets to a group of people for a particular night. Using my analogy, that night is your runway. Once you set your ticket prices, you start your descent (your onsale for that show). Your prices stay the same until you encounter information that causes you to make a mid-course change. All of the variables surrounding that particular performance come into play, such as the ones that I described above (perhaps it's very rainy, or perhaps your star is sick that night; or conversely, maybe there's a big convention in town that night, and you've got tremendous extra demand). These are, just like the changing wind patterns, things that alter the ultimate outcome, the demand for your product.

This is where dynamic pricing comes in. It's a methodology by which a marketer takes a regular look at the demand for a particular performance and adjusts the ticket price up or down depending on the nature of that event along the way. It's a mid-course correction based on inputs that you're getting from the marketplace. Dynamic pricing is really all about recognizing that you're not going to get your price right at the beginning, and you are going to need to make corrections to meet the demand curve as it changes.

Doing this means you'll probably end up with more revenue than you would have before. If demand is high, you raise prices, and vice versa if demand is low. There's also the possibility that you pull tickets from sale for a time as a way of generating demand. You may very well make extra money using dynamic pricing this way. The difference (the incremental improvement) shows the gap between your opening price with imperfect information, and your best guess at the proper ticket price based on varying the price as demand for a show changes. 

So isn't this the answer to our dreams and to meeting our budget every time? Well, the fallacy in this logic is that this incremental change cannot last forever. The more that you do dynamic pricing, and the better you are at matching the demand for your product, that increased revenue will begin to level off or diminish, because you're going to get better at pricing your performances in the first place.

Once I had digested this philosophy, I became convinced that dynamic pricing is very smart, and I wondered why our industry hasn't embraced it so far. In subsequent conversations, one industry expert suggested to me that the problem may be less about philosophy, and more about technology. The fact is that most incumbent ticketing systems can easily create discount codes on the fly. However, changing the actual face value of the ticket during the run is hard, if not impossible.

And there are also significant issues relating to budgeting and accounting. If you budget the gross potential of a show at the start then, with dynamic pricing, you are now essentially changing that gross potential number along the way. I'm sure there are a few accountants and bookkeepers whose heads are spinning at the mere thought of this. But the tail should not wag the dog.

The complexity doesn't negate the logic or the need. If you're wanting to start exploring this yourself, there are a few organizations that are worth paying attention to. In the larger sports and entertainment industries, as you might imagine, there are some sophisticated things happening. QCue claims it has "the world's only dynamic pricing engine for live entertainment events." But in our field, where the number of seats per performance isn't in the tens or hundreds of thousands, the approach is necessarily different. I'm aware of the success of two companies who are actively working in this arena. Both have their own "secret sauce" for how to do this, including consumer research, historical analysis, and day-to-day action. And both have results anyone would be proud of.

TRG, lead by Rick Lester, reports that it had recent success with the Arts Club Theatre Company (ACTC) in Vancouver. During ACTC's first season working with TRG (2008-09), ACTC monitored the houses as they were filling for each performance and made daily decisions—seating section by seating section—to adjust prices up or down based on demand. ACTC finished $1.6 million ahead of prior season results for single and group sales (not including subscriptions) for a total of $4.4 million. Of these sales, ACTC earned $430,000 from dynamic pricing strategies alone, about a 10% increase. The Pricing Institute (lead by Steven Roth, Tim Baker, and Alan Brown) has seen similar results from its clients. The Geffen Playhouse implemented a dynamic pricing strategy for a production that brought in an additional $60,000, which represents a 23.5% increase in sales for that production. And at the Yale Rep, dynamic pricing brought in an additional $50,000 of revenue for a production, which boosted single-ticket revenue for that production by 37%.

That said, relatively speaking, only a small percentage of organizations in the field are actually using dynamic pricing in this way, either with a consultant or on their own. Linda Forlini, director of customer relations at the New York Philharmonic, reported that she manually changes ticket prices for about 10% of the over 150 concerts that her orchestra presents each year. She has engaged in a sophisticated research study that showed her exactly where there were seats available on a per-performance basis using a pretty spiffy heat map. Linda says that she never changes the ticket prices by more than perhaps 5% or 10% in either direction. There is no wholesale ticket price slashing. Also, all of the price corrections that she makes are handled somewhere between the highest ticket price and the lowest ticket price. In other words, they never raised the price of their top ticket level, nor did they lower the price of their bottom—it all happens in the middle.

This begins to get us to the main point, which is how you can implement this on your own, if you have the conviction, the technology, and the staff to try it. There are some tips and tricks of the trade which make sense.

Someone in the audience at the panel I attended asked whether people who are sitting next to each other in a theater ever chat with each other and get angry learning that their tickets were different prices. Of course, Linda got a laugh when she reported that people in New York City don't talk to each other at all, so it wasn't much of a problem! But it's worth keeping in mind: If you're going to reprice, it's smart to change prices across an entire row rather than having seats next to each other at different prices.

Perhaps the biggest tip I learned about dynamic pricing is that if you want to do it at all, the most important thing is that you should not print your ticket prices anywhere. I don't mean you hide them. You just print a range—"tickets start at $15" or "tickets range from $15-$65." But don't print the actual prices on your tickets, or in your brochure, or at the box office. Otherwise you won't to be able to change them.

In the end, while I was surprised to learn that there really isn't any magic computer program that's running in the background doing this kind of dynamic ticket pricing, I was impressed with what I heard. All of this is in its infancy, and this is still very much a manual operation. And it makes sense that it's manual at this point, since it's as much an art as it is a science. Surely you have some productions you know will sell out now—that suggests that your top ticket price could move higher. And the reverse is true. If you lower prices along they way for performances that you know will not sell, you can meet the demand curve much more effectively, and reduce the number of truly discounted tickets you have to send off to third-party discount sites and services.

It seems clear to me that in 5-10 years, if and when dynamic ticket pricing is adopted broadly by the field, our halls will be more fully filled—and presenters will generate more revenue. I hope that this brief introduction to dynamic pricing offers food for thought. I am now convinced that dynamic pricing makes a ton of sense and has a role in the live-events world. I think it's time for our industry to start aggressively experimenting with this and start doing what other industries have been doing for decades with great success.

Comments

[Jenny]

Hey, great story. Just wondering where you got your facts about the successes arising from TRG and The Pricing Institute. I checked their website for more information and can't find these stories anywhere. Please help!

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