The Problems of Traditional Pricing and How Dynamic Pricing Can Increase Accessibility

Over the span of the last several months, there have been numerous emotional debates over pricing in the blogosphere, particularly among a small handful of very respected colleagues in the theater industry. I have remained, for the most part, on the sidelines as much as possible, because parts of the debate centered around practices that I have publicly endorsed at major conferences. As such, I didn't want to interfere in what was an open and honest dialog. However at this point, I feel the need to address some of the misinformation that has been posted on a few reputable blogs, and shed some light on what to me seems to be a misunderstanding of dynamic pricing by Isaac Butler (founder of Parabasis) and Adam Thurman (author of Mission Paradox).

Some things to think about:

1. Dynamic pricing in itself doesn't determine accessibility.

Dynamic pricing is simply a tool, or maybe it is better described as a philosophy. Like most things in life, the devil is in the details. How it is applied is much more important than the concept itself. Basic traditional pricing establishes a maximum price point usually determined by seating section and date of performance. Once tickets are placed on sale, they are usually released at the maximum price point. In contrast, with most applications of dynamic pricing, tickets are initially released at the minimum price point, and only increase to the maximum price point if demand warrants. This ensures that a certain amount of tickets are guaranteed to be sold at the minimum price point, whereas traditional pricing can allow an entire house to be sold at the maximum price point from the initial release date.

In addition, dynamic pricing doesn't dictate how an institution deals with allotments set aside for specific audience demographics. In the case of Arena Stage, we have six distinct savings programs that target specific audiences that are extremely important to us as an organization. Aside from the pricing of the general ticket allotment, most organizations that practice dynamic pricing protect ticket allotments for their savings programs, even for productions that are in very high demand.

From my vantage point, dynamic pricing is the Robin Hood approach to yield management. The very few people who wait until the last minute are charged the maximum price point to provide for those who are charged a much more accessible price by purchasing well in advance.

2. When debating pricing, the maximum price point is much less important than the average ticket price.

When determining how accessible major institutions are to the general public, it is much more important to examine an institution's average ticket price than to critique its maximum price point. To reach the maximum price point, at most institutions practicing dynamic pricing, demand has to be so high that 90% or more of available inventory is sold, meaning that only 10% of inventory is ever sold at the highest price. In looking at it from another perspective, 90% of all inventory is sold at some sort of discount. The only litmus test an institution has to determine how accessible they are to the general public is their average ticket price. To determine average ticket price, one needs to divide total ticket revenue (subscriptions + single tickets) by the total number of tickets sold. By looking at an average ticket price, one gets a complete analysis of all sales across the entire spectrum of their ticket allotments, including those sold through savings programs. The argument shouldn't be that non-profits shouldn't sell beyond a certain maximum ticket price. Instead, it should be that non-profits should maintain an accessible average ticket price. If you are focused on the maximum price point, you can't see the forest for the trees.

3. Dynamic pricing rewards behavior that is much more in line which subscription purchasing.

I have heard my colleagues bemoan the death of subscriptions for the past decade. I too am inclined to believe that generational differences in purchasing behavior will lead to the eventual demise of the subscription. However, traditional pricing practices have escalated the downturn of subscriptions.

In most institutions, subscribers are a group of patrons who purchase multiple productions and do so early in a show's purchasing cycle. For this, they are rewarded with a slight discount. The trouble with traditional pricing occurs when single tickets are placed on sale at the maximum price point directly out of the gate, only to be drastically discounted usually a week or two before the performance when management realizes there isn't the demand to warrant the initial price point. Subscribers then realize that in a significant percentage of cases, they can wait until the last minute to purchase, and will be rewarded with the same, if not better, discount than they would have received if they purchased months in advance. Pavlov proved that if you reward a certain behavior, it will increase. If you want to kill subscriptions, then continue with a pricing model that provides the best discount at the last possible minute.

Until someone much smarter than I figures out the solution to the subscription dilemma, I will always support a single ticket pricing model that encourages behavior more associated with subscription purchasing patterns. If an organization wants to increase its subscriber base, reward early purchasing decisions with the best possible prices, and make sure that those who purchase late, do so at the highest possible prices. I am convinced that this approach to pricing is why Arena Stage has significantly increased its subscriber base over the last three fiscal years in the midst of the global economic crisis.

Final Thought
When debating and analyzing pricing strategies for an organization, remember that "a little knowledge is a dangerous thing." Get all the facts. Study sales patterns. Talk to stakeholders. Hold focus groups. Look at peer organizations. Do your due diligence, and be prudent. Before moving forward, make sure you have a complete understanding of the various options and how your decision will impact organizational values. Prior to implementing a dynamic pricing strategy at Arena Stage, we thoroughly studied the model for more than a year, and had very thoughtful discourse among staff, leadership and the board.

Groupon and Mass Discounting Strategies

Spurred in part by an excellent article written by Chris Jones of the Chicago Tribune, in the past month, there has been a lot of talk about cultural organizations using Groupon (an online, mass discount website). Just like any mass discounting method, using Groupon should be a well thought out strategy. Used correctly, and it can work very well. Used incorrectly, and it can be very costly.

Things to remember about Groupon:

• It is out there for the world to see and it was designed to be used by social media, so that it is picked up and passed along at a very rapid pace. From some of my previous posts on this blog, you probably know that I am a fan of what I call "ninja discounting." Very rarely do I use mass communication to advertise and promote discounts, preferring instead to use one-to-one direct marketing techniques aimed at very strategic recipients. If I need to discount, then I want to make sure that I can control who gets the discount so that it flies under the radar of full price buyers.


• Groupon generally rewards a pattern of behavior that isn't desired--namely, last minute ticket purchasing. Before turning to a mass discounting strategy like Groupon, performing arts organizations will wait to see how their standard campaign is doing. If they are on goal, most won't discount. If they are off, time to throw out the offers. But this usually happens pretty late into a campaign. Let's use the Joffrey Ballet that Chris cites as an example. Their programming begins in October, as does Arena Stage's, so I would guess they launched their subscription campaign last spring. How do you think a subscriber who purchased early and at full price will feel when he sees that if he waited several months he could get a subscription at 50% off? and what do you think his purchasing behavior will look like next year? and trust me, he will get the offer because as my first point illustrates, it goes to everyone.


• Groupon is a for-profit company, and operates like one. They take a significant cut of each sale made. Using the example from the Joffrey Ballet, subscriptions were offered at 61% off regular prices. However, the cut that the Joffrey gets is significantly less than that, so they most likely sold those subscriptions at 75-80% off. Larger organizations can negotiate better splits with Groupon than their smaller counterparts, but I haven't heard of anyone keeping more than 60% of the full sales price.


• We must always remember that discount buyers behave differently and you must budget for that. Full season subscribers at most organizations renew at a rate between 85% to 90%. However, I have found that full season subscribers that purchase their subscriptions at a drastic discount renew at a much lower rate (around 60%). Additionally, because they spent significantly less amount of money per ticket, the no show rates are also substantially higher, sometimes leaving large empty holes in your house.

Instead of putting subscriptions on Groupon in order to attract thousands of new subscribers, I would do the following:

1. Using your database, compile a list of the tough holdouts that you have hit up seven to eight times already during your subscription campaign (usually includes single ticket buyers and non-renewed subscribers from the past 3-4 years).


2. Next, trade lists will all the other arts organizations in town.


3. Then possibly consider purchasing lists from a list broker.


4. Combine all the names into one master document, and suppress your current subscribers, donors and full price ticket buyers.


5. Using the exact same deep discount offer you were going to give to Groupon, develop a cheap, but effective mailer and send to your list. Make sure it is an offer that is impossible to pass up, and that the offer leads in design and has a deadline. (note: if you don't have a large box office staff, then make sure the offer is online only, or you will be swamped). The key is to keep production and mailing costs low--send using non-profit postage and use a discount printer/mail house.

By doing this, you get to keep the entire purchase price of the discounted subscription, and you minimize the possibility that your dedicated and loyal patrons will see that you are heavily discounting late into your campaign after thousands have already purchased.

I find that Groupon is most useful when trying to fill large sections of an empty house on dates that are less desirable. Full price ticket buyers don't seem to mind because they didn't want those dates anyway, and most companies budget low percent paid capacities on those dates so it is additional revenue that wasn't anticipated.

Remember to Test even the "Sacred Cows"

I think I have always been attracted to arts marketing because it allows me to use both creative as well as scientific talents. To this day, I might be the only person to graduate from Missouri State University with a major in speech and theatre education and a minor in mathematics. So it should come as no surprise that I take a very scientific approach to marketing.

In every campaign I lead, I constantly manipulate variables and note outcomes in an attempt to continually improve upon previous results. The easiest variables that marketers turn to are design and pricing. How many times have you tested a carrier package? an offer? pricing strategy? Probably quite a few times. Now think about how many times you have tested different timing schemes for putting products on sale.

This was the first year in my tenure at Arena Stage where we experimented with using timing as a variable. For almost as long as we have had mini-subscriptions, we have put them on sale at the exact same time as our full season subscriptions, fearing that instead of waiting or upgrading, our potential mini-subscribers would opt to go elsewhere for their entertainment. The fear of losing potential mini-subscribers was so strong that for many years timing wasn't even considered a possible variable to test.

As a leader, you have to always remember that the fear of a potential loss will always be significantly more powerful than the possibility of a probable gain. By nature, we are risk averse, and if given a choice to pursue status quo or trail blaze, we will choose status quo each and every time unless there are overwhelming odds. But you have to be mindful of "sacred cows," and be willing to test even the most concrete of assumptions. In my career, the testing of "proven strategies" has led to some pretty remarkable results.

For our inaugural season in the new Mead Center for American Theater, we experimented with exclusively putting full season subscriptions on sale for the first four months of our subscription campaign. In addition, we developed a pricing strategy that encouraged full package purchases, and new exclusive benefits for full season subscribers, such as the ability to purchase parking in our onsite, underground parking lot. It was a test of timing as a variable--would potential mini-subscribers upgrade to the full season, wait until mini-subscriptions were available or leave Arena Stage entirely.

As we are eight months into our subscription campaign, we have some pretty interesting results:

• we exceeded our projections for full season subscribers both in number of subscribers as well as revenue by almost 60%
• we had three times as many subscribers upgrade their packages when compared to those that downgraded
• full season subscriptions weren't just for renewals and upgrades--we more than tripled our projections for brand new subscribers to Arena Stage at the full season level. At this moment, 11% of our entire subscription base are patrons who have never subscribed to Arena Stage and did so in their first year at the full season level.

As our full season subscribers renew at a much higher rate than our mini-subscribers do, I anticipate that the growth that we have seen in our number of full season subscribers will benefit us for many years to come.