Pricing Case Study | Kaetz
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BUSI 760 – Pricing Case Study | Kaetz CASE STUDY Pricing for Hanson Productions Bryan Kaetz BUSI 760 | Professor Kobus | 2 MAY 2020 CONTENTS: I. Overview ................................................................................................................... 1 II. Venue 1 Analysis: Hilton ............................................................................................. 2 III. Venue 2 Analysis: Longacre .................................................................................... 3 IV. Venue 3 Analysis: St. James .................................................................................... 4 V. Recommendation for Hanson Productions .................................................................. 5 VI. References ............................................................................................................. 6 I. BUSI 760 – Pricing Case Study | Kaetz 1 I. Overview Hanson Productions is a theater production company that was founded in the mid-1950s with off-off Broadway shows. Their first major success came in the 1970s and Hanson has become a well-known Broadway and West End production company since, winning “numerous Tony awards for both musicals and plays.” (Famigletti 1) The President of Production, Joanne Shen, produced the musical “The Detroit Riots” in 2008. Considering all production, venue, capacity, royalty, and other factors into cost considerations, Shen had to make a decision on ticket prices as well as venue choice between three theater options: Hilton Theatre, Longacre Theater, and St. James Theater. Other factors that were considered for the pricing tier recommendation included the stated political environment during 2008 because it was an election year (Famigletti 3). Racial tensions were high due to President Barack Obama as the first black Democratic nominee running against white Republican nominee John McCain. Detroit Riots was based on the 1967 race riot in Detroit, MI that resonated with the political climate. This climate allowed potential for greater demand. A number of assumptions were made in order to analyze this case and methodologies to be summarized in the following. In the following analyses, there are two separate accounting methods presented: the first based upon the average ticket price presented in the case of $79.10, the second based upon tiered ticket prices based upon seating areas also presented in the case. In this case, there are 4 tiers of seats; the first being box seats accounted at a base price of $142; the second being Tier 1 seats, which includes orchestra seating, front mezzanine seating, and front balcony seating at a base price of $111; the third being Tier 2 seats, which includes middle mezzanine seating and back balcony seating at a base price of $76; the fourth and final being Tier 3 seats, which is comprised of rear mezzanine seating at a base price of $51. Each of these are presented per each venue and with the three price codes also presented in the case: Price Code A of Tuesday- Thursday with 4 performances per week, at the base price; Price Code B of Friday at 1 performance per week at a percentage increase of base considering Exhibits 3 and 4; and finally Price Code C of Saturday and Sunday with 3 performances per week, also at a percentage increase of base considering Exhibits 3 and 4. There was also a tax rate assumption made based upon external research with a rate of 35% due to final revenues achieved as accounted for in the following assessments. Finally, the rate of average attendance was assumed at 97% theater capacity, with the average being calculated from all rates presented in the case Exhibit 2. BUSI 760 – Pricing Case Study | Kaetz 2 II. Venue 1 Analysis: Hilton Considering the average ticket price of $79.10, it would take 29 weeks for the Detroit Riots production to break even at Hilton Theatre. Assuming a one-year run, the total net profit achieved would be just over $8.7 million. With the suggested price tiers based on seating and days of the week, the break-even period would be shortened to 24 weeks and the production would see an increased profit of just under $13.3 million over a period of 52 weeks. For Hilton Theater, there is also the consideration of their investment of 10% of total expenses ($1,308,167.20) with a payback of the usual 6% of revenue for fixed rent, an additional 10% of net profit after taxes, but before recoupment, and an additional 10% of 50% of final profits after recoupment. BUSI 760 – Pricing Case Study | Kaetz 3 III. Venue 2 Analysis: Longacre Considering the average ticket price of $79.10, it would take 48 weeks for the Detroit Riots production to break even at Longacre Theater. Assuming a one-year run, the total net profit achieved would be $1 million. With the suggested price tiers based on seating and days of the week, the break-even period would be shortened to 35 weeks and the production would see an increased profit of just under $6.6 million over a period of 52 weeks. BUSI 760 – Pricing Case Study | Kaetz 4 IV. Venue 3 Analysis: St. James Considering the average ticket price of $79.10, it would take 33 weeks for the Detroit Riots production to break even at Longacre Theater. Assuming a one-year run, the total net profit achieved would be just over $7.8 million. With the suggested price tiers based on seating and days of the week, the break-even period would be shortened to 24 weeks and the production would see an increased profit of just over $15.5 million over a period of 52 weeks. BUSI 760 – Pricing Case Study | Kaetz 5 V. Recommendation for Hanson Productions Based upon break-even alone, Hilton Theatre would be the best venue option to quickly recoup all expenses associated with the production. Despite this consideration, St. James Theater would be an equal option based upon the recommended tiered ticket pricing format. All in all, Longacre Theatre would not prove a good option in comparison to both Hilton and St. James. Another important consideration to take into account is net profit. This is of greatest importance as it shows how truly successful the production of Detroit Riots could be. Longacre Theatre has the lowest potential for profit, and therefore is not recommended for this production. Hilton Theatre has the best potential for profit in consideration of average ticket pricing of $79.10. Considering the other factors of recommended tiered ticket pricing as well as the payback requirements for Hilton’s investment, this would not be the final recommendation. The final recommendation would be to use St. James Theater with the Tiered Ticket Pricing structure. This allows for the greatest profit potential at $15.5 million after 52 weeks and fastest break-even point at 24 weeks. BUSI 760 – Pricing Case Study | Kaetz 6 VI. References “Broadway Season Statistics at a Glance.” The Broadway League, IBDB, 2019, www.broadwayleague.com/static/user/admin/media/statistics_broadway_2018-2019.pdf. “Broadway Season Statistics.” Statistics - Broadway in NYC | The Broadway League, The Broadway League, 2020, www.broadwayleague.com/research/statistics-broadway-nyc/. “Broadway Show Season Grosses & Attendance.” IBDB: Internet Broadway Database, The Broadway League, 2020, www.ibdb.com/statistics/#gross. Famigletti, Peter. “Hanson Production: Pricing for Opening Day.” Harvard Business Review, Richard Ivey School of Business Foundation (Ontario, Canada: 2010). “Federal Corporate Income Tax Rates, Income Years 1909-2012.” FAQs about the Border Adjustment, Tax Foundation, 17 Jan. 2017, taxfoundation.org/federal-corporate-income-tax- rates-income-years-1909-2012/. Sherman, Howard. “Why Are There So Few Long Running Plays On Broadway?” HESherman, Howard E. Sherman, 18 Aug. 2014, www.hesherman.com/2014/08/18/why-are-there-so-few- long-running-plays-on-broadway/. 910A11 HANSON PRODUCTION: PRICING FOR OPENING DAY Peter Famiglietti wrote this case under the supervision of Professor June Cotte solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2010, Richard Ivey School of Business Foundation Version: (A) 2010-05-20 Joanne Shen arrived home to her Central Park West apartment late on a wet October night in 2008, after overseeing work on her company’s most recent production of a revival of a Broadway musical. As she boiled water for some tea, she noticed the clock on the microwave showed 1:30 a.m. She sighed; tonight was the 12th consecutive night she had arrived home after midnight. As she dropped the tea bag into her cup and looked out the window to see the Manhattan skyline, she considered her challenges: she suddenly had to decide on a new theatre for the play, and she still needed to decide on ticket pricing structure. Shen lamented “How am I going to recoup this investment?” JOANNE SHEN Shen had worked for Hanson Productions (Hanson) for 12 years. She started as an intern while she was a student at New York University (NYU) and steadily worked her way up to President of Production, a title she had held for the past two years. She grasped the world of Broadway immediately: From the first time I saw Cats with my grandmother, I knew I wanted a career within the industry. The city, the atmosphere, the production, the costumes — audience members have no choice but to be captivated by the stage and performances. Hanson Productions was a well-established Broadway production company. Since Shen had joined Hanson, the company had won much acclaim, including numerous Tony awards for both musicals and plays.