Seven Theaters in Search of Revenue
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yale case 08-040 november 17, 2008 Seven Theaters in Search of Revenue A Study of Pricing Strategies in the Arts Sector Rebecca M. Rindler1 Sharon Oster2 Andrea R. Nagy3 How much should tickets to Saturday night’s show cost? Theaters weigh a number of concerns when deciding how to set admission prices. Revenue is important, of course: theaters price tickets at the highest level the market will bear. But theater is different from other goods, and finances are just one factor that influences pricing decisions. Capacity also matters a great deal: companies want full audiences as well as revenue- generating ones. They must balance the need to maximize revenue with the need to maximize audience. In addition, most arts organizations attempt to expand the breadth of their audiences by reaching out to groups that seldom attend the theater. Revenue, turnout, and audience diversity are all factors that theaters take into account when setting ticket prices. This case study examines the ways in which seven theaters from around the United States are capitalizing on high-demand shows while keeping programs accessible to all audiences. In order to achieve this balance, theaters vary prices according to several criteria. First, most companies offer subscriptions for several shows in a season. Subscriptions are a way to generate both revenue and audiences: they provide capacity upfront, informing the theater of audience numbers ahead of time and providing income to pay for productions before they occur. Ideally, theaters would sell every seat ahead of time through subscriptions. However, in reality, they only cover part of their needs this way. Subscriptions in the U.S. have been on the decline, decreasing seven percent from 2001 to 2006, according to statistics compiled by the Theatre Communications Group. This means that theaters must meet an increasing amount of their revenue and audience requirements through single-ticket sales. The groups surveyed use a variety of methods to market single tickets. Some adjust prices according to seat location, anticipated popularity of show, or day and time of performance. Some offer targeted discounts in order to fill seats, maximize revenue, or attract a certain demographic. At the same time as they adjust prices, theaters must be alert to the ways in which discounted tickets affect brand perception. In general, theater companies are becoming increasingly sophisticated in their pricing strategies. From demand-based pricing to single-priced low-cost tickets, they are trying many different approaches to meeting their financial needs while keeping their programs accessible. Demand-Based Pricing at Atlanta’s Alliance Theatre Atlanta’s Alliance Theatre offers a variety of programming on two stages, including Broadway musicals, new plays, classic plays, and family fare. Runs are typically four to six weeks long. In its 2006-07 season, Alliance had a $10.5 million budget and 10,200 subscribers; it served over 100,000 patrons. Pricing Strategy Virginia Vann, Director of Development and Marketing, says that her goal is to maximize the revenue of blockbusters in order to allow the theater to produce riskier, newer plays that will not bring in as much revenue. Alliance modifies prices to meet customer demand. This strategy requires flexibility in the pricing structure and necessitates immediate reactions by staff members to demand patterns, but it maximizes revenue by charging the highest price the market will bear for performances. Alliance uses the budgeting process to set average prices for each production in the coming season. For Broadway-style musicals or other proven products, the starting price might be set slightly higher. “You can always come down,” notes Vann. Alliance’s ticket prices are also benchmarked against their competition, which includes both touring productions and local theaters. For a number of years, Alliance had a complex price structure with 10 different prices for each show. This was difficult to explain and sell, so in 2004 the marketing department changed the pricing structure to set only orchestra and balcony pricing in addition to pricing by performance. Pricing Adjustments Using single ticket averages, the staff then determines the discount for subscriptions and the discount or markup for single tickets. Single ticket prices are not announced until later in the season, closer to the performance date, allowing Alliance to change the price as the demand changes. Alliance’s pricing tactics are responsive. The marketing staff carefully tracks sales and raises ticket prices when demand has grown to the point where audiences will pay a premium. If there is high demand for a show early on, and the marketing staff suspects it may become a big hit, they will raise all single ticket prices. If performances are selling out rapidly, Alliance will offer VIP seats at a price of $125 each during the last two weeks of performances. In addition, staff will keep discounted tickets and comps (complimentary tickets) at a minimum to maximize revenue. This scenario is most likely to occur with popular musicals. On the other hand, if a show is not selling well, Alliance will offer specifically targeted discounts. Discounts of 20 percent might be offered to special groups or through last-minute offers to the subscribers of atlantaplanit.com. These discounts are tightly targeted rather than offered to the general public, allowing Alliance to continue selling as many tickets as possible at the original price. Alliance’s pricing tactics encourage subscription. Single ticket buyers can save by purchasing tickets early, but many continue to purchase later on in performance runs at a higher price. In general, Alliance’s subscription and single ticket audiences do not seem to be particularly price- sensitive. A recent survey of subscribers showed little price sensitivity. For example, for the 2005-06 production of A Christmas Carol, audiences did not react adversely to Alliance’s price increases. In fact, the production earned $94,000 over its revenue goal, $65,000 of which came directly from price increases. 2 seven theaters At the same time as it attempts to use ticket pricing to maximize revenues, Alliance also is committed to broadening access to the theater by offering low-priced tickets, both to the general public and to targeted groups. Seniors, students, and members of the military receive discounts. Rush pricing and $15 tickets are available for most shows. According to Vann, these access goals are seen as part of the total pricing strategy, as lower-priced tickets are offset by maximized revenue on high-demand shows. Future Plans Alliance’s future pricing strategy would involve “more science,” says Vann. “We have not done the kind of demand analysis, price/value research, or econometric modeling I would like to do.” Further development of pricing tactics is also a goal. Vann cites Pacific Northwest Ballet as an ideal; their Tessitura ticketing software automatically increases prices for remaining tickets when the house reaches a certain capacity. Product-Form Pricing at La Jolla Playhouse Southern California’s La Jolla Playhouse programs a variety of work, including six to eight main-stage plays and musicals each year as well as non-subscription new work. The theater often employs well- known playwrights and directors and is respected in the theater community for sending more than 30 productions to Broadway in its 30-year history. In 2005, La Jolla had 9,700 subscribers, resulting in $1.3 million in subscription revenue. In the same season, it sold 50,000 in single tickets for $2.1 million in sales. The theater offers several different ticket prices to maximize both revenue and audience numbers. Pricing Strategy La Jolla’s two pricing objectives are to maximize income from their most popular performances and to maximize audience through variable pricing for different performances, seating sections, and special opportunities. Leandre Kearns, Director of Communications of La Jolla Playhouse, calls their income maximization strategy “highest highs and lowest lows.” This means raising prices for shows with high demand to maximize revenue and lowering prices for shows with less demand to maximize audiences. In comparison to Atlanta’s Alliance Theatre, La Jolla uses a more mathematical approach to setting prices. Whereas Alliance is willing to keep prices flexible, moving them up or down in response to changing demand, La Jolla often plans its blockbusters ahead of time. In 2005, La Jolla moved to a “product-form” pricing model, a method commonly used by orchestras and opera companies. Using this strategy, the theater sets the price of the ticket in relation to the production’s attractiveness to the marketplace, rather than setting one price across a season. Theater management sets ticket prices based on the type of show, and the day of the week on which the show is performed. This method also allows La Jolla to lower prices in order to attract audiences to the theater’s more adventuresome works. Kearns budgets and predicts income through an inventory occupancy analysis. This method involves looking at several shows from the past season that were mid-range performers (around 70 percent attendance). She calculates how many tickets in total were available by performance or day of the week, then separates by subscription and single ticket audiences. This allows Kearns to look at what percentage of seats were single tickets. She can then calculate the inventory “load factor”: the percentage of seats sold versus the theater’s total capacity. This calculation is useful in determining list price categories and price increases and decreases based on demand. 3 seven theaters Kearns differentiates between the value of the show (the ideal ticket price the theater would like to set), the list price (the price regularly quoted to customers before applying discounts), and the average price paid, which may be lower than the list price on less popular shows due to discounting.