April 11th, 2018

Ticket pricing for events

One of the main sources of revenue for sports or events is ticket pricing. As such, it has gotten a lot of interest from professionals and researchers alike in order to determine the best way to maximize the price of tickets. What is unique about sports and entertainment though, is that they do not rely on only one source of revenue, but have several ancillary revenues streams once on premises, such as parking, concessions and merchandise. While tickets are important, maximizing ticket revenue may decrease spending in these other areas and decrease total revenue. 

There are three main ways that managers can price their tickets; cost based, variable of rmulti-tier and demand or dynamic based, but many will utilize a combination of these methods. When pricing, one the most important to things to keep in mind is the willingness to pay of the consumer. This concept sets the maximum amount that a consumer will pay to attend the event. This concept is how pricing has changed to accommodate different consumer's different price sensitivities. Offering a ticket to a consumer based on their willingness to pay can capture a larger total revenue than offering a ticket for the same price. The hotel, airline and tourism business has been doing this for years. They have adopted dynamic ticket  as a way to generate the maximum amount of revenue by offering different prices to different consumers, and sport and entertainment has followed suit. Now, it is common to see prices fluctuate depending on the demand for the event.

Cost based ticket pricing is based on setting the price for a ticket in response to the total cost of running the event, plus whatever profit is required. Every seat in the house is therefore priced at the same rate. This helps the company to guarantee an income, assuming they sell out, and make easier budget decisions since there are no unknown costs or revenues. The downside is that if the cost is below the consumer's willingness to pay for that ticket then money may be left on the table, so to say.

Variable or multi-tier tries is based on pricing tickets depending on external factors that may impact demand, such as seat quality, quality of the opponent or performer, day of the week, etc. While it is still priced long before the event, it is attempting to create different price points for consumers will different willingness to pay levels. This is why seats that are considered premium have a different price attached to them. Offering the same product (entertainment) at different rates allows the venue to capture revenue from these different price points, which increases total revenue.

The final way to price tickets is dynamically. In this scenario the tickets are all priced based on demand for that event. It can then fluctuate up or down depending on how the market is responding. In general, dynamic pricing increases revenue by an average of 14%. In true dynamic pricing, the market (potential consumers) set the price based on their demand for the product. This means that highly coveted events can sell for very high prices, while less attractive events will be sold for less.

In sport, however, there is an added concern, the fact that season tickets are also sold. Many organizations are loathe to price tickets below the price of their season ticket holders, therefore devaluing the season ticket. Many will then attempt to set a price floor that is equal to the per game price for the season ticket. This means that the cost of the ticket from the venue is set a minimum, but that does not mean that alternative ticket sources (StubHub, etc) have that same constraint.

The secondary ticket market where consumers can buy and sell tickets from a third party not the venue itself has applied pressure on the sport and entertainment venues to adopt to different methods of prices in order to compete. Ironically, they are competing against themselves since, in essence, the tickets are to their own shows. But, purchases made by third party, secondary sources, may not include a relationship with the venue, so they may be losing out on potential income from ticket sales. They will still make money at the venue assuming that the purchaser will spend money once inside the venue.

Two ways that venues are attempting to handle this is to have their own ticketing marketplace, where consumers can buy and resell tickets directly through the venue. They accomplish this by partnering with a ticketing company that can handle the trading back and forth. The benefits to the venue are that it captures the revenue from incremental selling, as well as the initial purchase. It is a way to compete with the third party markets that do not contribute a percentage of the sale back to the venue. This has been a major problem in the tourism industry when consumers purchase hotels and flights through alternative methods instead of directly through the hotel or airline. The other method that the venues have started to implement is to systematically decrease the price of the ticket over time. This allows consumers the ability to purchase a ticket at the price they are willing to pay for it. The longer they wait, the cheaper it may become, but once the venue is sold out there are no more tickets.

The impact of ticket prices has made it so that venues can see incremental increases in their revenues that then go toward supporting their bottom line. Sport and entertainment also benefits from the fact that the ticket price is fairly inelastic, meaning that as price increases, demand and attendance does not change much (at least not at the higher competitive levels). This also makes it easier for the venue to capture the maximum amount of revenue from the ticket sales. However, managers also need to be aware of how their consumers spend money in aggregate at their venue. If a higher price leads to fewer in venue purchases this may actually lead to a net decrease in revenue generated. The ultimate goal is to generate the maximum amount of revenue per person, not necessarily the maximum amount per ticket. Understanding how they spend on all the other purchase options helps managers make the most informed decision regarding pricing and attendance. Care must also be demonstrated not to price a core group of consumers out of the venue, however. Ticket sales and venue visits should also be viewed across the whole calendar year and not on a per event basis. Paying high price tags for every event may cause consumers to stop coming or change their purchase habits. Families may also not be able to afford incremental price increases for more than a few events, so if families are the core of your consumer base, it is necessary to see how they react and respond to changes in prices.

Conclusion:

• Dynamically pricing tickets can increase revenue from ticket sales if implemented after adequately considering the willingness to pay of the consumer and the total amount spent by the consumer at the venue.
• It is vitally important to understand how consumers respond and perceive prices at the venue and how attendance and spending changes as a result. Alienating consumers is not a winning strategy over the long term.

References:
Drayer, J., Shapiro, S. & Lee, S. (2012). Dynamic ticket pricing in sport: An agenda for research and practice. Sport Marketing Quarterly, 21, 184-194.
Kaplan, D. (2015, October 25). Dynamic ticket pricing makes successful debut in the NFL. Sport Business Journal. www.sportsbusinessdaily.com/Journal/Issues/2015/10/26/Leagues-and-Governing-Bodies/NFL-dynamic.aspx
Young, J. (2017, December 3). Dynamic ticket pricing use takes off, and teams hope it'll lure fans back into sports stadiums. CNBC. www.cnbc.com/2017/12/01/dynamic-ticket-pricing-use-takes-off-and-teams-hope-itll-lure-fans-back-into-sports-stadiums.html