Feature | Dynamic pricing: an introduction
How to optimise cultural organisations' revenue using dynamic pricing...
If you’ve ever flown on a plane or stayed in a hotel room, you’ve already had direct experience with dynamic pricing. Dynamic pricing is a strategy of optimising revenue being used with great success in various areas and industries, but it remains much less popular within the arts sector in the UK and Europe, for reasons that aren’t completely clear. Is it that we don’t have a rich understanding of what dynamic pricing can do for our organisations? Are there logistical problems blocking its implementation? Or are there other motivations behind why, despite clear evidence of its success in the arts sector in the United States and elsewhere, we’ve been so slow to explore what dynamic pricing can do for us?
This article introduces what dynamic pricing is, discusses when dynamic pricing is and is not appropriate, and explores some of the reservations around implementing a dynamic pricing strategy. It will also provide examples of the difference dynamic pricing can make to an arts organisation’s bottom line. Each organisation has to find the pricing strategy that is right for them – which may or may not include dynamic pricing – but for many organisations it offers great flexibility to maximise sales and income.
What is dynamic pricing?
Before discussing dynamic pricing, we first need to discuss revenue management. Dynamic pricing is one part of an overall revenue management strategy, and understanding the bigger picture helps to see how and where dynamic pricing fits. Revenue management is a strategy first established in the 1970s by airline companies. Their key objective in establishing revenue management strategies was to address the perishability of their product - namely, that once a plane has taken off, you can no longer sell any seats on it! This same problem applies to hotels and theatre seats: you can’t sell a hotel room once the night’s over, and you can’t sell a ticket to a performance once it’s already started. Revenue management is therefore the strategy of selling the right product to the right customer at the right time for the right price. This includes reducing prices to stimulate demand when sales are low, as well as increasing prices to maximise income when demand is strong.
“Revenue management” is an umbrella term, covering a wide range of tactics. These include things like variable pricing by performance, variable discounting, standby, variable scaling (i.e. changing the configuration of an auditorium between performances), and inventory control (i.e. increasing or decreasing the amount of inventory available). While not every organisation will be using every one of those tactics, arts organisations have been practicing revenue management for years; the opportunity now is to manage it better. Dynamic pricing as one facet of revenue management, is therefore the practice of charging different prices for the same ticket at different times in response to emerging and changing patterns of consumer demand.
When should dynamic pricing be used?
Dynamic pricing can be particularly useful in a few different situations:
- When demand is difficult to forecast. For example, if an organisation is putting on a type of performance it hasn’t previously offered, setting ticket prices can be an unknown quantity. Dynamic pricing allows the adjustment and refining of prices as customer demand becomes clearer.
- To help drive earlier booking and reward customers who are willing to commit upfront. This is discussed in more detail later, but this strategy is particularly successful when it is as transparent as possible; if consumers know the best prices will be the first ones available, they know to buy early.
- To reward customer groups such as members or subscribers. Excluding members from dynamic pricing increases creates an additional benefit for members, thereby further incentivising membership purchase.
- If an organisation’s brand or positioning demands consistent pricing across a range of performances, but customer demand is very uneven. Dynamic pricing allows quick responses to changing levels of demand without having to scrap your branding strategy.
However, there are also situations where dynamic pricing either isn’t appropriate or isn’t effective.
- If your organisation has a high proportion of loyal, frequent customers who already book early, you won’t see much of a return on a dynamic pricing strategy.
- If it doesn’t fit into your overall earned income strategy. If pricing is being used to leverage other income streams such as memberships or donations, dynamic pricing will be at cross-purposes with that objective.
- If it’s too late: waiting until an event is 80% sold out and only then raising prices may look, on the face of it, like a dynamic pricing strategy, but that’s not actually responding to customer demand - and is missing out on 80% of its value!
Dynamically pricing the arts experience
Dynamic pricing is already being used successfully in certain sectors and countries with airlines and hotels using it extensively - however, this model of dynamic pricing won’t necessarily translate directly to how it can be used in the arts. The key difference is related to value, or what economists refer to as utility: the satisfaction of a need. The utility of a seat on an airplane is largely objective. A seat on a flight from London to Berlin is fundamentally the same experience: regardless of the carrier or seat location, the flight will still take its passengers from A to B. A customer may choose to pay more for perks like extra leg room or better in-flight entertainment, but again, these are objective qualities.
The value of a theatre event, on the other hand, is largely subjective. There are certain objective characteristics, like proximity to the stage or the acoustics at a particular seat’s location, but the core utility of a theatre performance is primarily subjective. A plane ticket offers a means to an end; a theatre visit, on the other hand, is a means in itself. Because of this, the conscious and subconscious calculations of price against value are entirely different. For this reason, demand is much harder to predict for arts events – one of the key differences in implementing pricing compared to airlines for example - this also explains why if a show is struggling you sometimes can’t even give away tickets for free!
Why you’re not using dynamic pricing…yet
That said, however, we know dynamic pricing can be a success within the arts sector because we’ve seen it elsewhere: the use of dynamic pricing is ubiquitous in the entertainment sector in the United States. It’s clear that dynamic pricing can and does work in the arts: the issue is therefore why the UK has been so much slower to adopt dynamic pricing strategies.
Reduced focus on earned income?
One major difference between the arts sectors in the US and UK is their respective levels of public subsidies: American organisations typically receive far less public subsidy, and are far more focussed on increasing their earned income as much as possible. British arts organisations are less likely to be quite as dependent on earned income, and thus may have had less motivation to experiment with expanding their income streams.
Another possibility is simply problems with technology and implementation. While it is perfectly possible to implement dynamic pricing without specific technology, monitoring pricing opportunities and evaluating the impact of price changes can be greatly simplified with software.
We believe that dynamic pricing within the arts sector, however, can never be fully automated, for the same reasons that make the arts model of dynamic pricing very different from how airlines use it. Because customer demand is based on such subjective factors and therefore is much more difficult to forecast, human input is necessary to assess criteria for pricing.
Another potential issue holding back presenting venues in particular has to do with the nature of the deals between agents, promoters and venues. The way in which profits are divided - particularly the percentage split between venue and promoter on ticket sales -can disincentivise retailers from fully engaging in dynamic pricing, as they see the rewards from that strategy as potentially not worth the effort. The result of this, though, is that all parties lose income.
It seems the biggest barrier organisations face is fear - fear that implementing dynamic pricing will upset or anger their patrons, or a fear that dynamic pricing is unethical. However, the arts sector has already been using one form of dynamic pricing - it’s just been called discounting. For years, loyal customers have been able to purchase a full price ticket far in advance of a performance, only to turn up on the day and find themselves sitting next to someone who bought their ticket at the last minute for half price. Dynamic pricing merely turns this scenario on its head, with the late booker paying 50% more rather than 50% less. Implementing dynamic pricing is an opportunity to improve on a larger practice already in widespread use.
A similar fear - and one that seems to be at the root of much of this resistance - is that dynamic pricing is somehow sneaky or underhand, and that increasing prices is cheating patrons. In fact, dynamic pricing works best when it is transparent. Everyone knows that you get the best deal on a plane ticket by purchasing early; no one resents that pricing model because airlines have made it perfectly clear that’s how their ticket pricing works. Clear messaging about when ticket prices are at their cheapest, that prices can and will increase over time, allows organisations’ customers to make the same kind of informed purchasing decisions. Communicating pricing strategy clearly is actually a benefit for everyone involved.
Dynamic pricing in practice
And make no mistake about it, the benefits available are enormous, as just a few examples from the United States make clear:
- Center Theatre Group has used dynamic pricing to make an additional $1.4 million on just one long-running show
- The Adrienne Arsht Center, Florida’s largest performing arts venue exceeded their income goals for one-week shows by more than $150,000 using dynamic pricing
- The revenue of the Houston Ballet’s production of The Nutcracker had stalled at just under $4m for several years running; after implementing dynamic pricing they increased their income by $600,000
The Seattle Repertory Theatre, a non-profit resident theatre in the Pacific Northwest, increased theirincremental income by $50,000 in a single year using dynamic pricing.
Dynamic pricing for the future
It’s clear that while dynamic pricing may not be right for every organisation, there are many more opportunities to benefit from a dynamic pricing strategy than organisations are realising. Customers are familiar with the use of dynamic pricing in other industries, and will clearly understand and accept a shift to a dynamic pricing model within the arts - just as long as that shift is communicated clearly and consistently. The barriers to its use -worries about angry patrons, or that using dynamic pricing is unethical - are falling away as more and more organisations recognise that an aversion to dynamic pricing is based on preconceptions and assumptions rather than actual evidence.
Dynamic pricing is an incredibly useful strategy, and one that can benefit organisations and loyal audiences alike. We know it works - the only question is just how well it can work for you.