Feature | Integrated income

Understanding how cultural organisations can better capitalise on the relationships between areas of earned income...

For most cultural organisations, ticket sales are just one element in a wider range of income streams. Organisations generate income not just from admissions but also donations, sponsorship, membership schemes, gift shops and catering services like theatre bars or museum restaurants. Very often though, responsibility for these disparate streams of income is spread over different departments.

Can organisations better capitalise on the relationships between areas of earned income to create a whole greater than the sum of its parts? And what kinds of strategic shifts need to take place for that to happen?

An introduction to Integrated Earned Income strategies

An ‘integrated earned income’ strategy is an approach to maximising revenue that ensures all of an organisation’s income streams work together to maximise contributions overall. Looking at the bigger picture of an income strategy can however require a shift in thinking. Implementing such an approach may also require changing how individual areas or departments within an organisation relate to one another.

This article focuses on three key areas - admissions, affiliation and ancillary sales - which centre around ticket buyers at an organisation; it will discuss how these areas may be considered in creating an integrated approach, and give a few examples of what implementation might look like.

What are the key elements of earned income?

The three key areas of earned income which have a shared focus on your audience are:

    • Admissions
    • Affiliation
    • Ancillary sales

Admissions is fairly self-explanatory: money made on tickets, often sold at different prices for different seats (in a performing arts context), days or times. Affiliation is income that comes from people associating themselves with an organisation. Ancillary sales is a broad category encompassing all the income made beyond any admissions purchase that is generated by admissions. In other words, anything and everything a customer might purchase as a result of attending a performance, from a souvenir programme to a three-course meal in an affiliated restaurant. (Although this is not always contingent on a ticket purchase; you can often use a café without buying a ticket.)

An important caveat to note is that not every organisation will have full control over all of these areas. For many organisations, the organisation itself only controls a small portion of its income streams. Catering is very often franchised, and external event producers often control merchandise sales. Many presenting venues really only have control over their friends scheme, any add-on transaction prices and the ticket prices themselves; in these cases, organisations need to focus their strategy on the areas where their own earnings can be maximised.

While many organisations seek to maximise their earned income, problems can arise when responsibility for these areas is split across departments: front-of-house will handle one area, marketers will handle another, fundraisers yet another and so on. It’s easy to see how this approach develops - different expertise and skills will be most useful in different areas - but a common danger is that each department becomes its own silo of activities and objectives. When different departments focus exclusively on their own income, an organisation’s overall strategy is similarly segmented. Even if these different approaches aren’t working at cross-purposes (although this can easily happen!), the fact is that lacking a bigger-picture strategy means missing out on cross-departmental opportunities to increase income.

Understanding Margins

Margins are the difference between what a particular item or service costs to sell and what the customer pays for it - that difference is where profit is located. Margins often differ dramatically across areas of earned income. Ticket sales have next to no incremental costs. In other words, the cost of selling two admissions to an exhibit rather than one is almost nothing, so virtually the whole of the income adds to the marginal profitability. Catering, on the other hand, often has very small margins: the industry standard is 70% gross profit, out of which all staff and other business costs must be paid. Discounting too heavily on the cost of food and drinks reduces gross profit further and can lead to losing money overall. Similarly, if an organisation partners with other companies – e.g. a presenting venue that hosts touring productions - its margins will be affected by the way in which income is shared with that other party.

Because of this, it’s important to remember that for many organisations, a pound isn’t always a pound (£). A pound of income from merchandise sales that must be shared with the performance’s producers is LESS than a pound, while a pound from a Gift-Aided admission can actually be MORE than a pound of income. A major advantage of an integrated earned income strategy is that it focuses on finding where an organisation gets the most out of its income, and can then direct efforts to maximise income in those areas.

An integrated earned income strategy will also ensure that departments within an organisation don’t inadvertently undermine overall revenue. One situation where this is very easy to do involves membership schemes. Most organisations have some sort of membership scheme, and for good reason: schemes can guarantee longer-term revenue and attendance while rewarding loyal customers. However, it is surprisingly common for organisations to offer membership schemes with benefits that undercut their own profits. For example, a popular benefit to members or friends of an organisation is a discount on merchandise. But if an organisation only has a 10% margin on their merchandise, and their membership scheme gives members a 10% discount, they have erased their entire profit on any member-bought merchandise.

What is behavioural economics and why does it matter?

We would all like to believe that we are completely rational beings when making economic decisions - but we’re not. Behavioural economics is the study of how human factors affect economic choices. Being aware of how customers can be influenced towards, or away from purchases can be an incredibly useful tool. This could easily be the focus of a whole other article, but here are a few examples of how behavioural economics can help shape the decisions that customers make and how an understanding of consumer psychology can help to maximise the effectiveness of an earned income strategy:

People like to assess the value of an unknown by making comparisons. If they are given an option that compares unfavourably with what an organisation actually wants them to buy, that can nudge them to make the decision you want. For example, the Mercury Theatre in Colchester offers different types of season ticket. The Silver season ticket offers tickets to six productions for £90, while the Gold season ticket offers tickets to eleven productions (along with other benefits like free programmes) for £132. The Gold package is obviously a much better deal - and that’s the entire point: the Silver package exists to provide a comparison for what a great deal the Gold season ticket is. This strategy has been a success; as of time of writing, 80% of the Mercury’s season ticket sales were for Gold season tickets.

How an offer or description is framed has an enormous effect on how people interpret it. The University Musical Society at the University of Michigan tried promoting an upcoming concert with three different emails sent to separate groups. Each email offered mezzanine seats at the standard price for balcony seats. However, the offer was phrased in a different way for each email group: as a free seat upgrade, as a saving of up to $12, or as a saving of up to 29%. The open and click-through rates for each email group were similar, but the average revenue per unique click was not: for the free upgrade offer, average revenue was $5.86; for the $12 offer, average revenue was $8.78; and for the 29% discount, average revenue was $17.49. Even though the absolute value of each offer was identical, the percentage discount in this instance was much more motivating to customers.

The order in which people are given choices can shape how they think of those options. On a wine list, beginning with the highest price makes each subsequent option look like a great deal - as opposed to the other way around, where each new option looks more and more expensive! The Royal Academy of Arts lists its admission prices in descending order, with an adult admission including a Gift Aid donation first; this fosters the perception that admission with Gift Aid is the standard option, and thus increases the likelihood that people will choose it.

When thinking about implementation

One tactical manifestation of an integrated earned income strategy is bundling: packaging items together from different income streams and offering them to customers as a single purchase. The Birmingham Hippodrome has implemented this to great effect, offering several different theatre packages that offer tickets, catering, and souvenir programmes. Targeting different bundles to different segments of their customer base - a “VIP Experience” may appeal to friends on a big night out, while the “Royal Box Romance” targets couples on dates - allows them to get much more mileage out of what is effectively a very similar package. The Hippodrome has also realised additional value through their packaging by including a souvenir programme with each ticket in their bundles; ordinarily couples would only ever buy one programme, so this approach means they realise additional income that could not be achieved if the programme was sold separately.

However, packaging items together does not just mean items for sale; often high demand can be leveraged to produce more income in an area with greater margins. For example, the Center Theatre Group in Los Angeles discovered a portion of seats that were clearly more popular than the identically priced seats around them. Instead of raising the prices on those popular seats, they made them available only to donors; the average donation amount was greater than the amount that could have been achieved through a price increase. This approach moved revenue across income areas, an option that would have been difficult at an organisation without an overall earned income strategy, and thereby created more income than they would otherwise have realised. The Friends scheme at Norwich Theatre Royal offers priority booking as a benefit; this offers tremendous value for customers, driving additional Friends sales and therefore income, while costing the theatre nothing.

The Malmö Opera in Sweden used a similar approach with their ticket pricing; certain high-demand seats at their venue can only be booked as part of a package that includes catering. (It’s important to note here that they run their own restaurant.) This approach, like that of Center Theatre Group, leverages items with strong demand in one income-generating area to create higher revenue in another.

However, bundling is not always the best approach, particularly if bundling will cross a price threshold. For example, if an existing bundle to a theatre performance costs £17, and adding a souvenir programme to that bundle will bring the total to £19, the perceived cost of the bundle has remained largely the same. If, however, the existing bundle costs £19, and adding in a programme will bring its total to £21, the price has crossed a £20 threshold; even though in objective terms the additional cost is the same, the psychological effect is greater, and customers may be more resistant to purchasing. In that case, leaving the souvenir programme as an individual purchase may be the smarter choice.

It is also important to remember to give customers multiple opportunities to make purchases. This includes additional opportunities to make purchases both pre-and post-attendance, e.g. through email reminders to pre-purchase. It can also mean maximising opportunities to purchase while at the venue, such as considering the placing and number of sales points.

A successful integrated earned income strategy therefore requires a robust understanding of an organisation’s audience through to where its most profitable margins are located. It also requires shifting organisational thinking, from close attention to individual income streams to a higher-level look at organisational strategy. The rewards from putting in this strategic work can be tremendous.