dynamic pricing

Making Ticket Refundability The Customer’s Choice

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When conversations about demand based pricing for the performing arts comes up, there is often a comparison made to the airlines and the way they factor in dozens of variables when they price their seats. One airline practice that doesn’t get mentioned is the refundable fare where you pay more in return for the right to cancel the ticket.

The right to exchange, and sometimes even get a refund for tickets, has long been a benefit extended to performance subscribers. Now that subscription sales are fading, perhaps it is time to think about applying it to single tickets?

The thought came to me when I was reading an story on a Microsoft blog about Jet.com The company is heavy into dynamic pricing to the point where the price of an item changes while it is in your shopping cart as variables are factored.

One of the ways people can lower the price of an item is to agree not to return it.

At checkout, customers can waive the right to return certain items, driving the cost down further; choosing one credit card over another — or paying directly from a checking account — takes dollars off, too. The system also suggests purchasing combinations that can save customers money.

With greater control over these variables, shoppers can strike their own personal balance between cost and convenience, something Lore’s team saw as missing in the industry. “The whole concept of Jet is to make transparent all of the costs that go into an e-commerce transaction, and then empower consumers to pull out costs as they see fit.

So what if you offer the opportunity to return tickets for an extra $5-$10 per ticket charge?

Generally the motivation for not allowing returns is fear of not being able to resell a ticket. There are also the labor costs and credit card transaction fees associated with processing a refund. Having different pricing makes the economics of all this more transparent and shifts some control to the purchaser.

If you do decide to allow a refund on a ticket sold as non-refundable, the rationale for a fee is clear. I know some performing arts organization charge an exchange fee which can seem punitive. In the context of this type of discount program, it can seem less so since the customer was offered the choice and the price difference has already been discussed.

I am not advocating this as a new source of income. There are social and emotional transactions that occur during the refund process, the results of which may not be directly correlated to whether a full refund was granted or not. It is better when the subject never comes up, regardless of whether you are generating any income from the exchange.

Still, it is something to think about. Especially if the choice of a discount in exchange for waiving the ability to make a return becomes more widespread and familiar.

If such an approach is implemented, it would definitely need to be handled at the time of sale from the positive perspective of “All our tickets are refundable, but you can get an additional discount if you don’t think you will want to exchange/refund,” rather than a more negative, “it will be an additional $10 if you want to be allowed to get a refund.”

Airlines handle it in the latter manner. Just think how much happier you would be if the $500 ticket were only $300 if you waived the right to a refund.

Airlines can’t really it that way because people initially hunt for the lowest price. They gain advantage from advertising the lowest price and adding costs as you choose options.

Price hunting doesn’t factor as much into the decision about which production to see so arts organizations have a little more flexibility in that respect.

I would be curious to see if a higher level of satisfaction might result from implementing this type of pricing. Would people feel more satisfaction secure in the knowledge they can either get a refund at any time or having gotten a great discount to something they fully intended to see anyway?

I imagine it would depend on the demographics of the community. Younger people and families might appreciate the low risk flexibility. More established audiences might view the unorthodox approach and additional level of pricing as confusing.

Dynamic Pricing Backlash

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I learned today via a post on Twitter from TRG Arts that the University of Michigan will stop using dynamic pricing at their football games as a result of protests from the general public.

The article talks about negative feedback from alumni and students as well but much of that relates to a separate issue with season and student tickets which were more expensive, but not subject to dynamic pricing.

Living as I am in Ohio, I am obligated to suggest that this only goes to illustrate the inferiority of the Michigan football program.

What really interests me about the policy change was that two years ago I wrote about how University of Michigan and the Cincinnati Reds were going to be using dynamic pricing for their games. I took a quick check of the Red’s website and they will continue to use dynamic pricing during their 2015 season.

My post two years ago emphasized that value is not price presenting some thoughts on that concept. As I looked into University of Michigan’s decision to eliminate dynamic pricing, my effort to determine where the balance between price and value became further complicated.

If you look at the bottom of this article, you will see students protesting with signs invoking tradition over money and the university brand. But if you read my original article, I note at the time tickets were already on sale on the secondary market for far more than the published price, prior to single tickets going on sale. At that point, the only ones who had them were season ticket holders and maybe some students.

While not everyone is going to try capitalize and sell their tickets to hot games on the secondary market, it is clear that some of the tickets are more valuable than what you paid for them. Shouldn’t you be happy about getting such a great deal?

As much as you may want to complain about students and alumni being malcontents who want to maintain the status quo rather than acknowledge increasing costs and value, there really isn’t any difference between them and the people who comprise your audiences.

Except maybe they are much more passionate about football than your programming. (Which is why I can’t have shows on Saturdays in the Fall.)

I suspect one of the biggest factors in whether people will tolerate dynamic pricing or not is the level of investment they have in the activity and how strong the sense of community is. The Cincinnati Reds and Broadway shows can probably get away with it because people expect to pay more or less dependent on the popularity of the event.

College football isn’t just a sporting event, it is entwined more deeply with personal identity. For students and alumni, it is directly associated with your occupation for four plus years. You didn’t just live in a locality with sports teams, all the buildings you occupied all day in were owned by the entity that owned the team. All the people you worked, ate and played with everyday were members of that entity.

There is going to be so little distinction between value, price and identity that change to any one of these will result in a strong reaction.

It probably doesn’t help that the university was requiring $150 donation to be considered for season tickets with no guarantee you would get some and no refund if you don’t. (And this is a very common practice among larger university sports programs, even ones that don’t perform very well.)

I don’t think University of Michigan’s decision should dissuade an arts organization from considering dynamic pricing in itself. I think it points to the fact that you need to consider the level of investment your potential audience has in your work and what the tenor of that investment is.

For some, a higher price may only increase the sense of investment as it indicates a greater level of personal prestige. Not surprisingly, for others it will be a sign of exclusionary elitism. Other communities may barely notice the prices changed since they weren’t paying attention to begin with.

Value Is Not Price

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The Drucker Exchange recently noted that the Cincinnati Reds and Michigan Wolverines teams have started using dynamic pricing, scaling prices based on popularity.

The Reds don’t provide much information about their structure, though they promise the price will never fall below whatever the season ticket holder pays. They set their base pricing at the start of the season per anticipated demand and start implementing the dynamic pricing two weeks out so it probably pays to buy early.

The Wolverines basically set their anticipated pricing from the start ranging from $65 for the Akron game, $10 less than last year, to $195 for the Notre Dame game, $100 more than last year. (And by the way, that is the lowest price tickets. Their top tier tickets for Notre Dame are $500.)

The piece on The Drucker Exchange says the mistake companies often make is to ask what customers value. This is aptly illustrated by the secondary market for those Wolverines games. You can get those $65 Akron tickets for $35 on the secondary market, but those $195 Notre Dame tickets seem to be going for about $319 already. (Single tickets go on sale tomorrow, 8/1)

Peter Drucker lamented how few companies recognize the importance of simply asking themselves what their customers value. “It may be the most important question,” Drucker noted in Management: Tasks, Responsibilities, Practices. “Yet is the one least often asked.”

One reason for this is that companies think they already know. “Value is what they, in their business, define as quality,” Drucker wrote. “But this is almost always the wrong definition.” For example, for a teenage girl, “value in a shoe is high fashion,” while durability and price matter little.

“Another reason why the question ‘What is value to the customer?’ is rarely asked is that the economists think they know the answer: Value is price,” Drucker added. “This is misleading, if not actually the wrong answer.”

For instance, electrical contractors, while famously price-conscious, may prefer one of the most expensive fuse boxes on the market. “To the contractor this line is actually low-priced because it is engineered to be installed fast and by relatively unskilled labor,” he explained.

The ultimate lesson is simple but not easy: “The customer never buys a product,” Drucker wrote. “The customer buys value.”

(My emphasis on that last sentence on the Drucker citation)

There are many intangibles that factor into what people value. Will the Notre Dame game be three times better than Akron? Possibly. By game day in September, there is a fair chance the primary market tickets to the Notre Dame game will be four or five times more expensive than Akron, if not more.

There will be a point where the quality of the actual Notre Dame gameplay can’t be better than that of Akron in proportion to the difference in ticket price.

What people are willing to pay so much more for is the experience of tailgating and attending a potentially great game steeping in the palpable excitement surrounding the long rivalry between the two teams with thousands of others.

I have resistance to dynamic pricing for a number of reasons, many of which have to do with the relationship I feel we are trying to cultivate with our audiences.

The question is, do people really recognize and value that we are making the effort? Is it all pretty much one-sided? Many people don’t really discern between profit and non-profits organizations when making their entertainment decisions.

Are non-profits basically putting themselves at a disadvantage by not using dynamic pricing for shows that clearly will sell out months before the performance date based on a devotion to an audience that has no idea the organization has decided to suffer for their benefit?

There is a need to keep prices low to provide affordable access. If 900 people clearly value attending a performance that they will commit at $25 a ticket between one and three months before the show, do you really owe it to the last 100 people to maintain the $25 rate until they get around to buying tickets?

Or do you owe it to your long suffering staff to try to increase the revenue stream so you can pay them $12/hour instead of $8 by using dynamic pricing?

We aren’t sure about the investment of the community in your organization, but we can be more certain about the investment of your staff.

I am still a little uncertain about dynamic pricing. The issues aren’t as clear as I present them here. However, one issue I don’t generally see people mention in the dynamic pricing conversation is that by not using it you are potentially punishing your staff in the service of an ideal the community may not be aware of much less value.

If customers show they willing to place a higher value on a product, should non-profits acknowledge that by placing a commensurately higher price on it?

2012 Year In Review

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I often tell people that it surprises me what postings take off. There are things I write that I think are really insightful that barely get any notice. Other posts that I just dash off after hours of trying to think of something pithy to write about will garner all sorts of attention.

I pretty much see it as a parallel for the whole non-profit arts experience so I don’t take it personally if I don’t get a lot of attendance at the stuff I deem to be brilliant masterpieces.

However, looking back at the posts that garnered the most attention in 2012, I am assured that my dreck isn’t rising to the top.

The most traffic by far went to my post Forget Dynamic Pricing, Use Placebo Pricing

The Next Most Visited Page was The About Me page (you like me, you really like me!)

But the second most visited post was Your Mouth Says Innovative, Your Pictures Say Status Quo

Third, is unexpectedly, Dramaturgy Is Everyone’s Responsibility. In the coming year I may have to explore the subject more often.

Fourth and Fifth were June’s Embracing The (Cost) Disease and last month’s Expectations Feed The Disease. I wrote about Baumol’s Cost Disease three times last year and two of those entries popped into the top 5 so apparently the subject is of some interest.

What I was most inspired by this year was an animated typographic video of Ira Glass’ advice about creativity. The post I included it in is a little long and doesn’t do justice to the frisson I experienced when I watched the video so I won’t link to it. However, I used the video in a couple presentations this year, including a middle school career day.

My favorite line is right near the beginning where he talks about how when you first start out, what you are making isn’t really all that good, “But your taste, the thing that got you into the game, your taste is still killer.”

Like Glass, I wish someone told me that when I was first starting out.