Business Models

Isn’t It Better To Be Damned If You Do Try

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Chad Bauman, Executive Director at Milwaukee Rep made a post on LinkedIn today where he acknowledged that making a change in a business model can threaten the existence of an organization, but that changing times and expectations often leave you no choice.  While he is talking about the current challenges performing arts organizations face, he cites a series of decisions Milwaukee Rep faced in its early years that nearly saw the end of the theater.

Milwaukee Rep had a similar crisis nearly a decade after its founding. In its earliest years, it built a large audience based on the star system bringing big stars to Milwaukee to perform. In 1961, the star system was abruptly ended and a resident acting company was founded. In less than a year, the theater lost 60,000 patrons, or two-thirds of its audience. It took seven years for the theater to rebuild its audience and it nearly went bankrupt on multiple occasions. The decision was a correct one as the theater would eventually grow to more than 150,000 patrons, but it almost collapsed along the way.

The star system was common practice in theater in the late 19th century that waned rather than something Milwaukee Rep specifically was doing and decided to end. While the star system is most frequently associated with film studios, they adopted it from theater which apparently borrowed the concept from P.T. Barnum.

I have seen stories similar to this in which arts organizations made decisions 10-15 years ago to make changes in their business models or change their programming mix to include segments of their community which were underrepresented in their audience and casting. They too came to the brink of closing.

There is obviously a bit of survivorship bias to some of these cases. Those that didn’t succeed in the shift weren’t around to talk about it later. With all the closures, downgrading, layoffs, etc that arts organizations are undergoing, we are hearing of many more stories of arts organizations who are having difficulty continuing their existence than we did 10-15 years ago. Some of them were in the middle of trying to effect change, others were trying to stick with what worked in the past so there is no clear indication about which approach may be better in these times.

Some that haven’t closed completely may reorganize and continue on as Milwaukee Rep did. I am sure no one wants to be faced with the prospect of it taking seven years and several brushes with bankruptcy to make a successful transition.   From one perspective though, it might be better to fail while trying to do better for your community rather than attempting to preserve the status quo for as long as possible.

Sunk Cost Psychology Reinforces Added Hidden Ticket Fees

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A survey found that in the UK, 93% of event ticketers add “drip fees” on to transactions.  As you probably suspect, those are the undisclosed added fees that pop up as you go through the purchasing process.  They appear in more than just event ticket transactions. Though in the UK, event ticketers had added the fees at double the national average.

Drip pricing occurs when consumers are shown an initial price for a good/service (known as the base price) while additional fees are revealed (or “dripped”) later in the checkout process. These “dripped” fees can either be mandatory (e.g., booking fees) or optional (e.g., seat reservation on a flight). This practice means that consumers may be “baited” into choosing a product because of its (low) base price, yet possibly have to pay a much higher price to complete the purchase as consumers do not become aware of dripped fees until they have already started the checkout process.

As the article notes, one of the challenges to getting rid of the fees is that no one wants to be the first to provide the honest total price up front for fear of losing out to their competitors. If you see a flight for $99 and another for $250, the psychology of sunk cost will keep many people from abandoning a transaction in favor of the more honest airline after realizing the $99 ticket is $300 after fees because they have already spent a fair bit of time choosing seats, putting in address and credit card information.

Seeing that there is little benefit to being honest about the cost up front, many companies will resort to advertising a low price and then having add on fees for every choice you make.

Essentially what is required are rules to force people to reveal fees up front, or no one will do it. The danger is that unless the rules are particularly well-written, there are always opportunities label added fees in a way that slips through the cracks and then the whole practice starts over again.

Not A Good Sign When People Are Googling How to Shutdown A Non-Profit

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In a sign of an alarming possible trend, the For Purpose Law Group blog cites an observation by the CEO of the National Council of Nonprofits that (my emphasis):

….an “ominous sign” is that “… the most popular page on NCN’s website for the last few months has been an article on how to shut down a nonprofit.” It’s a “kind of burnout at the highest level …. Leaders are beyond fried,” explains the head of the nation’s largest group of nonprofits. “They’ve been trying to hold things together with baling wire and chewing gum.”

The full piece goes into depth about the factors at play, prime among them are decreases in philanthropy in the face of increasing inflation and compensation expectations.

On the arts side, we are already seeing this manifest with the closures and layoffs by major arts entities. This week the Brooklyn Academy of Music announced layoffs and shortening of their season of programming. A couple weeks ago, the Center Theater Group announced layoffs and the closure of the Mark Taper Forum. Earlier this month, the Public Theater announced the end of the Under The Radar Festival.

There are grumblings on social media about unsustainable business models, but the fact is everyone is pretty much using the same general business model as these places are. Last week I wrote about how Oregon Shakespeare Festival is experiencing a similar crisis, partially due to a heavily restricted endowment.

People who know theater history know these shifts in business models have occurred before. But we have the comfort of hindsight to know how the transition transpired so that theatrical practice continued. But when you are experiencing the transition, you don’t know if things are evolving toward a format more suitable to the times or heading to extinction.

Water, Water Everywhere, But Not A Drop To Drink

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A public radio station’s report on the Oregon Shakespeare Festival’s (OSF) finances is a good illustration of how restricted endowments can imperil the health of a non-profit organization. OSF recently had to make an appeal for $2.5 million in order to keep their doors open. This despite the fact the organization has $96 million in assets.  About $32 million of that is in property and equipment which are generally illiquid assets. Of course it would be difficult to mount of festival if they sold off all the property and equipment.

The crux of the problem for OSF is that only 15% of the approximately $39 million endowment fund is unrestricted which is roughly $5.8 million.   The remainder of the assets totaled around $25 million in cash and equivalents, but their annual expenses are around $18 million. Their business model has been to make about 70-80% of revenue from ticket sales according to the article. That worked well enough until Covid hit and audiences were subsequently became less willing to attend as restrictions eased.

While being able to access more of their endowment wouldn’t completely eliminate their woes,  the combination of lower ticket revenue and an inability to access more than $5.8 million from their endowment for unrestricted use have been contributing factors