Business Models

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?

Stuff To Ponder: Subscriber Rush Tickets

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Since I have started a new job I am in the process of evaluating every document, process and interaction my organization undertakes. One of those areas is customer service, of course.

For that reason, an article I came across via The Drucker Exchange is really resonating with me. In a blog post titled, The Dark Side of Customer Experience, Monique Reece opens with a joke we can probably all relate to.

The longer version is in the post, but basically a guy dies and is shown heaven and hell and given a choice between the two. On his visit to heaven, everything is sedate and lovely. Hell is a veritable Mardi Gras party. After the doors close on Hell, the guy tells St. Peter he chooses Hell. The doors open and it the scene is the stereotypical hellish landscape.

Upon wondering what happened to the party scene, the man receives the response “Well,” said St. Peter as the doors closed. “The first time you came to visit you were a prospect. Now you’re a customer.”

Reece cites some of my biggest pet peeves– the introductory rate that rewards new customers and makes the person who has been loyal for 10 years, enduring price increases, feel like an idiot for sticking around so long for no recognition or reward. As Reece notes, there is actually more of an incentive to separate your relationship and then renew it.

The performing arts version of this is giving cut rate discount tickets to last minute purchasers, suggesting a certain amount of foolishness on the part of those who planned and purchased ahead of time. Some arts organizations sell large amounts of rush tickets at rates lower than those of subscribers who have committed to many shows in advance.

It just occurred to me moments ago, why don’t performing arts organization offer Rush tickets exclusively to those who have already purchased two or more tickets?

This would have multiple benefits 1- It rewards people who committed in advance; 2- It turns those people into recruiters for your show when they invite their friends along; 3- It gets people you already have a relationship with paying closer attention to your emails or social media account that you are using to communicate this discount, providing an opportunity to get them excited and mention other shows.

My suspicion is that attending a show on a half price ticket thanks to two people who purchased weeks in advance is a better model of behavior than attending alongside two other people who also decided to attend because tickets were half price.

It probably also reinforces many elements of the advance purchasers’ self-image if they know their friends were only able to attend because they were stalwart supporters of the arts organization.

The only real problem I can see with this idea is reserved seating. Offering rush tickets in this way appeals heavily to a social element which is compromised if everyone can’t sit together.

Granted, it illustrates the appropriate outcome associated with paying half price on the day of a performance versus full price in advance. Still the emotional disappointment of not being able to sit next to ones guests could supplant the acknowledgement of this logical consequence.

General admission events are good to go though.

This is not the direction I intended to go in when I started this entry. I like this result better.

We’ll Pay You Twice As Much As The Last CEO (*snicker*)

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Apropos to my post dealing with doing more with less earlier this week, last week Janet Brown, CEO & President of Grantmakers in the Arts wrote about the problems with non-profit CEOs forgoing pay.

She cites an example where the retiring CEO of a performing arts center had only accepted a nominal salary. The savings that represented meant the different between running a deficit. Now with the CEO retiring, they either needed to find someone else who was willing to do the job for free or find the money to pay someone for the job.

The performing arts center should have been booking the CEO’s non-salary as an in-kind contribution all these years, keeping the reality of the expense in the budget. This, of course, would have shown a loss for some years, which (I’m only guessing here) is probably not what the CEO or the Board wanted. So the cycle of under-capitalization continues.

Brown asserts that every organization should strive to be completely transparent financially, not only for the sake of those who inherit leadership positions, but also to retain the confidence of supporters.

Sound business practices are possible in nonprofits but, as I’ve stated before, this demands transparency and leadership that wants to do more than keep the doors open….Our investors in the nonprofit arts world are community members, governments, foundations and corporations who give money because they believe in our organizations, their missions and the good they are doing for our communities. These investors also deserve (and should demand) returns, which include the best artistic product possible and the strongest balance sheet good management can provide.

I guess the lesson here is not to pay your executive director as well as your interns, erm I mean, pay them both!

Giving, Rather Than Sacrificing

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I was thinking last week about the growing sentiment that non-profit organizations should resist the impulse to do “more with less.” The idea being that it gives funders, boards, government entities and the public an unrealistic view of what the real costs of programs actually are and is likely to cause burnout among employees.

The quality of all programs will probably suffer in an effort to make up for the loss of funding to one, as well.

Although it would really hurt organizational pride and morale, the suggestion is to eliminate the program rather than stretching and stressing yourself even more trying to maintain it. That way, at least the consequences of low funding are unambiguous.

A cynical thought crept into my mind that some organization of younger workers unfettered by concerns of good pay and work-life balance might come along and belie your insistence that the program couldn’t be supported, by happily suffering through its execution.

But soon I got to thinking, why not let them? Not that you should welcome an under-captialized organization with unrealistic expectations, but if there was someone qualified who thought they could do a better job, maybe your organization should hand over your files to them.

I started to wonder if many non-profits had really ever thought of this. Most organizations are aware of people doing similar work in their region, whether they are viewed as competitors or providing parallel services. If you are being faced with having to eliminate a program, but are conflicted and a little guilty thinking about all those whom you serve losing something they valued, perhaps it is best to give your program materials to a group that possesses better resources or sees that program as one of their core competencies.

Once you no longer view each other as competitors, there may be room for constructive partnerships. For example, a performance venue who is seeing their K12 school show program flounder due to decreasing availability of bus money might direct their clients to a group that performs in schools, but doesn’t have their own facility.

The traveling group may benefit from the additional contact list, as well as costumes and props that the venue will no longer be using. In return, however, the traveling group may still do an occasional school show for the venue or may produce a series of weekend family matinees at the venue, allowing the venue to continue offering family programming without having to bankroll the development.

Or perhaps both groups wanted to do an after school program, but neither had all the resources they needed to pull it off. Yet as partners, they do.

By the end of my musing, I started to think that trying to do more with less and hold on all your programs might not only be harmful to your organization, it might also impede constructive partnerships.

Instead of looking around at other groups as competitors for the same pie, which granted is increasingly becoming the case, it may be more productive to evaluate what other people are doing as well, if not better than you, with an eye to possibly having to cede that to them.

Times when things are going well are probably best to consider these issues because it also allows the time to evaluate potential partnership options while free of financial panic.

Perhaps you will decide to transition things away before a critical decision ever needs to be made, when your program still remains vibrant and is a worthwhile addition to another company.

No organization should be in a mode of constantly contemplating its demise. I know many elderly start mentally ear marking who will get what when they die, if they haven’t already started actively giving things away. I don’t think that is a healthy way for a non-profit to operate.

It should know where its strengths lay, what its core functions are and what things occupy a more secondary role. Strive for excellence in everything and shine in the community, but be consistently clear about what the priorities of the organization are.

Boards and staff members are likely to have strong emotional attachments to the work that your organization is doing, and probably rightfully so. An open and ongoing conversation about what another organization is doing well can help to motivate your organization to step their game up and do a little better.

But having an open conversation about the organizational priorities as well as what other organizations are doing well may ease the decision to cede/transition a program away if the staff and board has regularly acknowledged the worthiness of another organization to do the work that is being set aside.