Have you ever paid $6 or $7 for a bottle of water at a theme park? How did you feel about it?
In the late 90’s, Coca Cola decided to experiment with their pricing and customer’s willingness to pay. They created a “smart” vending machine: this vending machine knew how badly you wanted that coke, and charged you accordingly. Well, actually, the vending machine detected the temperature and assumed you were willing to pay more when the temperature was hotter. On the flip side, you paid less when it was colder outside.
For those of us that have been taught that setting your pricing through market segmentation is the wave of the future, this sounds like a pretty brilliant idea. The problem? Their customers were furious. Coca Cola was crucified in the media, with journalists exclaiming that this was “a cynical ploy to exploit the thirst of faithful customers” (San Francisco Chronicle), a “lunk-headed idea” (Honolulu Star-Bulletin) and the “latest evidence that the world is going to hell in a handbasket” (Philadelphia Inquirer).
Coca Cola quickly ditched the effort.
Price discrimination is a pricing strategy where identical or similar goods or services are transacted at different prices by the same provider to different consumers, segmenting your customers by their willingness to pay.
So if Coca Cola can’t pull it off, can your performing arts organization? And should you even try?The truth is, you likely are already practicing price discrimination.
Here are a few way to get your feet wet – some that you likely are doing, and some that you may want to consider trying out:
1. Scaling the house:
scaling the house refers to dividing the seats of a performing arts venue into those that are more and less desirable and charging different prices for them based on that desirability. In the performing arts, patrons that have a different willingness to pay for tickets to the same production can choose to purchase tickets in cheaper or more expensive price sections. When you can charge a higher price for those willing to pay for it, you can drive more ticketing revenue. If you’re not scaling your house, you’re likely leaving revenue on the table. You could also improve your patron’s performance experience: if people are arriving early to get a good seat, they might prefer paying up front and avoid standing around.
2. Peak Load Pricing:
Peak load pricing refers to organizations charging different prices for different performances of the same production. This often involves either charging higher prices for weekend performances or performances later in the run. Like scaling the house, all patrons have access to all of the price sections and nights and self-select by what they are willing to pay. The key is to correctly identify which performances have a higher demand and the corresponding value to patrons. If patrons are indifferent between the performances, they will simply buy tickets to the least expensive performance.
3. Targeted Discounts:
Targeted discounts is the practice of dividing consumers into two or more groups and charging different prices to each group. To divide patrons into distinct groups, some characteristic must be identified that signals a different willingness to pay for members of that group. For example, students and senior citizens often are willing to pay less than the average patron, and they can be easily identified with an ID or driver’s license.
The key to utilizing targeted discounts in a way that maximizes revenue is to make sure the offer is extended to a group that is easily identifiable and that is actually willing to pay less than the average population. If the group is easily identifiable, such as employees of a certain company, but the group is willing to pay the same price on average than the rest of the population, then a discount is not necessary. If the group is not easily identifiable, the discount can effectively be used by everyone. For example, a discounted communicated through Facebook is essentially available to the entire market. Those types of discounts drive down your ticket price. If you need a wide-spread discount to hit your ticketing goals, likely your ticket prices are too high.
4. Dynamic Pricing:
Dynamic pricing refers to the pricing strategy of varying prices for the same seats over time based on the demand for the production. Ticket prices for a specific production start at a base price, and then increase or decrease based on the sales of that production relative to productions in the past.
The “gotcha” with dynamic pricing comes from the potential perception of it being “unfair.” Consumers dislike price variation, regardless of if the average price remains the same. One option used by performing arts organization is to simply advertise nothing about the dynamic pricing. This is possible when used only for single tickets, where most customers are new or only occasional enough purchasers to not be familiar with the standard prices, there are many price points, and only the lowest price point, which does not vary, is advertised.
There are many possible negative side effects to keep in mind when entering the world of dynamic pricing. Some include potentially disgruntled customers and increased staff time to both constantly monitor the prices and handle customers’ concerns. Also, if customers know you never sell out your venue, over time they will learn to wait until the last minute to get a cheaper seat.
Price discrimination can get a bad rap, but segmenting your market to match their willingness to pay can result in more tickets sold and more ticketing revenue. The truth is, you are likely doing some form of price discrimination already. When price discrimination is done well, you can actually improve the patron experience by giving them an avenue to pay for the experience they’re seeking versus adapting to a one size fits all ticket buying process.
Let’s continue the conversation in the comments below or on twitter @laurabeussman.