The Perils of Demand Based Pricing

A few weeks ago, the Associated Press published an article by David Sharp about the notion of using demand based pricing throughout the performing arts community. If you aren’t already familiar with demand based pricing as applied to orchestras, it is a method where a higher price is charged for seats within a given pricing section. By and large, this is a terrible idea for the orchestra business in general at this point in time, however, before going down that road let’s examine some instances where demand based pricing makes sense…

In David’s article he uses popular holiday productions, such as “The Nutcracker,” to illustrate where organizations increased ticket revenue by implementing demand based pricing. The point which didn’t make it into David’s article – and this is crucial in order to have a productive discussion on the topic – is whether or not the productions were selling out before they implemented price increases. Simply put, if tickets are selling out then it is reasonable to charge a higher price for seats that are most popular. So long as the price increase doesn’t lower cumulative ticket sales, then it is all gravy.

However, the dark side to this scenario rears its ugly head when demand based pricing is implemented by organizations that aren’t regularly selling out concert events. Although the likely result is a single season increase in ticket revenue, this will mitigated by an increase in lower overall ticket sales. This business already suffers from issues related to scaling the house to artificially inflate ticket revenue at the sake of lower overall ticket sales.

Those groups which implement demand based pricing strategies for shows which do not sell out do so at their own peril and almost certainly risk agitating existing adverse conditions. Naïve managers will quickly succumb to the lure of quick cash in the face of challenging economic conditions whereas wise managers know when the time is right to dedicate internal resources toward exploring demand based pricing scenarios.

Instead of focusing on the math behind demand based pricing (admittedly, it is fun to geek out on the numbers), organizations should first devote those resources to filling the hall. Ultimately, a better option to consider at this point in time is reducing average ticket prices in combination with targeted audience development strategies with the overall goal of sold out performances and no loss in ticket revenue. Once the core and casual concertgoer base is supporting that model, then organizations will find themselves in a better place to consider demand based pricing.