Dynamic pricing is becoming common in the sports and entertainment sectors in the USA, but organisations in Australasia and Europe have been slower to pick up on the opportunity. Tim Baker explores some of the reasons why, and explains the key issues in implementing revenue management in this article in Australasian Leisure Management.
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2. contentsNovember/December 2013 Number 101402846505436features 20 28 COVER: WetnWild Sydney opens. See our feature on page 20.www.ausleisure.com.auregularsEnchanting Generations36 20Wet Wild WestThe Price is Right?40 Serving the Community46 Choosing my Replacement50Five Year Stretch54 Leading the Way58 Bumps and BruisesThe opening of the new WetnWild Sydney waterpark The Philippines Mario O. Mamon is IAAPAs new Chairman Implementing revenue management in sport and entertainment Are Councils providing the right type of facility? How would you deal with management change? Anytime Fitness five years in Australia Richmonds ASB Aquatic and Fitness Centre Injury rates in junior football codes6 From the Publisher 8News32People44Subscriptions60ProductsAustralasian Leisure ManagementFor the latest industry news go toDiary - go to www.ausleisure.com.au 4 Australasian Leisure Management November/December 2013www.ausleisure.com 3. The Price is Right? Dynamic pricing is becoming common in the sports and entertainment sectors in the USA, but organisations in Australasia and Europe have been slower to pick up on the opportunity. Tim Baker explores some of the reasons why, and explains the key issues in implementing revenue management.The slow adoption of dynamic pricing is partly to do with technology. Its quite possible to implement dynamic pricing without specific pricing management software, and I would argue it is not generally appropriate to fully automate the pricing process. With dynamic pricing, it is important to be able to monitor pricing opportunities and evaluate impact. This is why a system such as Revenue Management Application (developed with JCA, exclusively for the Tessitura customer relations management [CRM] system) enables marketers to undertake sophisticated analysis to inform longterm strategy, make day-to-day dynamic pricing decisions, and then quantify their impact.Dynamic pricing is a pricing strategy where the provider of a service or commodity varies the price depending on the time and expected or observed demand.However, its not just about technology for another issue holding the sector back is the nature of the deals done between agents, promoters, and venues. The structure of these sometimes creates a disincentive for retailers to fully engage in dynamic pricing the margin isnt in it for them. As a result all parties lose out on income, while an opportunity is created for the secondary market to buy up and take advantage of under-priced inventory. Overall, the biggest barrier is often management attitudes; a fear that dynamically adjusting prices will adversely affect sales. I think this is based on a number of misconceptions. Firstly, that revenue management, yield management and dynamic pricing all mean the same thing. They dont, and understanding the difference is important. Secondly, people often think that dynamic pricing is what the airlines do understandable, because they invented it but thats not the only way to do it. Pricing for entertainment events is different and those differences need to be recognised in adapting appropriate methods. Theres also a concern that dynamic pricing is somehow unethical. Lets clear one thing up first this sector has been36 Australasian Leisure Management November/December 2013doing one form of dynamic pricing for years. Its called discounting. For years, a loyal customer has been able to purchase a full price ticket way in advance of an event, only to find someone sitting next to them who has turned up at the last minute and paid half price. Is this really more ethically acceptable than if that late booker turns up and pays 50% extra, rather than 50% less? Actually, we have all been doing revenue management for years which includes many different tactics: standby is revenue management, advance booking discounts is revenue management - the opportunity comes in managing it better. Can we use the airline model in the entertainment sector? Sometimes concerns about the appropriateness of dynamic pricing derive from the association with budget airlines. This is, in fact, a completely different model, based on being low cost. Its a stripped back service, reducing value in order to reduce price which I would argue is not right for the arts and entertainment sector. While budget airlines do use dynamic pricing, its the full-service carriers that operate the most sophisticated revenue management strategies, with many more variables at their disposal; more like the arts sector. Sometimes, airline-like models can work (such as at Belfasts MAC arts centre see case study) but what is most important is to understand the principles of revenue management and apply them in the relevant way for your particular business. The key difference between airfares and arts pricing relates to value or in economists terms utility. We all go through a (largely subconscious) process all the time, weighing up prices against the value we expect to get back. For an airline that value is fairly objective; a flight from Sydney to Melbourne is always much the same. You are buying the right to sit in a seat for a specific journey and that seat has objective qualities that you can choose to pay more or less for, such as leg room, food and the like. Of course, some of those seat qualities also apply in the arts, but Id argue that at the core, most of the satisfaction sought from an 4. arts ticket purchase is subjective. A flight is a means to an end. A theatre visit is the end in itself. So, the subconscious calculation of price against value is entirely different. This is the main reason why a totally automated, algorithm-based approach to pricing is not appropriate, for if customers are making decisions based on subjective, human impulses, it often requires a human being to fully understand them. Dynamic pricing and revenue management whats the difference? Dynamic pricing is just one element of revenue management. The origins of revenue management lie with the airlines back in the 1970s, and its key objective was to address the perishability of the product the fact that when the plane takes off you cant sell an empty seat. The same applies to hotels and to theatre seats. Robert Cross, Chairman and Chief Executive of Revenue Analytics (widely recognised as the foremost expert in the field of revenue management), defines it as revenue management ensures that companies will sell the right product to the right customer at the right time for the right price. This includes reducing prices to stimulate demand when sales are low, as well as increasing prices to exploit high demand. While yield management focuses just on maximising income, revenue management focuses on optimising yield and volume of sales. Revenue management is the umbrellaterm, covering a wide range of tactics, including inventory control (changing the number of seats, performances or flights available), variable pricing byperformance (higher prices for Saturday performances), variable discounting, subscription design, advance booking discounts, standby, premium upgrades as well as auctions and the standard airline tactic of overbooking. Dynamic pricing involves the changing of pricing of the same inventory over time (increasing or decreasing prices for the same ticket over time) in response to changing patterns of consumer demand. When should dynamic pricing be used? Dynamic pricing can be particularly useful: When demand is difficult to forecast Or when brand or positioning demands consistent pricing across a range of performances, but demand says otherwise To help drive booking earlier (and reward customers who are willing to commit) As a way to create an enhanced benefit for subscribers or members, where they are not impacted by dynamic pricing increases. But there are situations where dynamic pricing might not be the best approach: For an organisation with a high proportion of loyal, frequent customers who all book early. Where dynamic pricing does not fit with the overall earned income strategy. For example, where pricing is being used to leverage other income streams such as memberships or donations. Where you already know that demand will be high. Assuming that your objective is to optimise yield, it is always better to get prices right from the start, rather than38 Australasian Leisure Management November/December 2013using dynamic pricing to address underpricing later (unless you have branding reason for starting prices low/uniform). Organisations should certainly be doing everything they can to plan pricing properly, but customers willingness to pay can vary so unpredictably that it is not possible to set each price at exactly the right level for each purchaser in advance. Then, dynamic pricing allows you to respond to customer demand. Dynamic Pricing: the time is right The time is right for dynamic pricing. Customers understand and accept the practice, barriers to its use are mainly in the mind, and implementation can be relatively easy. In the USA, theatres are making very significant improvements to their box office revenue: Center Theatre Group in Los Angeles took an additional $1.4 million on one show while the Arsht Center in Miami has been exceeding sales goals for one-week shows by more than $150,000 a time. Even smaller theatres, such as Seattle Repertory Theatre, have earned $50,000 in incremental revenue (just the yield over and above original prices) in a year. Tim Baker is Director of international software and consulting firm Baker Richards and Vice President of its US-based sister company The Pricing