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Pricing Advisor Newsletter July09

PPS Newsletter containing article
Published on: Mar 4, 2016
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Transcripts - Pricing Advisor Newsletter July09

  • 1. The Pricing Advisor™ is PRICING published monthly by the Professional Pricing Society The 3535 Roswell Road, Suite 59 Marietta, GA 30062 ADVISOR 770-509-9933 www.pricingsociety.com Kevin Mitchell, Publisher All Rights Reserved © 2009 A P r o f e s s i onal Pricing Society Publication July 2009 For pricing practitioners, working ‘Dancing’ With Consultants: with a consulting firm can seem like a complex dance. Positive relation- ships can result in increased success The Delicate Balance Needed for for the pricing function, while nega- tive relationships can result in un- Mutual Pricing Project Success dermining the pricing practice. The F authors, Peter Maniscalco and Alan or some pricing professionals, way and clear roadblocks for greater pric- Hollander, assert that, to structure a working with consulting firms ing function power and responsibility. beneficial relationship, pricing prac- may seem like learning how to titioners must understand the consul- waltz for the first time with an Conversely, a poorly structured relation- tant’s motivators and have a checklist experienced dance partner. It is impor- ship and project engagement can result of items to be addressed prior to be- tant that the relationship and end result in pricing practitioners working for both ginning an engagement. Mr. Manis- is mutually beneficial for both parties the consulting firm and their own boss, calco is a senior pricing management since consultants can be instrumental in creating an increasingly greater workload professional and can be reached at a practitioner’s personal and functional as well as increased stress levels. More Peterm09@yahoo.com. Mr. Hol- success if the project is structured prop- frightening is the fact that this scenario lander is the director of Solution erly. In many cases, the establishment can sometimes instill a perception that Marketing at Avaya, Inc., and can of a new pricing function and therefore the current internal pricing function’s be reached at Hollander@avaya.com. job creation is the direct result of a prior capabilities are inferior. Lastly, sound consulting engagement. In addition, a strategies and tactics that the team may consulting firm can educate and influ- have been tirelessly advocating can get ence senior management to help pave the absorbed by the consulting firm and be In This Issue: Page 1 PPS Happenings 1984-2009, Celebrating 25 years ‘Dancing’ With Consultants: The Delicate Balance Needed for Upcoming Events Mutual Pricing Project Success t 20th Annual PPS Fall Conference: Hyatt Regency Grand Cypress – Page 5 Orlando, Florida; October 21-23, 2009. Workshops and Special Events offered The Pricing Prize on October 21 include: Page 6 1. Price Uncertainty in Uncertain Times: 10 Ways to Stop Leaving Money Seeing Profit Despite on the Table – Reed Holden Misunderstood Pricing Strategy 2. The Pricing Organization Transformation Workshop – Larry Montan & Page 8 Parvathy Hariharan A Proposal to Solve Concert 3. Recession-Proof Price Negotiations – David Palmer Ticket-Pricing Woes 4. Pricing for Executives Summit 5. Pricing for Latin America Symposium Have a pricing article, case study or story to share? Send articles to For the most up-to-date information about PPS events and programs, please editor@pricingsociety.com. visit our website at www.pricingsociety.com frequently.
  • 2. PRICING ADVISOR The 3535 Roswell Road, Suite 59 Marietta, GA 30062 770-509-9933 A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com presented as their own ideas, giving no you won’t have Owen Wilson show final read out presentations to client credit to the existing pricing function. up! Remember that a consultant’s end executives. A project that is perceived goal is always to get an audience with as well done can provide significant In order to structure a relationship and your boss or bosses’ boss and some may word-of-mouth benefit within the client specific project engagement for mu- simply view you as a means to an end. organization into other business units, tual success, pricing practitioners must That said, not all firms are like this. as well as provide the firm with referrals understand consulting firms’ business Some firms: a) have a strong culture of for new client opportunities. motivators and have a checklist of items “teaching clients how to fish” so they that should be addressed prior to start- can become obsolete and b) measure A Cautionary Note: ing an engagement. In addition, on- their success on your own or your team’s Practitioners must be wary of firms who going inspection, communication and success (e.g. whether you get promoted, may take and repackage existing client review are critical to maintain- information that is: 1) not san- ing project momentum and ity checked for accuracy, 2) eventual success. lacks proper citing of source material or 3) used in the prop- What Makes er context of the discussion Consulting Firms topic. Some firms can prioritize Tick? speed over quality and the re- Consulting firms share a num- sult is significant internal client ber of common business objec- re-work and revisions to cor- tives. However, some vary in rect mistakes. That said, most terms of the emphasis placed consultants tend to take great on each objective. Pricing prac- care in ensuring there is proper titioners must clearly under- buy-in and incorporation of in- stand these motivators before ternal feedback prior to presen- engaging a consulting firm: tation of key findings as part of • Leverage fixed resources. A the results read out process. consulting firm’s major asset is people (very smart ones Setting Realistic too). If this asset is not being Expectations on utilized properly (e.g. 80%+ the Consultant’s Role billable time), the firm is not In far too many cases, a proj- making money. In addition, ect kick off with a consultant consulting firms want great- is destined for immediate fail- est utilization from junior ure due to misaligned expec- resources, often 100%, even tations around the roles to be though they may bill at lower played. A typical “non-start- rates. This allows partners er” from a consulting stand- and other senior personnel In order to structure a relationship and point is the client’s expectation to cover more projects and specific project engagement for mutual for them to serve as an addi- ensure both quality and rela- tional internal team resource tionship control. success, pricing practitioners must for hands-on implementation understand consulting firms’ business management and/or process • Establish and maintain Ex- motivators and have a checklist of execution. Although this can ecutive-level client relation- be ideal for the pricing team ships. This is a key element items that should be addressed prior to since it temporarily fills a re- for consulting firms with starting an engagement. source gap, it does not lever- respect to driving follow-on age consulting resources effec- business within existing cli- tively and results in very high ent projects. Most consulting priced temp workers that may firms want to get in the door and stay, if the team gets expanded etc.). be performing lower value tasks. If addi- kind of like an in-law or friend that tional resources are needed to fill a gap, just needs a place to stay for “a couple • Enhance reputation and subsequently then seek the appropriate, but temporary, weeks” but ends up staying forever. If referrals. Consulting firms typically internal resource or contractor. you remember the movie “You, Me and maintain high standards around analyt- Dupree,” it’s just like that, although ics and project deliverables including Conversely, a pricing practitioner should July 009
  • 3. PRICING ADVISOR The 3535 Roswell Road, Suite 59 Marietta, GA 30062 770-509-9933 A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com Figure 1 have for the con- sulting group, Checklist Low Engagement Likelihood of Success High should be in Criteria alignment as a result of due dili- Consultant Process Execution Program/Process Targeted support/ Strategic solution gence and clear Role management expertise (e.g. partner communications analytics) between you and Problem Definition Fix our pricing/give Acute problem – end Structural problem – Systematic problem the consulting us a strategy period discounts list price setting – strategic pricing group. Will this capability roadmap project, and the Internal Alignment: Single Function Internal facing team External facing team Cross functional results shared, *functional view (RD, Finance) view (sales, help to establish only customer svc ) only or “legitimize” an existing pricing Internal Alignment: Grassroots/ Divisional/PL Sr. level CFO, CEO, COO function? It’s also *seniority Functional managers specific governance/review a good idea to set forum a work agenda, Resource Availability Limited to none Dispersed subject Existing pricing team Dedicated cross or scope of work matter experts/ functional team (SOW), for align- Virtual team ing your compa- Progress/Results As needed Milestone driven Regular cadence with Formal read ny’s requirements Tracking working team out/update forum with the consul- members (sponsors team) tant’s capabilities. Execution Process TBD Post project handoff Pre determined Change and Plan to Operational group implementation management/ Regardless of the team training team problem defined, senior manage- ment involve- not cede the role of lead pricing interface to Problem definition and scope (identify- ment in and support of the project is company executives over to the consultant. ing the critical issue you want to solve). critical in order to successfully resolve This executive communication role is criti- Establishing a project checklist is critical the problem. This can be determined by cal for enhancing credibility, and although for success. The first step is that the prob- who is initiating or driving the project. ideal for the consultant, it can minimize lem needs to be defined. Is it a specific In order to effectively contribute to the the relevancy of an existing pricing team if pricing problem (e.g., end of period dis- success of the project, it behooves all in- deferred since the consultant becomes the counting) or more of a macro level issue volved to understand if this is a division defacto voice of pricing. such as managing customer profitabil- manager’s “special project” or if it’s be- ity? Maybe it’s a deficiency in execution ing driven at the executive level. Having The ideal role enables consultants to fo- of your company’s pricing strategies or mutual agreement that a problem exists cus on providing additional support, and tactics or ineffective use of existing op- is important, as it helps to facilitate the work collectively with an existing pricing erational resources. It’s also quite possible project timeline and its scope. practitioner and his/her team, to cham- your company’s entire pricing approach is pion pricing as a core competency or inefficient and needs re-examination. Key Consideration: strategic advantage with executives. This • Are there different diagnoses or views includes helping lay out a pricing roadmap Key Consideration: from Sales, Marketing, Finance, Product or foundation for building sustainable • Is the project intended to address an Management etc. or a generally aligned pricing capabilities across the organization. acute pricing problem or a broader view across functions? strategic issue? • Finance, RD view problem as value Planning For the “Dance” • End of period discounting, grey market selling related vs. Marketing, Sales view Once practitioners have internalized the pricing vs. managing customer profit- problem as product cost/list pricing set of key consulting motivators and un- ability, new offer packaging/purchase related derstand the roles for which the consul- models tants are best suited, they can then cre- Internal resources available (within ate a plan for success based on a simple Degree of internal support and align- and outside the pricing function). Once checklist of items. ment. Your company’s internal project you’ve agreed that there is a problem, expectations, as well as the one’s you and that you’re going to implement the July 009
  • 4. PRICING ADVISOR The 3535 Roswell Road, Suite 59 Marietta, GA 30062 770-509-9933 A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com project and engage with a consulting Progress Monitoring and Results larity of tracking update meetings and group, the next priority is agreeing on Measurement. Periodic updates to does it include executive “check ins” as the timeline for project completion. Your gauge the progress of the consulting well as process for escalation? expectation as to the amount of time group’s performance are a must. This it should and will take is important for should be done with the consulting Implementation, Planning and Ex- budgetary reasons and for the internal group’s participation. Updates or brief ecution. Will you have the internal resources that will be assigned to work presentations to management are im- resources to do so or will you need to with the consulting group. portant in order to ensure that everyone enlist the assistance of the consulting is on the same page, that the consulting group for follow-up? Will those who Internal resources should be made group is “marching” towards the end are going to implement the action plan available to work with the consul- deliverable and that there are no poten- within your company have the tools tants. It should be clearly communicated tial surprises at the completion of the and education to do so? Ensuring that who will work with the consultants and project. your internal resources are fully edu- what the parameters will cated and trained by the be for doing so (e.g. over- consulting group on the sight and review, execution “tools” needed to imple- expertise, data or analytics ment and maintain the support). project’s action plan is essential for project close Who should work with out. You may also need them? The internal project to have those involved facilitator should ideally be who are implementing a key member of the pric- and maintaining the ac- ing team. However if none tion plan trained on ad- exists, then identify some- ditional/supplementary one who is fully aware of tools (e.g. database man- the scope of the project, agement software such as has the wherewithal to Microsoft Access). work closely with the con- sulting group and facilitate Key Consideration: the project as well as to • Do you have commit- provide periodic updates ment for cross-functional to the company’s manage- project team members who ment team. will responsible for imple- menting and monitoring Should there also be com- action plan(s)? pany resources involved • Continuous engagement from outside the pricing of change management team department? This depends vs. blind hand off to separate on the scope and nature of the project At the conclusion of the project, has the implementation resources and what other cross-functional group it ‘expected’ outcome been achieved by will also impact (e.g. member(s) from the the consulting group? Reviewing and Conclusion IT group if it’s a project to implement a contributing to final results with the Engaging with a consulting group can pricing quotations computer system). If consultant is critical. There should be and should be a mutually beneficial ex- your company decides to have a cross- a final presentation and discussion be- perience. Both the consultants and com- functional team involved with the proj- tween executive management and all pany have an end-goal which should be ect it would still be wise to designate a key members involved in the project. satisfactorily met. However, applying (pricing) project leader to facilitate and Ensure that there are specific recom- due diligence in selecting the appropri- oversee the project. mendations shared for how to act on ate partner is critical to your company’s the findings. As a result, your company project success. Building a good relation- Key Consideration: should be able create and implement ship with each other can pay dividends • Do you plan to use a virtual team of an action plan in order to benefit from in the short and long term. The key is to experts who exist across functions or these findings. ensure it’s the “right fit” for both your dedicated functional expertise (e.g. company and its new “partner.” And re- product marketing or pricing etc.)? Key Consideration: member, you don’t want a partner like • What is the planned cadence and regu- “Dupree” who ends up staying forever. July 009
  • 5. PRICING ADVISOR The 3535 Roswell Road, Suite 59 Marietta, GA 30062 770-509-9933 A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com The Pricing Prize ket research because they worry that it pricing policy was unfair. In many industries, managers make will take too much time. “But there are pricing decisions without fully ana- some practical and easy ways,” Wadhwa But there are multiple ways to implicitly lyzing their long-term profit impact. says, “to get quick checks of what the implement a segmented pricing strat- customer response is going to be — for egy without alienating customers. “You In this article from Columbia Busi- instance, an online pricing survey, con- can create variations of the product,” ness School, author Professor Hiten- versations with trade partners and sales- says Wadhwa. “Or you could offer the dra Wadhwa, associate professor of people, and analysis of sales and pricing product at a high price and then selec- history across accounts.” tively give discounts on a targeted basis, professional practice in marketing through one-on-one conversations with at Columbia Business School, ex- Third, think about a customer’s life- those accounts that you feel are price plains three key parameters for pric- time value to your company. In what sensitive, without necessarily broadcast- ers to keep in mind while creating or cases might you want to sell something ing it to everybody.” at a lower price today in order to foster a changing pricing strategy. He can be long-term relationship with a customer? A third possibility is to change your reached at hw2114@columbia.edu. pricing metrics. An online employment Financial services companies have or dating service, for example, might T amassed huge databases of information charge customers based on the volume he right price for the right cus- that they can use to sell complementary of communication they engage in rath- tomer in the right market at products to existing customers. But they er than charging a flat monthly fee. “If the right time is your compa- don’t always leverage that information to somebody’s a heavy user, they’re likely ny’s greatest source of value. make strategic pricing decisions based on to be less price sensitive,” Wadhwa says. customer lifetime value. “They’re strug- “If you’re charging everybody the same In many industries, pricing is more art gling with the complexity of managing price, then you’re leaving money on the than science. Managers make pricing multiple product lines and customer seg- table since those customers were willing decisions without fully analyzing their ments, with tons of data that in theory to pay more.” long-term profit impact. Companies may they could mine,” says Wadhwa. “That’s have only a vague understanding of their a situation where there’s certainly un- 3. Reexamine the Marketing Mix customers’ sensitivity to price. Manufac- tapped opportunity.” When sales of a new product don’t meet turing firms often take a cost-plus ap- your expectations, your first instinct proach rather than a market-driven ap- In the retail world, where drug and ap- might be to drop the price. But perhaps proach to pricing. And even in industries parel stores are now starting to benefit you simply haven’t done enough to edu- with more sophisticated pricing meth- from revenue management tools devel- cate consumers about the product’s value ods, companies don’t always take advan- oped in the airline and hospitality indus- or haven’t lined up enough support from tage of opportunities to apply creative tries, there is even more room to improve your channel partners. And by lowering pricing strategies. by getting the basic economics right. the price you may unleash a price war, drawing you and your competitors into a So how can you do better? Professor 2. Find Creative Ways to Segment downward spiral. Instead, consider fo- Hitendra Wadhwa, who in the past 12 Your Customers cusing on further differentiating your years has helped several leading compa- Do you know which of your customers product and creating healthier long-term nies design optimal pricing strategies, are willing to pay more for your prod- pricing conditions. suggests three areas for improvement. uct? If so, are you charging those cus- tomers a price that reflects the value “In getting price right, often you have to 1. Get Your Basic Economics Right they assign to the product? operate the other aspects of the market- First, understand which costs are rel- ing mix,” Wadhwa says. “Price is very evant to price and which are not. For Some companies are squeamish about easy to change, and the short-term sales example, fixed cost allocations like over- price segmentation because they think effect can be attractive, so it’s an instru- head should not be driving price. it will annoy their customers. When ment of first resort as opposed to last re- Northwest Airlines announced that it sort. But when you operate in a vacuum Second, know your customers’ sensi- would charge a higher price for exit row and you’re only focused on price, you’re tivity to price at different price levels. seats, which offer slightly more legroom, ignoring the opportunity to use the oth- Sometimes companies skimp on mar- some customers complained that the new er variables to your benefit as well.” July 009 5
  • 6. PRICING ADVISOR The 3535 Roswell Road, Suite 59 Marietta, GA 30062 770-509-9933 A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com Seeing Profit Despite Misunderstood Pricing Strategy nal pricing typically corrects over time, in the counterpart game with no such Citing the research of Kellogg profes- the researchers sought to explain why the fee. sors Nabil Al-Najjar, Sandeep Ba- full-cost pricing fallacy continues to be perpetuated, even in numerous account- Accounting for the liga, and David Besanko, author ing textbooks. Their results demonstrate Learning Curve Peter Klein, Kellogg MBA 2008, that an exception to the rule does in fact According to Al-Najjar, Baliga, and Be- uses this article to illuminate why the exist, and full-cost pricing can be benefi- sanko, however, such studies fall short of sunk-cost fallacy has remained so per- cial in limited market conditions. addressing the question of whether man- agers learn to price their products cor- sistent in pricing despite the efforts of Modeling Manager rectly by observing the dynamics of their economists to champion variable-cost Pricing Decisions own marketplaces, even if the founda- pricing conventions. More on this re- By modeling numerous marketplace sce- tions for their pricing strategies are theo- narios in which more simplistic pricing retically incorrect. search can be found at http://insight strategies are employed, Al-Najjar, Ba- .kellogg.northwestern.edu. liga, and Besanko were able to determine To address this question, they built a how these strategies would play out over model that assumes managers make pric- C time and affect the profitability of the ing decisions based on their firm’s bud- an a company improve its companies using them. geting assumptions and costing method- bottom line by pricing its ologies, both of which may or may not products incorrectly? The In particular, the authors show that in include sunk, fixed, and variable costs. answer is yes, in certain cases, a differentiated product oligopoly, firms The model also assumes that each firm according to recent research conducted will learn over time to confound vari- has imperfect knowledge regarding the by Kellogg professors Nabil Al-Najjar, able, fixed, and sunk costs, because mar- budgeting assumptions and costing meth- Sandeep Baliga, and David Besanko. ketplace experiences will reinforce the odologies of rival firms, including wheth- practice through higher true profits. Ex- er or not their cost bases are inflated and The research, published in the RAND amples of such oligopolies—that is, dif- when (or even if) they make adjustments Journal of Economics, examines one ficult-to-enter markets in which a small to their practices. of the most widespread pricing errors: number of firms produce similar but not namely, the inclusion of fixed and sunk identical products—include the cereal The model shows two things. First, it in- costs in a company’s calculations for and the global automobile industries. dicates the obvious: each manager learns making pricing decisions. over time to choose as high of a price as By taking sunk costs into account, firms possible within the limits of his knowl- “Economic theory offers the unambigu- predispose themselves to set higher pric- edge and assumptions, regardless of the ous prescription that only marginal cost es. Experimental research supports the market in which he operates. The second is relevant for profit-maximizing pric- conclusion that managers often confuse conclusion is more surprising: the model ing decisions,” emphasize the authors. sunk, fixed, and variable costs. For ex- indicates the impact that different mar- However, they note that in reality, many ample, in a 2006 study by Offerman and ket scenarios have on equilibrium prices. companies, through naiveté or perhaps Potters, subjects were asked to play an For instance, in monopoly markets, the sheer optimism, ignore this principle equilibrium pricing game. The players confusion of variable, fixed, and sunk and confound fixed costs (expenses that were divided into two groups: those who costs does not lead to a higher equilib- do not vary, regardless of production or paid a sunk entry fee to play the game rium price for the simple reason that the sales levels), sunk costs (expenses that and those who paid no such fee but faced monopolist will learn by trial and error have been incurred and cannot be recov- an identical set of variable costs. what his most profitable price is. ered to a significant degree), and variable costs (those that increase directly in pro- Theoretically, the equilibrium prices Errors in costing methodologies do not portion to the level of sales) when mak- reached during each game should have lead to higher equilibrium prices in per- ing their pricing decisions. been identical. But in practice, the equi- fectly competitive markets either, since librium price reached in the game in firms have no pricing power in such mar- Although laws of supply and demand which players paid the entry fee was sig- kets. If a manager were to inflate the cost are persuasive teachers and such irratio- nificantly higher than the price reached basis for his firm, he would simply move 6 July 009
  • 7. PRICING ADVISOR The 3535 Roswell Road, Suite 59 Marietta, GA 30062 770-509-9933 A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com the company away from making its prof- raise its prices in line Figure 1 it-maximizing quantity. Thus, experience with A’s so as not to in such a market should eradicate the miss out on the ad- misunderstanding of cost allocation. ditional profits avail- able to it because of Similarly, homogeneous product oli- higher prevailing gopolies do not support the distortion of market prices. costs or prices. The experimental When the products of rival firms are in- results indicate that terchangeable, customers should be indif- both the number ferent to where they purchase the prod- of firms present in ucts—the decision is based exclusively the oligopoly mar- on price. Therefore, pressure for a firm to ket and the degree lower its prices, undercut its rivals, and of differentiation capture its entire market is strong enough for these goods have to clarify any confusion regarding correct profound impacts on costing over time. the likelihood that a firm would benefit Higher Profits Can Encourage from full-cost pric- Confounding Costs ing. In examining differentiated-product oli- gopolies, however, the authors discovered Figure 1 presents evidence supporting the sunk-cost fal- these results, with N lacy. Managers of firms in such markets being the number of are incentivized indirectly through high- firms in the market; er profits to confound variable, fixed, θ being the degree to and sunk costs. which products are differentiated; 0 indi- The intuition for this result is that in a cating that the goods differentiated-product oligopoly, if a firm are completely differ- raises its prices, its rivals increase theirs entiated and indepen- fectly competitive market, cost-basis dis- as well, resulting in a more profitable in- dent; and 1 signifying that the goods are tortions tend to disappear. In the middle dustry equilibrium. By taking sunk costs perfect substitutes. P0 is the equilibrium of these ranges, however, cost-basis dis- into account, firms predispose them- price in the market given no cost-basis tortions can be significant. For example, selves to set higher prices. The resulting distortions; s* is the cost-basis distortion when N = 2 and θ = 0.80, the cost-basis increase in profits reinforces this prac- that persists given the model’s output; and distortion is roughly 36 percent of what tice, making firms more likely to take p* is the actual market-equilibrium price should be the market’s undistorted equi- fixed and sunk costs into account in the suggested by the model. Within the table, librium price. future. s* is the key number: the larger the s*, the greater the increase in the market’s appro- These results offer new insights into why It is important to note that these results priate equilibrium price. the sunk-cost fallacy has remained so hold true only in product oligopolies in persistent despite the efforts of econo- which a firm’s price increase causes either Within the table, s* is the key number: the mists to champion variable-cost pricing an elevation in price or a stabilization of larger the s*, the greater the increase in the conventions. price in its rival firms. For example, if market’s appropriate equilibrium price. restaurant A raises its prices, restaurant Reference B has no incentive to lower its prices, As the data shows, for markets in which Offerman, Theo and Jan Potters (2006). since the meals offered at A are different there are numerous players, cost-basis “Does Auctioning of Entry Licenses Induce enough from those at B that such a cut distortions are minimal. Greater inten- Collusion? An Experimental Study.” Review ought not to drive customers away from sity of competition accounts for this re- of Economic Studies, 73(3): 769–791. A to B. Restaurant B, therefore, might sult. Additionally, when a market begins maintain its current prices, or might to resemble either a monopoly or a per- July 009
  • 8. PRICING ADVISOR The 3535 Roswell Road, Suite 59 Marietta, GA 30062 770-509-9933 A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com A Proposal to Solve Concert Ticket-Pricing Woes ing and attendance analysis. Much can may help set initial ticket prices. But an Many industries have found success change in six months: An artist may get analysis on years-old data cannot cap- in this challenging economy by imple- heavy airplay and high promotion, oth- ture the uncertainties of today’s demand er similar acts may be playing the same and ensure that Rows C and R are priced menting dynamic pricing strategies. week, there might be poor weather, and properly. Author Rafi Mohammed points out so on. how utilizing a similar approach to Would you risk losing $100,000 by rely- pricing would benefit the concert in- Even if a challenge is identified, it’s ing on an analysis of one- to five-year- hard to quantify its effects. For exam- old data that “estimates” those crucial dustry, especially now that consumers ple, a Hall of Fame band may have sold last 1,000 seats will be sold? I wouldn’t. have smaller amounts of disposable well two years ago, but will its classic There’s too much uncertainty. Mining income. Rafi Mohammed has worked rock fans be as enthusiastic this year? We past data can provide good insights, but all know that this summer will be eco- it won’t solve the concert industry’s pric- in pricing for more than twenty nomically challenging for concert fans. ing challenges. years, is the founder of Culture of So why are some bands doing well, while Profit LLC in Cambridge, Massachu- others aren’t? What do industries that use dynamic setts, and the author of the Pricing pricing, such as airlines and hotels, have It is difficult to properly scale a venue. in common? They all have high demand for Profit blog. He can be reached at Having just two or three price levels uncertainty and offer perishable prod- rafi@cultureofprofit.com. won’t capture the value of every seat. ucts. Sounds a lot like the concert indus- Standing in Row A is a lot better than try, doesn’t it? A sitting in Row Z, but at most venues, t a recent D: All Things Digi- these tickets are priced the same. Simi- Dynamic pricing adjusts prices in accor- tal Conference, Ticketmaster larly, having a seat in the center of Row dance with demand. If a tour has good CEO Irving Azoff proclaimed, A is more valuable than having a seat at buzz in the Midwest, prices rise in those “We haven’t done enough dy- the end of the same row. Profits are be- areas. If a widely anticipated tour seems namic pricing for tickets, and we should, ing left on the table. to be falling short on selling those last and that will help make people happy.” crucial 1,000 seats, prices can be lowered. Mr. Azoff is right. One solution, of course, is to add more If demand for Row C tickets is lower tiers. But, if it’s a challenge setting ac- than expected, other tickets upfront can Dynamic pricing is the key to pricing curate prices for three tiers, it’s hard to be discounted. And just as it is in the for profits and growth in the rock con- believe that setting 10 would be more airline industry, those who willingly pay cert industry. precise. Should the price differential be- high prices subsidize others by making it tween Rows F and G be $25 or $50? possible to offer lower price tickets. The challenges of setting concert ticket prices come down to two key issues: (1) Some have suggested using an analysis To be clear, the goal of applying dy- uncertainty and (2) properly scaling the on historical data to set prices. Yes, us- namic pricing to the concert industry house (setting the right price for differ- ing past data in conjunction with experi- isn’t always to achieve a sellout. The ent seats). ence is always better than not do- goal is to offer consumers more choices, ing so, and analysis as well as for promoters In an industry where high financial and artists to increase sales guarantees to artists are the norm, pro- and make the most money. moters need to set the right tick- et prices to survive. There may be Dynamic pricing is a 12,000 fans cheering for an encore, win-win strategy. By un- but if a promoter had bet that the at- derstanding demand and tendance would be 13,000, s/he is sulk- setting the right prices, ing over a big loss. bands, promoters, and consumers all win. If other Their profit comes after selling those last industries can profit and 1,000 seats. Given that tickets are rou- grow by using dynamic tinely sold six months before a show, it’s pricing, so can the rock impossible to undertake an accurate pric- concert industry. 8 July 009

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