Dynamic Pricing Part II, Details of the Black Magic

Dynamic Pricing Part II, Details of the Black Magic
Photo by Jean-Philippe Delberghe / Unsplash

Welcome wizards of the theatre world. In part one we discussed the basics of dynamic pricing. We mentioned some math, we talked about some science, and we contemplated some ethics. We had some scary charts and we also had some very obvious principles. As mentioned in that article, we barely scratched the surface. In this part two article, we’re going to dive more into the exact techniques that count as dynamic pricing. To keep things interesting, we’re going to hold your attention with elaborate wizard puns. If you don’t come for the math, you’ll come for the creative wizard razzle dazzle. Why wizards? Because mastering dynamic pricing in the theatre industry is like casting a spell, timing and ingredients matter. Let’s dive right into it and list off the dynamic pricing spells we’ll cover; cost-plus pricing, competitor based pricing, value-based pricing, bundle pricing, time-based pricing, conversion-rate pricing, customer segmentation, and personalized pricing. We won’t cover the auction techniques, even though they’re also technically in the mystical book of dynamic pricing. A wizard that’s familiar with casting these spells knows that each technique is empowered with powerful shamanic incantations.

“Transmutational Tides of Cost-Plus Pricing Perfection!” brings forth the great power of a cost-plus pricing spell. Cost-plus pricing is a fancy term for adding a specific fixed percentage markup to product costs, it’s a popular strategy in government contracts and industries where products are made to buyer specifications. In the theatre industry this means you’re pricing in your fixed costs like rent and employee pay along with your variable costs like utilities and maintenance. This becomes more critical to cast/calculate accurately when your theatre hosts a one-time event with unique touring performers or for commissioned plays. Typically successful theatres consider external factors like competitor pricing and demand for each production, so assuming a stable cost structure, cost-plus pricing is mixed with other strategies in the long run as marginal costs and average costs converge. All of the spells we’ll discuss here can be used to help determine price elasticity (how much demand changes based on ticket prices), and cost-plus pricing is the essential foundation needed for these incantations.

"Competitor Conjuring Cascade of Profitable Parity!" is the chant used to instill the strengths of your competition, by peering into the soul of their pricing models and working to evolve on them. This technique focuses on responding to, you guessed it, your competition. One of the specific ways you can do this would be by leveraging something called charm pricing (great name). This is getting in the realm of dark magic pricing because it’s meant to appeal to customers’ emotions rather than their reason. We all know some of these tricks, such as Just-Below pricing, where the fee is $29.99 instead of $30. A study published in the Marketing Bulletin in 1997 found that 60% of prices in advertisements ended in the digit 9 and 30% of prices ended in the digit 5. With only 7% of prices ending in the digit zero and slightly over 3% ending in all other numbers combined.

This is in line with the Left-Digit Effect, where the leftmost digit tricks people into thinking $29.99 is closer to $20 than to $30. On the other hand, some theaters or specific events may charge round numbers like $50 or $100, to convey a sense of brand sophistication when compared to competing theatres and events.  There’s also Prospect Theory, where you might sell a premium ticket for $49.99 and a regular ticket for $45. The slight price difference makes the premium ticket seem like a great deal. You’re probably already using this technique, but now you know the names of all of its intricacies.

"Victorious Vortex of Value-Based Pricing Valor!" Value-based pricing is slightly more nuanced and mainly patron focused, as it takes attempts to quantify not only a patron’s attachment to a performance, but also the ambience of the theatre and other patron related external factors like patrons willingness to pay (WTP), painting a more holistic picture. Marginal revenue (MR) is the revenue generated from selling one additional ticket, while marginal cost (MC) is the cost of accommodating one more patron. Any keen wizard understands that MR must be greater than MC for ticket sales to be profitable. Since patrons can have different WTPs, tiered pricing is usually able to capture more value. Value-based pricing allows a theater to accurately determine when to charge premium ticket prices because they correctly identify high perceived value. It’s worth noting that theatre performances are considered ‘experience goods’, or goods whose value is only realized after the experience. This means that the hype and expectations must be met or exceeded to create a highly valued experience, which in turn attracts more patrons and supports higher ticket prices.

"Bountiful Bundle Blasting Balad of Abundant Affinity!" is a powerful spell that almost all companies use. Bundle pricing is when two items are cheaper when purchased together as opposed to separately. For theaters, this usually comes in the form of either a season pass, a subscription, a special event bundle, genre-based bundles, or family and wizard group bundles. In all of these cases, bundle pricing provides a perception of value, acting as a convenient way of getting a deal. Your theatre should obviously have MR > MC priced into every available product, so a slight break on price of each one can be well worth a bundle sale to a theatre if it’s set up properly.

"Temporal Time-Based Pricing Turn of Chronos Command!” This spell is quite common, but still effective.  The "prime time" for theatres is typically evening shows on weekends, where demand is highest due to the convenience for most patrons. Just like retailers raising prices during peak shopping hours, theaters can increase ticket prices during these high-demand periods. On the other hand, matinee shows, weekday performances, or late-night shows usually see lower demand. So, similar to retailers reducing prices in the evening, theaters might lower ticket prices during these times to encourage more patrons to attend. We covered examples of this technique in part one, so we’ll banish it to the shadow realm for the rest of our discussion here.

"Conversion-Rate Cyclone of Captivating Charm!" is a more lucrative incantation; like the name implies it primarily focuses on maximizing the potential patron conversion rate. When we say ‘patron conversion rate’, we’re referring to the rate at which potential customers become actual ticket buyers. Note that adjusting ticket prices to maximize your conversion rate isn’t mutually exclusive from the other techniques listed here, it’s quite obvious that a large part of determining the maximum conversion rate will involve adapting to competition and demand, as well as some price discrimination through techniques like tiered and group pricing. Among these techniques, conversion-rate pricing can be fairly complex, just like brewing a potion. Since it requires an almost real-time analysis of many different factors (arguably more than value-based pricing), it certainly needs to be well thought out. We should point out that Fourth Wall Tickets provides beautiful live graphs to help track ticket sales metrics.

"Segmentation Surge of Singular Customer Synchronicity!" In the enchanted world of theatre, customer segmentation works like sorting patrons into their distinct houses, each with its unique preferences and tendencies. By dividing your audience into segments based on their characteristics or behavior, you can tailor your marketing and pricing strategies to better meet the needs and desires of each group (we touched on this in part I). Advantages of this approach include the ability to identify and target your most profitable segments, customize your offerings and messaging to resonate more deeply with different segments, and potentially increase overall ticket sales and customer satisfaction. For instance, recognizing that weekday performances attract a larger senior crowd may prompt you to offer special pricing or packages designed for this demographic. And with Fourth Wall Tickets you can create stunning ticket purchase pages that appeal to everyone.

However, the charm of segmentation isn't without its challenges. Like defeating the dragon in the hills, it requires a significant amount of data collection and analysis, which can be resource-intensive. There can also be a risk of over-segmentation where the segments become so small that the cost to reach and serve them outweighs the benefits. Furthermore, if not handled with care, some patrons may feel they've been put under an unwanted spell, perceiving segmentation as a form of discrimination or exclusion.

"Personalized Pricing Portal of Precise Predilection!" Personalized pricing can be a potent potion for theatres, akin to divination that discerns a patron's willingness to pay (WTP) as with other techniques. By tailoring pricing to individual customers, you may be able to extract more value from patrons who are willing to pay more while still maintaining accessibility for those with a more modest budget.

This strategy can help improve profitability, and when paired with the right data, can unlock powerful insights about your patrons. It might make your theatre accessible to wider audiences, by offering lower prices to those who may otherwise be unable to attend, while charging a premium to those who have the means and are willing to pay for it.

However, tread lightly with this strategy as the path is fraught with risks. Just like a misfired spell, personalized pricing can backfire if customers perceive it as unfair or discriminatory. It could lead to a loss of trust among patrons if they discover that others are paying less for the same experience. Furthermore, this pricing strategy requires a considerable amount of data and analysis to execute effectively. The transparency of the digital world can also make it more challenging, as customers can easily compare prices and potentially feel disillusioned if they believe they've been charged more than others. As with the other powerful spells discussed here, wield it wisely.

"Drip Pricing Deluge of Deceptive Digits!" Drip pricing is akin to a ‘magician’s push’, pulling prices out of thin air, captivating the audience with an appealing initial price, and then gradually revealing additional costs as the purchase process advances. It's quite literally casting an illusion that draws in patrons with an enchanting headline price, only to gradually reveal additional, and perhaps unavoidable, fees that ultimately reveal the true price.

The magic of this strategy lies in its effectiveness. Much like a charm, drip pricing makes the base price irresistible to patrons, leading them to focus on that initial figure and underestimate the total cost. Subtle enchantments (small surcharges) can enhance purchasing intentions and satisfaction levels. However, this strategy is not without its darker elements (seeing a pattern yet?), much like a curse, it can distort competition by making it challenging for theatres with transparent pricing to compete. Beware, as with any potent spell, drip pricing can have unforeseen consequences. If not used with caution, this technique can foster a sense of mistrust and dissatisfaction among your patrons. Also, much like magic is regulated in the wizarding world, drip pricing is subject to legislation in many jurisdictions. Ensure your theatre stays within the bounds of law to prevent any backlash from customers or regulatory authorities. Failing to do so could be like losing your robes - destructive and bad for your reputation! In industries such as airlines, event ticketing, hotel & resort booking, drip pricing has faced legal challenges and considerable scrutiny. For example, airlines have faced increasing regulation regarding drip pricing, with requirements to disclose the final price inclusive of all unavoidable charges. Other sectors have also faced similar concerns, underlining the importance of being transparent and maintaining a fair pricing strategy. While drip pricing might seem like a powerful technique for ticket sales, it's essential to consider the ethical implications. In conclusion, drip pricing should be used judiciously and ethically with only the purest intents. As a wise wizard once said, "With great power comes great responsibility". It's crucial to maintain a balance between enhancing revenues and upholding customer trust and satisfaction. After all, the world of theatre thrives on the enchanting relationship between the performer and the audience.

Now let’s briefly dive into some of the details of exactly how we can quantify what patrons want. Revealed preference theory, initiated by the economist Paul Anthony Samuelson in 1938, is a magical orb in the realm of economics, casting light on the subtle desires of consumers as reflected by their purchasing patterns. This methodology is used primarily for discerning the influence of policies on consumer behavior. It’s a kind of economic divination that gleans knowledge from observed behaviors in the marketplace.

Imagine, if you will, two bundles of goods, bundle A and bundle B. Within the limitations of a consumer's fiscal spellbook, if bundle A is chosen over bundle B, then bundle A is considered to be (directly) revealed as the preferred choice. The Weak Axiom of Revealed Preference (WARP), dictates that if bundle A is chosen over bundle B when both are affordable, then there should never be a scenario where the consumer prefers bundle B over A, simple right? This axiom ensures the consistency of consumer preferences, a crucial factor when casting the spell of dynamic pricing.

The Strong Axiom of Revealed Preferences (SARP), a more potent version of WARP, is a complex spell that prevents the creation of 'loops' or preference inconsistencies. It requires the relationship between chosen bundles to be transitive, a critical component to ensure the logic of choice and utility remains unbroken.

The Generalised Axiom of Revealed Preference (GARP), as the name implies, is a generalized version of the strong axiom in the realm of revealed preference theory. It accounts for conditions wherein two or more bundles provide equal levels of utility at a constant price. In this scenario, multiple consumption bundles can reach the peak of the utility mountain, resulting in various optimal choices. GARP maintains that preference data must not form a preference cycle, hence ruling out the creation of preference paradoxes while upholding the principle of transitivity.

As we can see, both bundles A(a) and B(b) are within the patron’s budget (B line), and both provide the same level of utility and satisfaction (thus both on the Indifference Curve), meaning one may be chosen over the other randomly. The axes here represent two different products.

When dynamic pricing is applied to theatre ticket sales, the concept of revealed preferences reveals the patron's true valuation of the performance. We can agree that each transaction declares the individual's preference for one performance over another. By monitoring these preferences carefully, theatre wizards can adjust their pricing strategies to better match supply and demand, maximize revenue, and ensure the satisfaction of their patrons.

Thus, the dance between revealed preferences and dynamic pricing forms a symbiotic bond. They operate in harmony to create a market environment that caters to the desires of the consumer while promoting the sustainability of the theatre. Magic, indeed.

If that made your head spin then good! These are important concepts to know, and after a few more you’ll feel confident discussing them with the egghead wizards in the high towers. That’s all we’ll cover for today, but if there’s one thing to take away, it’s what we’ve been repeating throughout; these strategies are powerful double-edged swords. Approach and wield them with caution, and you’ll prosper. This dynamic price series is meant to inform and educate, so we hope dearly that you’ve gleaned at least a couple nuggets from it so far.