Broadway for 2 at $700? Dynamic Pricing Keeps Expanding

$700 is the price a couple would pay for the best seats to see Hugh Jackman Back on Broadway this month.  With a runaway hit, producers have raised prices several times.  Orchestra seats that were priced at $155 are now priced at $175.  Premium seats that were priced at $250 are now priced in the range of $275 to $350, depending upon demand for specific performances.  Their decision to use dynamic pricing has placed Hugh Jackman’s essentially one-man-show in the top earner position on Broadway with roughly $1.5 million in ticket sales for the week ending November 20^th, 2011.

With pricing success like this, one can suspect that more executives may benefit from considering the value of dynamic pricing.  In this article, we will clarify specific aspects of the Hugh Jackman case, position the Broadway form of dynamic pricing within the broader category dynamic pricing, and then explore the applicability of this approach within other consumer and business markets, specifically transport.

Hugh Jackman Specifics

Broadway’s Hugh Jackman wasn’t always priced so high.  As recently as November 9^th, discounted tickets could be purchased at the TKTS booth in Times Square.  After critics gave it rave reviews, the producers measured the pace of ticket sales and determined that future performances were on track to be sold out.  With strong demand and limited supply, the show was in a prime position for dynamic pricing.

This point highlights to three the key requirements for using dynamic pricing.  The first two are exposed in most  discussions of this form of dynamic pricing:  (1) strong demand; (2) limited capacity.  The third requirement is mentioned less in the academic literature but presents a true operational challenge:  (3) reasonably reliable predictions of demand. The producers had to be able to predict with reasonable reliability the future demand for their product.  Developing predictions on future sales from current sales most likely utilized data mining of past ticket sales trajectories to uncover patterns that were statistically quantifiable and reliable.

If the producers did not bring in dynamic pricing, the ticket brokers would have.  Secondary markets for Broadway tickets are well established (just as they are for several other markets).  Without dynamic pricing, the excess demand for the tickets would have resulted in strong profits for the brokers yet no real results for the producers, theatre, and performers.   By using dynamic pricing, the producers are able to benefit from the value of the product they deliver while the ticket brokers could no longer free-ride on their hard work and risk taking.

This point highlights one of the key indicators that dynamic pricing might be needed:  secondary markets for the product may already be doing it.

In other instances where dynamic pricing has been introduced with running entertainment acts such as ballet or orchestras, the company would not drop the base price for undersold tickets below subscriber prices.

This point highlights that the rewards granted to early purchasing customers cannot be undermined by giving greater rewards to late purchasing customers.  Concerns of fairness are likely to influence decisions very strongly when deploying a unilateral dynamic pricing strategy.  Firms are likely to find it untenable to be perceived as “penalizing” early customers by “favoring” late customers with a better price.

Major Forms of Dynamic Pricing

As a principle, dynamic pricing simply implies that prices change over time due to actions of the buyers, sellers, or both.

For instance, one could state that negotiated prices are a form of dynamic pricing.  In a negotiation, both buyers and sellers participate in defining the price which dynamically evolves over the course of the negotiation.  Price information in negotiations flows bilaterally from buyers to sellers and sellers to buyers, and likewise transaction price requirements move bilaterally, with upward price acceptance by buyers and downward price acceptance by sellers.  General strategies for negotiating a strong outcome rely upon defining one’s BATNA (Best Alternative to a Negotiated Agreement), exploring non-price dimensions of the transaction to increase the joint value that can be gained through transaction, and anticipating and exploring the potential ZOPA (Zone of Potential Agreement) by testing the reservation prices of one’s counter party.  Specific tactics for negotiating a strong outcome will vary according to structure of the negotiation, but generally include making aggressive initial offers and conceding ground in conjunction with one’s counter-party.

Similarly, auctions and reverse auctions are also forms of dynamic pricing.  In forward and reverse auctions, price information flows between buyers and sellers dynamically while transaction prices requirements move in a unidirectional manner.  In many ways, forward and reverse auctions are easier to manage than other forms of dynamic pricing.  Because the information communicated within an auction is often constrained purely to price offers, participants have little more to determine than their walk-away price.  In forward auctions, buyers should control the emotion of the moment and bid no more than their pre-determined willingness to pay.  Similarly, in reverse auctions, sellers should control their emotions and bid no less than their pre-determined price minimum – even if it means they lose the deal.  These prescriptions are given to avoid the challenge of a “winner’s curse”, where the winner of the deal finds that they over-paid (forward) or under-bid (reverse) and therefore lost value.

In contrast, revenue management, the type of dynamic pricing practiced with Hugh Jackman’s Broadway hit, requires sellers to make unilateral decisions regarding the price they demand while buyers have simply to choose whether to purchase at that price, or not.  In this sense, price information flows unilaterally from seller to buyer, but information regarding demand is aggregated from collective buyer behavior.

Revenue management is a much studied form of dynamic pricing.

From a management perspective, the criteria that should indicate a need to investigate the value of revenue management can be easily understood.  Briefly, successful deployments of revenue management meet the following 4 criteria.

1. Capacity is Limited and perishable
2. Customers will reserve units ahead of time, and once purchased cannot forfeit freely
3. The firm can sell capacity at a variety of prices and increase the price variation over time
4. The firm can change the availability of price and capacity levels over time

Analytically, one might say revenue management is the rocket science of pricing.  While the science of revenue management is beyond the scope of a brief general management article, it is well known and can be read in standard pricing textbooks such as Pricing Strategy.

Revenue Management for Consumer and Business Markets

Revenue management has long been practiced by airlines and hotels and is increasingly practiced by major touring musical acts along with the new entrant of Broadway.  In format, television broadcasters selling “up-front” time-slots to advertisers for future shows followed by selling spot-market time-slots are practicing a form of revenue management.

An area where revenue management is increasingly being deployed in business markets is transport and logistics.  Shippers will reserve shipping capacity ahead of time and prices will vary between customers.  Shipping capacity is limited and perishable for many forms of transport, specifically air cargo and to a lesser extent ocean cargo and other forms of transport.  Finally, if the transport firm so chooses, it can control the availability of capacity at different prices and at different times.

One of the hurdles transport firms face in deploying revenue management is in holding customers liable for purchased capacity when they don’t use that capacity.  One might think such a hurdle is easily overcome with management directives; however a combination of inertia and uncertainty often holds transport firms captive to pursuing high capacity utilization goals through keeping customers “happy” rather than striving towards high capacity profitability goals.

Analyzing past transactions to define factors such as capacity utilization, prices paid, price variation, timing of purchases, and percentage of capacity reservations forfeited, can provide transport executives with some insights into the value of moving towards revenue management techniques as well as reduce the uncertainty in making the transition.  Similarly, robustness tests that account for different expressions of customer behavior can clarify the risk and uncover risk mitigation strategies for making the transition to revenue management.  Once the technique has been proven for these firms, the approach can be expanded and routinized with appropriate investments in people, process, and teams.

Are dynamic pricing techniques, and more specifically revenue management, right for everyone?  No, but for some, it is as proven as the profits from the X-Men series.

References

• Patrick Healy, “Broadway Hits Make Most of Premium Pricing”, The New York Times, November 24, 2011. http://www.nytimes.com/2011/11/25/arts/new-pricing-strategy-makes-the-most-of-hot-broadway-tickets.html

Note of Interest and Holdings: At the time of writing, the author is not currently a direct consultant to nor investor in any of the firms listed in this article.