Dynamic Pricing: The Toolbox You Need for Extra Revenue – Part One

Let’s face it. Achieving your revenue goals is tough work- right? What if you could just add a little extra cost to each ticket transaction? Sounds like a reasonable idea? Now, I’m going to say something that may shock you. You should always be actively dynamic pricing your ticket inventory. Now, don’t run for exits. I’m not talking about sticking it to your patrons. You aren’t selling airline tickets. There’s nothing wrong with dynamic pricing if it is done well and respects your customers.

In fact, dynamic pricing is very much part of our everyday lives. If you shop on Amazon you are being subjected to their advanced dynamic pricing models continuously. If you want to do a little experiment, try putting something in your Amazon shopping cart and leaving it there for a few days. Watch what happens!

Dynamic Pricing Philosophy

To understand dynamic pricing you first need to understand the underlying philosophy. Dynamic pricing is the practice of varying the price of a particular product or event over a period of time. One very common example is setting an advance purchase price for an event that is lower than if purchased on the day of the event itself.

For example, an event could have a $15 price if purchased in advance and a $20 price if purchased on the day of the event at the door.

The other type of dynamic pricing involves changing the price of an event in response to demand for the event itself. If tickets are selling well for a particular concert, an organization might raise the price of the remaining tickets to take advantage of the potential for incremental revenue. Dynamic pricing is an attempt to respond to demand. Demand can be expressed in economics through a demand curve.

A Demand Curve

In this curve, Price is reflected on the Y-axis and Demand is reflected on the X-axis. At $60 the demand for a product or event is zero. As we move downward on price, demand increases resulting in an increase in the quantity of the product or event sold. Demand curves are inversely proportional, meaning that as price decreases, quantity increases. Demand curves are said to be elastic.

Elasticity and Inelasticity

Price elasticity is a measure to show the change in quantity demanded based on the change in price. To put this in context, think about your box office ticketing in terms of the following graph.

Price Vs. Demand

In this graph, the Y-axis is the number of tickets sold. The X-axis represents price per ticket. At the $100 price, about 85 tickets are sold. As the price decreases, the number of tickets sold increases. Take a look at your own ticket numbers and put them into a chart like the one above. Do they look similar?

If more people buy tickets at the $25 and $10 prices, why offer a $100 price? Here is where the concept of price inelasticity comes into play. At the $100 price, 85 people purchased tickets to the event. Let’s say that these tickets are for the best seats in the theater. They provide the best experience. If you increased the price to $125.00 and 85 people still purchase tickets, the price is said to be inelastic. Price inelasticity is a measure to show a scenario in which the quantity demanded is unaffected by changes in price.

In your seating inventory, you develop different prices based on the location of the seats relative to the stage. You price those locations based on the demand for each one of those seating locations. If you only offered tickets for all seats at $100 you would have fewer buyers attend your event as the demand for tickets at that price level is low. Likewise, you wouldn’t want to price all of you seats at $10. Demand might be high, but you will lose money. Having prices at different levels is an attempt to address the elasticity of demand in the marketplace.

Let’s cover one more concept with respect to understanding dynamic pricing – the event booking curve.

Event Booking Curve

An Event Booking Curve is simply a graph that shows the number of tickets sold to a particular event over a period of time. In the curve above the number of tickets sold is tracked from 6 weeks prior to the event through the week of the event itself.

What this curve shows is how ticket demand increased for the event over time. Notice the steep incline in ticket sales beginning three weeks out and continuing through the week of the show. What is happening here? Does this look similar to your own booking curves for your events? Remember the concepts of elasticity and inelasticity? Those buyers who wait until two weeks or less to purchase a ticket for a particular event are more inelastic than those who purchased five or six weeks out. Those inelastic buyers are where dynamic pricing can lead to incremental revenue gains.

Let’s recap what we’ve covered.

Dynamic Pricing – Dynamic pricing is the practice of varying the price of a particular product or event over a period of time.

Demand Curve – Demand curves are inversely proportional, meaning that as price decreases, quantity increases. Demand curves are said to be elastic.

Elasticity – Is a measure to show the change in quantity demanded based on the change in price.

Inelasticity – Is a measure to show a scenario in which the quantity demanded is unaffected by changes in price.

Event Booking Curve – Is a graph that shows the number of tickets sold to a particular event over a period of time.

With these key concepts introduced we will put them to use in part two of our dynamic pricing blog. In Part Two we will introduce:

  • How to build a dynamic pricing model
  • When to engage in dynamic pricing
  • How to measure the effect of dynamic pricing
  • How to use dynamic pricing in different scenarios

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