At a recent D: All Things Digital Conference, Ticketmaster CEO Irving Azoff proclaimed, "We haven't done enough dynamic pricing for tickets, and we should, and that will help make people happy." Mr. Azoff is right, dynamic pricing is the key to pricing for profits and growth in the rock concert industry.
The challenges of setting concert ticket prices come down to two key issues: (1) uncertainty and (2) properly scaling the house (setting the right price for different seats).
In an industry where high financial guarantees to artists are the norm, promoters need to set the right ticket prices to survive. There may be 12,000 fans cheering for an encore, but if a promoter had bet that the attendance would be 13,000, s/he is sulking over a big loss.
Their profit comes after selling those last 1,000 seats. Given that tickets are routinely sold six months before a show, it's impossible to undertake an accurate pricing/attendance analysis. Much can change in six months: An artist may get heavy airplay and high promotion, other similar acts may be playing the same week, there might be poor weather, and so on.
Even if a challenge is known, it's hard to quantify its effects. A Hall of Fame band may have sold well two years ago, but will its classic rock fans be as enthusiastic this year? We all know that this summer will be economically challenging for concert fans. So why are some bands doing well, while others aren't?
It is difficult to properly scale a venue. Having just two or three price levels won't capture the value of every seat. Standing in Row A is a lot better than sitting in Row Z. But at most venues, these tickets are priced the same. Similarly, being in the center of Row A is more valuable than in a seat at the end of the same row. Profits are being left on the table.
One solution, of course, is to add more tiers. But if it's a challenge setting accurate prices for three tiers, it's hard to believe that setting 10 would be more precise. Should the price differential between Rows F and G be $25 or $50?
Some have suggested using an analysis on historical data to set prices. Yes, using past data in conjunction with experience is always better than not doing so, and analysis may help set initial ticket prices. But an analysis on years-old data cannot capture the uncertainties of today's demand and ensure that Rows C and R are priced properly.
Would you risk losing $100,000 by relying on an analysis of one- to five-year-old data that "estimates" those crucial last 1,000 seats will be sold? I wouldn't. There's too much uncertainty. Mining past data can provide good insights, but it won't solve the concert industry's pricing challenges.
What do industries that use dynamic pricing such as airlines and hotels have in common? They all have high demand uncertainty and offer perishable products. Sounds a lot like the concert industry, doesn't it?
Dynamic pricing adjusts prices in accordance with demand. If a tour has good buzz in the Midwest, prices rise in those areas. If a widely anticipated tour seems to be falling short on selling those last crucial 1,000 seats, prices can be lowered. If demand for Row C tickets is lower than expected, other tickets upfront can be discounted. And just as it is in the airline industry, those who willingly pay high prices subsidize others by making it possible to offer lower price tickets.
To be clear, the goal of applying dynamic pricing to the concert industry isn't always to achieve a sellout. The goal is to offer consumers more choices, as well as for promoters and artists to increase sales and make the most money.
Dynamic pricing is a win-win strategy. By understanding demand and setting the right prices, bands, promoters, and consumers all win. If other industries can profit and grow by using dynamic pricing, so can the rock concert industry.
Rafi Mohammed, Ph.D. is a pricing strategy consultant and author of pricing strategy books, "The Art of Pricing" (Crown Business, 2005) and the upcoming "The 1% Windfall" (HarperCollins). He wrote his economics Ph.D. dissertation (Cornell University, 1994) on rock-concert ticket pricing and bundling. For more pricing-strategy insights, check out his website.