Sunday, March 27, 2011

The Devil (and the Details) are in the Budget

All major decisions that an organization makes are made during the budgeting process. In many cases, the budgeting process is informed by a strategic plan or multi-year proformas. However, the practical and strategic decisions that are necessary to put a strategic plan into play are primarily discussed and decided upon during the budgeting process.

Ideally, an operating budget is created and adopted by an organization’s senior staff, thereby ensuring that each department is represented. For senior managers that represent marketing and are responsible for earned revenue streams, the following are some important questions to ask during the budgeting process:

1) How accessible does your organization desire to be?
• Average Ticket Price and Percent Paid Capacity. In major organizations, earned revenue can come from a myriad of different sources including ticket sales, fees, parking, restaurants, concessions, event rentals, merchandise, advertising, classes and summer camps. However, for most performing arts organizations, the majority of earned revenue comes from ticket sales. When adopting sales figures for tickets, a manager must consider two variables: average ticket price and percent paid capacity. When a budget is being developed, the higher these two variables climb, the less accessible an organization becomes. For example, if an organization adopts a budget with an overall average ticket price of $60 and an average percent paid capacity of 80%, it will be forced to enact pricing and marketing strategies to fulfill its budgetary requirements, meaning that only 20% of its inventory can be sold at less than $60 (and this includes all complimentary tickets).
• Complimentary Tickets. All earned revenue budgets should include a well thought out complimentary ticket budget. In many cases, organizations will find themselves with competing interests. Economic pressures can force an organization to increase its percent paid capacity and average ticket price, but doing so will also force a change to how an organization uses complimentary tickets. Many organizations use complimentary tickets for charitable donations, community outreach, publicity, donor cultivation, staff benefits and artist relations. However, only the budget will determine the amount of tickets available to use in any given year for these purposes. It is the responsibility of marketing representative to remind the budgeting team that no matter what current standard operating procedures are or what the desires are of staff members, the higher the average ticket prices and percent paid capacities go, the fewer tickets, especially for prime seat locations, will be available for complimentary tickets.

2) How much risk are you willing to take? The budgeting process can be pressure filled. After several rounds of budgeting, the pressure mounts on the marketing representative to increase his earned revenue forecasts. In doing so, there is only one question the budgeting team needs to ask—how much risk are we willing to take? A couple of bits of advice:
• Let the Data Do the Talking. A marketing representative should have years of data at his disposable, and he should use that data to produce the most accurate earned revenue projections he can. In projecting ticket sales for individual projections, one needs to do two things: 1) study the micro sales patterns of similar productions in recent history (3-5 years), and 2) study the macro sales patterns of all productions in recent history (5-7 years). The sales patterns of similar productions should give you a good indication of what is both possible and probable. I try to select at least three similar productions: one that under-performed, one that performed as expected and one that over-performed. Using the data from all three gives you a statistically probable figure, with room to do better than your projections. The macro sales patterns gives you an overall sense of standard operating revenues as well as outliers. If you notice during your budgeting process that you are forecasting that each of your productions will perform in the top 10% of all productions in your recent history, you might want to leave a little more room for failure. If the organization you are working for is taking the appropriate amount of artistic risk, you will need it. Final word of advice—no matter how much you are encouraged to do so, never go with your gut or “a feeling.” Decisions like these are should be left to the data.
• If You Are Uncomfortable, Say So. Marketing representatives have one primary responsibility in the budgeting process—they must be honest and transparent. If a budget makes you uncomfortable, voice your opinion. Ultimately, the budgeting team and the executive staff have final authority over the budget, but as part of the budgeting team, you must tell people when you are uncomfortable. That doesn’t mean you shouldn’t pass a budget that makes you a little nervous. All of us have passed budgets in the past that have kept us up at night, particularly in the past few years during the global economic crisis. However, you should never support, present and defend a budget that is irresponsible and dishonest. I am fortunate that I have never been placed in the position where I have been told I must present a budget that is irresponsible or face the consequences. However, if am ever faced with that position in the future, I would immediately start my search for new employment.
• Tell the Truth No Matter How Uncomfortable. I am fortunate to have a close working relationship with the senior staff at my current position, which allows for open and honest discussion. However, even in the best of environments, it can be uncomfortable to tell the truth. As the marketing representative on the budgeting team, you are in your position because the organization requires your truthful analysis and opinion. To not provide it for any reason is tantamount to dodging your responsibility. That being said, you also must be open to hearing sometimes painful and uncomfortable analysis as well.

3) Do you have the capacity to fulfill the budgeted expectations? My boss at Arena Stage has a great way of phrasing this question during the budgeting process. He diligently asks throughout the process if we have the capacity and resources to match our ambitions. It is a succinct and direct question that focuses the entire budgeting process. I am afraid that too many times arts organizations extend themselves by having unrealistic budgets because this question wasn’t asked. In terms of marketing, even if demand warrants a high budgeted goal, one needs to ask if you have the infrastructure to execute, which can include a multitude of actors such as staffing, technology, and operating procedures.

The final question I like to ask myself in terms of revenue projections is the ultimate litmus test—do we have an equal or better chance of over performing on budgeted revenue goals as we do under performing? If there is evidence that a greater likelihood exists that an organization will under perform rather than over perform, then I encourage you to adjust expectations to mitigate your risk.

Saturday, March 19, 2011

Is It Time to Re-Think the Way We Discount?

It seems to me that there are two reasons to provide discounts:

  1. To encourage and reward particular behaviors

  2. To provide access to targeted demographics

Too many times arts organizations provide discounts that don’t encourage desired behavior, or that benefit patrons outside of targeted demographics. While exercised with good intentions, a quick examination of some common practices reveals that there can be some detrimental unintended consequences:

Rush Tickets. Many organizations have policies that place tickets on sale, sometimes to certain demographics like students, at the last minute at a steep discount. Unless your organization is selling at a high percent capacity, or has thousands of seats, by practice, you are guaranteeing a steep discount to relatively good seats in exchange for people exercising an unwanted behavior (late ticket buying). Many organizations bemoan the deterioration of their subscriber base, but continue to promote their rush ticket policies. Why would patrons buy several shows at once months in advance when they know they can get a better deal on decent seats at the last minute? Instead, I would encourage organizations to develop policies to reward desired behaviors. In order to convert a single ticket buyer to a subscriber, an organization usually must do two things: 1) convert them into multi-buyers so that they are purchasing multiple productions in the same season, 2) incentivize them to purchase their tickets earlier and earlier. By doing both, you establish behaviors that closely mimic a subscription, and therefore your conversion from single ticket buyer to subscriber should be much easier. Recommendation: If you would like to provide discount tickets to targeted populations such as students, then do so in a manner that instills early buying habits. Instead of incentivizing a last minute purchase, incentivize purchases that are done weeks, if not months, ahead of time.

Pay-What-You Can (PWYC) Performances. The intent of a Pay-What-You-Can performance is honorable. Most organizations desire the ability to make their products available to populations that simply cannot afford standard ticket prices. However, in practice, another reality presents itself. I am always amazed by organizations that continue this practice citing accessibility concerns, when all one has to do is stand outside and count the number of patrons who arrive for PWYC performances in expensive luxury sedans and fur coats. If you can afford a Mercedes, I am pretty sure you can cover the price of a regular ticket. What those patrons are doing is taking away inventory from the people you want to serve. They are taking advantage, but only because you are allowing it. Recommendation: Several organizations are now requiring proof of limited income in order to access PWYC performances or substantially reduced price tickets. Much like how students must show IDs, proof such as an EBT card or a tax return can ensure that you are serving the exact populations you have created these programs for.

Complimentary Tickets. A complimentary ticket represents the ultimate discount, yet too many times they are used for the wrong reasons. Consider the following circumstances:

  • Potential Donors. Many development officers use complimentary tickets to get donor prospects in the door and into a performance. We all know that first impressions are critically important, so I would ask what message are we sending to someone with obvious means when we have to give them a free ticket to get them in the door? If they are seriously interested in your work, or in becoming a major donor, shouldn’t they want to pay the same ticket price that standard patrons pay in the first place?

  • Board Members and Current Major Donors. Giving at certain levels should come with exclusive benefits, such as access to purchase house seats or the ability to purchase tickets before they go on sale to the general public. However, many organizations simply give away tickets to Board Members and Major Donors. In the case of Board Members, they should always be looking for ways to help an organization increase revenue, and by taking complimentary tickets, in many cases they are using inventory that can be sold. Major Donors on the other hand are often gifted tickets at certain levels of giving, however the ideal situation would have them purchasing tickets and giving philanthropically. By providing large amounts of complimentary tickets to Major Donors, all an organization is doing is moving revenue from the earned line to the contributed line. When trying to build revenue, both earned and contributed, an organization cannot rob Peter to pay Paul.

  • Media. Many organizations don’t take the time to properly credential media, and by not doing so, they are tempted to provide complimentary tickets to every request that comes into their press department. Professional journalists deserve a complimentary ticket if they can commit to coverage via a properly credentialed media outlet. If journalists request a complimentary ticket, but cannot commit to coverage or they represent an outlet that is less than professional, it is the responsibility of your publicist to decline the request. In many cases as a courtesy, organizations will also provide a second complimentary ticket so a journalist can bring a guest, however this isn’t obligatory. Many Broadway producers and major organizations will only provide a single complimentary ticket for a journalist in circumstances where there is incredibly high demand on inventory.

  • Complimentary Standing Room (CSR) or Standby Tickets (CST). Many organizations have very liberal policies for CSRs and CSTs. However, similar to rush tickets, unless you are selling out regularly, you are training those that use CSRs that they are available for virtually any performance, thereby guaranteeing that those who use CSRs will never purchase a ticket in the future. In many cases, CSRs are a self-fulfilling prophesy. The argument being that if an organization has unused inventory immediately before a performance, why not use unfilled seats for CSRs or Rush tickets? Well in many cases, CSRs and Rush Tickets are the reason why organizations have unsold inventory at the last minute. In my opinion, CSRs should only be used for customer service issues for longtime subscribers/donors or for internal artistic staff that need to maintain a production in a long run. Other than that, CSRs should be subject to your standard complimentary ticket policies and tracked as a complimentary tickets.

A final thought on complimentary tickets:
It isn’t uncommon for an arts organization to use 5-10% of its entire inventory for complimentary tickets. Usually these tickets are provided to people that could easily afford the cost of a ticket. At the same time, many organizations are desperately looking for ways to make their work more accessible to populations of people who simply do not have the means to purchase a ticket, even at a discount in some cases. I wonder what would happen if an organization adopted a policy that complimentary tickets would be reserved exclusively for patrons who had no other means to access their work? Hundreds, if not thousands, of complimentary tickets would become available to the people who needed them the most.

Tuesday, March 01, 2011

Oh, How We Like our Awards

'Tis the season for award shows. Oscars, Emmys, Grammys, Golden Globes and the Tonys. We sure do enjoy our annual award shows. In Washington, DC, we have our own awards for theatrical excellence--the Helen Hayes Awards--which just announced their nominations last night. It reminded me that as marketers, awards present us with a significant question--how aggressively should we use these awards in our marketing campaigns?

You might be thinking that the answer to that question is relatively easy. Why shouldn't you celebrate your nominations and trumpet your awards? A few things to consider:

When you market an award...
  • you are willing building the brand of the award. It is said that smart lawyers only ask witnesses the questions they know the answers to. That way, the lawyer is in control of the situation, and there are no surprises. In my relatively short time in the DC market, I have seen numerous companies trumpet their large number of nominations and awards year after year until the inevitable year comes when they are left out in the cold. By building the brand of an award, performing arts organization's leave their perceived success in someone else's hands. They are no longer in control of their own destiny. When you say to a consumer over and over again that an award proves your artistic excellence, what does it prove when you are left out? were you artistically insolvent that year?

  • you are publicly endorsing the validity of the award. You should ask yourself if you have any serious misgivings about the awards process. If you do, then you should not prominently market them, as doing so implicitly gives your endorsement of the process. One cannot market the awards, and then second guess the process.

  • you are sending a signal to the artists who work at your organization. And what might that signal be? Is an artist's work not as important to the institution if it isn't recognized with a fancy award? Should an artist take less risk knowing that the results of the risk might lessen his chances for public acknowledgement? Is one artist more important to a production than another simply because of a nomination?

Awards are fickle. They will come, and they will go. And most of the time, you'll have no clue as to why. The one thing they are good for is bringing together the artistic community one time a year for a great big party. So if you are a winner this year, enjoy your glass of champagne, because if there is one thing I can guarantee, it will be that you will get screwed in the future.