Saturday, May 21, 2011

What if...We Cast Off our Non-Profit Status?

In honor of Theater Communications Group's 50th Anniversary, the performing arts service organization solicited "what if" manifestos for their upcoming annual conference. In that spirit, I decided to point the "what if" in the direction of the the non-profit business model by asking what would happen if resident theaters abandoned up their non-profit status.

I am by no means the first to address this topic. On Tuesday, May 17, Thomas Cott featured the three great articles addressing this issue in his "You've Cott Mail" that day:

L3C Cha, Cha, Cha by Diane Ragsdale
Questioning Old Dogmas by Colin Tweedy
Revenue Means More Than Business Models by James Undercofler

The Assumed Argument: Mitigating Financial Risk by Relying Less Upon Volatile Funding Sources
I assume that the proponents of reexamining the reliance upon the non-profit business model by our resident theaters comes from those who feel that theaters could mitigate their operating risk by relying less upon volatile funding sources. In a previous post entitled The Funding Conundrum: A Marketer's Response, I discussed tactics an arts marketer could take in light of major government funding cuts. Coming from an advocacy background, my first instinct was to look at ways marketers could become better advocates. In doing so, I was trying to find ways to maintain status quo in a time of dwindling support. However, I now find myself asking what would happen if we found a way to develop an artistically valid and sustainable model that didn't rely upon any government funding? Would that allow us to create our own destiny? Would it eliminate our reliance upon a funding source that at best is dubious these days. We wouldn't have to consult the tea leaves to see if we were going to get our rationing of government funds or face the devastation that comes when those funds are cut at the eleventh hour. I hear many organizations discuss risk management these days. I wonder if eliminating a volatile revenue source and replacing it with revenue that is more dependable could become a very attractive option to companies that want to mitigate financial risk.

The idea of leaving behind the only thing most resident theater administrators have known their entire lives is daunting. In briefly contemplating this issue, a few questions immediately came to mind:

Would we jeopardize the artistic product?
As Ms. Ragsdale pointed out in her well written article on this topic, Arena Stage covered all of its expenses for its first fifteen years from box office revenue. In reading Zelda Fichandler's personal speeches to the original investors of Arena Stage, they don't reveal a particular concern about needing to sacrifice artistic integrity due to the financial pressures of having to meet expenses solely from the box office. However, I do not believe that resident theaters can depend solely on box office revenue if they eliminated their non-profit status, and doing so, would in my belief, inevitably lead to artistic sacrifices. That being said, as contributed revenue sources have declined, many organizations have had to look for new revenue streams so that the box office didn't become the sole method of revenue generation. New sources of revenue are popping up everywhere from real estate ventures, event rentals, restaurants, parking, corporate visibility opportunities, summer camps, bars, consulting services and partnerships with for-profit ventures. As long as there are other substantial revenue streams that prevent the box office from becoming an organization's sole source of revenue, the artistic product should be protected. Check out these articles about popular sources of new earned revenue:

Arts Centers and Real Estate: Sustainable Business Model? Createquity
New Jersey Arts Center Sets Real Estate Venture The New York Times
Lincoln Center to Consult on New Arts Center in China Forbes
Atlanta Symphony Orchestra Purchases Telemarketing Firm Artful Manager

Would we have to sacrifice the revenue currently generated by contributed sources?
Most annual fund campaigns track revenue from individuals, board giving, corporations, special events, foundations and government support. This isn't my particular area of expertise so my thoughts might be naive or worse yet, impossible, however below are my guesses at what might happen to these sources if theaters were to drop their non-profit status:

  • Individuals: Perhaps the largest loss of contributed revenue could be from major donors, who benefit significantly from the tax breaks received from philanthropic giving, although politicians are debating reducing the tax deductibility of charitable gifts. However, I don't believe that revenue from lower level donors would be significantly impacted. Research indicates that lower level donors primarily give to receive benefits designed to improve their experience while attending the theater, and not due to a value-based philanthropic reason. If theaters were to continue to offer experiential benefits in exchange for an additional fee, regardless if they were a non-profit or not, I believe they could maintain the revenue they receive currently from lower level donors.

  • Board Giving: I wonder if non-profit board members could be transitioned into investors in a for-profit model, serving in a similar capacity to a limited partner. That could allow an organization to maintain partial revenues from board members, while offering them an opportunity for investment returns.

  • Corporations: Corporate giving via truly philanthropic avenues has steadily decreased in the past decade. Most corporations now have moved their sponsorship dollars out from under philanthropic officers and into the hands of their marketing departments. Corporate sponsorships are primarily about visibility and client entertainment. I would guess that marketing officers aren't going to care if a theater is a non-profit institution or not when deciding where to spend their sponsorship dollars. They care about the value of the opportunities the theater can provide.

  • Special Events: Why not look at special events as one night, for-profit productions? By programming in-demand talent, pricing tickets at fair market value and controlling expenses, special events should be able to still generate significant revenue.

  • Foundations: Many foundations only give to non-profits because the IRS provides certain tax benefits to those that give 5% of their assets each year to organizations with 501(c)3 tax exempt status. For several theaters, this would be a substantial loss in revenue. I wonder if this could be resolved if the IRS offered to count grants given to LC3s in the same manner as those given to 501(c)3s.

  • Government Support: For many organizations, government funding is either non-existent or so volatile that it cannot be included in operating budgets by prudent organizations. Arts organizations close regularly because they lose municipal or federal support. Many well-governed organizations have already learned to treat government support as icing on the cake, and nothing more. Those that haven't, risk total insolvency if the political climate shifts.
So, What's Next?
For now, it seems there is a lot of talk. These days, there is very little certainty in or agreement on anything, including the best business model for a resident theater. I am mindful though that Arena Stage was founded in 1950 as a for-profit entity, and thrived as such for several years. Could it be that to go forward, the field [5/31: replaced the word "we" with "the field"] must go back? It seems fitting to end with a quote featured from Zelda Fichandler in Ms. Ragdale's article: "I bring this up simply to point out that, while we are gathered here in the name of the nonprofit corporation (and, indeed, without the nonprofit income tax code, our American theater would simply not exist), being nonprofit does not really define us—our goals, our aims, our aesthetic, our achievements. What defines us, measures us, is our capacity to produce art.”

Sunday, May 08, 2011

It's Time to Pay Your Age

The predominant method of pricing to attract young audiences involves the last minute discounting of available inventory, usually resulting in what is commonly referred to as a "student rush." At Arena Stage, we had a similar system called our "30 and Under Program," which allowed patrons 30 years old and younger to access $15 tickets beginning at 10:00am on Monday for that week's performances. The $15 ticket price represented a 75% off discount from our typical average ticket price, so these tickets were in high demand. With such a popular program, you might be asking why are we trying to fix something that is "working" by launching a "Pay Your Age" program specifically designed to replace the previously popular "30 and Under" program?

Well, if you dig a little deeper, you'd find that it wasn't working because...

We were losing them at 31. Imagine if you had spent ten years paying $15 for a good seat to the theater, and on the day you turned 31, you received a birthday card saying "congratulations, in order to attend your favorite theater from now on, you must now pay 75% more than you have been." As an organization, in some cases, we had spent more than a decade teaching young adults that a ticket to the theater was only worth $15, when in fact we should have been reminding them that they were receiving a $60 ticket on a substantial discount because we recognized they were in school or were just starting their careers. The jump from $15 to $60 overnight was just too steep, and after paying such a substantial discount for so long, the value proposition was completely distorted.

We were encouraging late buying behavior. I have been to countless conferences where experts have blamed decreases in subscriber bases on younger patrons who are not willing to commit in advance. Well why should they? For years, we have been giving them great seats at the best prices at the absolute last minute. If you eventually would like younger patrons to become subscribers, you must develop pricing systems which encourage earlier buying behaviors. They need to be taught early on that in order to get the best deal on the best seats, they need to commit early. I always found it funny that the same theaters that forced younger patrons to purchase via last minute rush systems where the ones that complained they couldn't attract younger subscribers to offset the attrition of their older subscriber base.

We could not fulfill demand. In many ways, our inaugural season at the Mead Center for American Theater has been a banner year for Arena Stage. Performances sold out weeks and months in advance, and when that happened, requests for access to any held inventory and house seats for sold out performances flooded into our Artistic Director's office. By requiring 30 and under patrons to wait until Monday to purchase tickets for that week's performances, we found that in many cases, we had very limited, if any, inventory available for such an important program. That being said, I know how hard it is to tell a major donor or VIP that we can't sell them a seat because the seat in question was being held for our 30 and Under Program. Imagine--"I'm sorry Mr. Ambassador, the performance you would like to attend has been sold out for weeks, except for the tickets we have held for the 30 and Under Program. You aren't by any chance under 30 are you?"

The Fix
So we developed a new system called "Pay Your Age (PYA)." The premise: for our patrons who are 30 years old and younger, they can purchase PYA tickets starting two months in advance of the first public performance by calling the box office and simply paying their age for their ticket. Tickets will be held at will call for pickup, and box office associates will verify age upon check-in. We have guaranteed that 3% of the inventory for each performance will be held specifically for this program. In the case of our upcoming summer revival of Oklahoma!, this means that on Monday, May 9, 1,800 PYA tickets will go on sale in a first come, first served format.

I anticipate that demand for these tickets will be very high, and they will sell out quickly. This in turn will underscore the importance of buying in advance if a 30 and under patron wants to get the available discount. Wait too long, and we'll be sold out. In addition, by paying just $1 more per ticket per year, we hope to gradually adjust each patron year by year, so that when the time comes, there isn't tremendous sticker shock.