Friday, July 08, 2011

The Nonprofit Variant of Dynamic Pricing

I think for most of us that work in the nonprofit theater, our dream is to create exceptional art that is accessible to everyone. Speaking for me specifically, this is the reason I decided to make a career in the nonprofit resident theater, rather than some of my peers who opted for the commercial theater. There are times when I am envious of the visual arts, particularly in Washington, DC, which due to their funding models, many of which can provide exceptional art free of charge to the public. The predominant model for visual arts institutions in DC is based on uninhibited access. Wouldn’t it be great if the performing arts were the same way? The nonprofit resident theater model developed in a completely different manner however. In fact, Arena Stage was founded in 1950 as a for-profit entity, and thrived for years as such. From the very birth of resident theaters, patrons were charged to access the art, and we have had to fight to keep funding models in place that support accessible fees. With the development of the nonprofit model, it allowed previously for-profit resident theaters the opportunity to raise contributed funds (private donors, government entities, foundations, etc) in an effort to keep ticket prices as accessible as possible. Most resident institutions took advantage of this new found opportunity to improve access for all and to provide educational programs, however there were some that did not. Still to this day, in our community (not to mention on Broadway itself), nonprofit theaters and for-profit companies compete all the time, which seems to be somewhat unique to the theater world (do you know of any for-profit symphonies?).

Prior to 2008, few companies had experimented with dynamic pricing, primarily because the technology wasn’t readily available to operationalize what had previously been a well thought out theory. The idea was relatively simple -- if your house was playing to less than 100% capacity, it was symptomatic of the failure to determine an optimum price. If an optimum price could be determined, which perfectly aligned demand and supply, every house would be at capacity. The first use of dynamic pricing by a nonprofit organization to my knowledge was at the Chicago Symphony Orchestra. In 2003, Deborah Rutter joined the symphony as their new president, and introduced the idea of dynamic pricing (resident theaters would experiment with dynamic pricing much later). Tessitura, an advanced new database system developed by the Metropolitan Opera, had entered the market in the early 2000s, but was so costly that only major symphonies, operas, presenters and commercial entities could afford it. However, Tessitura was robust enough to handle the operationalizing of dynamic pricing for those institutions that could afford it. From 2003-2008, most marketing directors at nonprofit resident theaters were aware of a new “dynamic” pricing model, but we didn’t have access to the technology to implement it. While very large nonprofits were experimenting with dynamic pricing, so were commercial entities. The Producers broke records in 2001 by establishing an unheard of top ticket price of $480 (which by the way, The Book of Mormon just surpassed on June 16 with a top ticket price of $487). I immediately began to notice a difference in how for-profit and nonprofit entities were applying the principles of dynamic pricing. From my observations, Broadway producers did not consider accessibility in the least when establishing ticket prices. They had responsibilities to their investors, and would charge the maximum price they could for every seat in the house. On the other hand, I noticed many nonprofit companies increased their top ticket price when demand warranted in order to keep a significant portion of their houses at very accessible prices. And even the top “dynamic” prices at nonprofits didn’t get anywhere near $480 (I wonder if this is what Diane Ragsdale meant when she said that "nonprofits are expected to leave money on the table?"). Whereas both nonprofits and for-profits were using the same pricing theory, it has been applied and operationalized very differently.

A tipping point for nonprofits occurred in 2008. By that time, Tessitura had been on the market for almost a decade. Competing database products were being developed and tested, and the pricing for Tessitura had decreased to a level that most nonprofit resident theaters could now afford it. In addition, the world experienced the beginnings of the global economic crisis during September of 2008. That fall, I gave a couple of speeches at national conferences, and the predominant question on the minds of arts administrators was how a crisis at such an enormous scale would impact organizations. We had models from 1987 and the 1970s, but all indications were that this crisis would far exceed anything we had ever weathered.

Some organizations cut back programming and reduced expenses in a hope to ride out the storm. Others recognized the crisis as an opportunity to reexamine business models. Most correctly identified that contributed revenue sources would be heavily impacted. As nonprofits operate on two revenue streams (contributed and earned), in order to maintain the same level of artistic excellence, maintain living wages for artists and offer extensive educational programs, many organizations looked for ways to bolster earned revenues. Nonprofit resident theaters became very good at maximizing revenues from non-ticket sources in order to maintain accessible ticket prices. New sources of revenue were 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. However, new earned revenue streams took time to develop and decreases in contributed revenue were coming quickly. In order to maintain accessible ticket prices for a significant portion of the house, many nonprofits had to seriously consider a dynamic pricing model that allowed for an increase at the top pricing levels when demand warranted it. With a decrease in contributed revenue, organizations had a choice to make:

1. They could reduce expenses, cut programming and lay off staff in an attempt to resize themselves to match the new levels of contributed revenue available.
2. They could increase ticket prices at all price levels to make up for lost contributed revenue, however in doing so, making themselves less accessible across the board.
3. They could increase top ticket prices according to demand, and keep a significant portion of their inventory at accessible prices.

Not surprising to me, many nonprofit resident theaters went for option #3. To my knowledge, almost all the nonprofit resident theaters in the DC metropolitan area now utilizing dynamic pricing, and none so far have seen the negative ramifications as forecasted by some experts.

In today’s debates concerning for-profit vs. nonprofit incorporation, I am mindful of something Arena Stage Founder Zelda Fichandler said in a speech she gave in the 1960s: “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.”

Ultimately nonprofit resident theaters should be measured by their capacity to produce art, and to make that art as accessible as possible without sacrificing excellence or their ability to compensate artists at reasonable levels. Given today’s new realities of reduced contributed revenue sources for many nonprofit resident theaters, the development of new revenue streams and the implementation of dynamic pricing allows institutions to make up for lost revenue without sacrificing their ability to be accessible to their communities.


David Zoltan said...

As a purely pedantic note, the CSO was using dynamic pricing before Rutter. Carnegie Mellon's Master of Arts Management program initiated an early study on dynamic pricing in 2001 that largely studied how the CSO was using these practices and made preliminary recommendations on usage moving forward (now slightly dated). They had had dynamic pricing in place at that time for a couple of years already.

Michael Dove said...

I totally understand dynamic pricing from a financial standpoint and don't have much issue with non-profits taking advantage of this. What I worry about is the PR problem where Audience Member A sees that a ticket price is very high (BOOK OF MORMON) and feels that it's the only price and that it's too much. Then, you've done the opposite of making your show more accessible and closed out that potential buyer.

Amelia Northrup said...

Thanks for a thought-provoking blog post. It seems like the Cott dynamic pricing round-up has stirred up a lot of controversy. I appreciate your historical view of the situation and how Arena Stage has viewed theatre in the nonprofit context—it really helps puts the issue in perspective.

One of the things we’ve been talking about most around the TRG offices is—and you touched on it a little when you mention orgs reexamining their business models—that some arts organizations are coming to see dynamic pricing as a replacement for subscriptions, implying that the two are mutually exclusive. Rick just made a post addressing this shift in thinking. [] I would be curious to know your thoughts.

P.S. David, thanks for the MAM program shout-out! I’m a recent grad.