Data, Science and Money

The Perfect Price Blog

The problem with San Francisco Opera ticket prices

Posted by Alex on Aug 29, 2016 12:00:00 AM

A casual conversation about pricing opera tickets led to a disturbing discovery: there's a company that might be arbitraging supply and demand for tickets. It's called box-officetickets.com. And their business would make the Wolf of Wall Street jealous. 

According to their website, "Box Office Tickets has been a leading ticket provider for over 1000 venues across the United States and Canada". 

The thing is, they don't work with venues, and aren't a box office in any sense of the word. Instead, they buy low and sell high: they're like flash trading for tickets. At the time of this writing, for example, you can buy a Row Y Orchestra ticket from them for $265 (not including fees; that'll add $75/seat): 

box-officetickets_orchestra.png

And if you do, you won't actually get tickets right away–instead, they'll go get them for you. Perhaps, they go to ticket brokers. But why would they, if they could just go to the venue and pay face value?

sfopera_tickets_for_less.png

In this example, the broker has gross margin of almost 48.6%. That is, the buyer pays almost as much to the broker in profit as they pay to the performer ($685 to broker - $352 direct cost = $333 profit). Is that a lot, you ask? 

Get the ultimate pricing strategy book >>

 

Well, how excited was the Wolf of Wall Street when he learned about the 50% margin in OTC stocks?  

But I thought you liked dynamic pricing?

Yes, we absolutely like dynamic pricing. But when a market is dynamic, but the pricing is not dynamic, very bad things happen. This is almost always the seller's fault, as in every market (even some auctions) pricing falls on the seller.

sfopera_ticket_price.png

Demand and supply are out of balance. Above you see the price the venue sells tickets for (which could be 30% less with a membership, making it even more imbalanced). Below you see what buyers are willing to pay on Box Office Tickets–much more for this event than the real box office is selling the tickets for. Therefore, brokers can make the spread between what the comapny is willing to supply the ticket for ($170, in this case, plus $12 in fees) and what buyers are willing to pay ($270 + $75 in fees). 

box-officetickets_price_for_2_y.png

Not only does nobody benefit (except the broker), but the damage to the venue is far worse than this simple transaction shows. That's because of lifetime value: here you have a customer who gave their email address and credit card to a broker, not the venue, and for a premium ticket price–that is, we're not talking bargain hunting Groupon shopper here; we're looking at a potentially high margin, full price customer. For opera and other arts with a large component of philanthropy, not having that relationship could have cost them tens of thousands of dollars. And even if they were simply an occasional Opera fan, if they went to just one more show, and paid market price, the opera is giving up a $1200 lifetime value in just the first year–if the average retention is 5 years, that's $6,000 the opera just lost.

How does this happen?

There are two ways this can happen. First, the broker buys tickets in advance, usually in bulk and at a discount to face value. Nearly every major venue and sports team sells to brokers. This brings cash in the door and reduces the risk to the venue. The brokers are then largely on their own to maximize their profit from their inventory. Sometimes the brokers might take a loss or struggle to break even (say, a star can't perform, reducing demand for Opera–or baseball). 

One could have a healthy debate about whether this would be better implemented as a financial instrument (a loan) but as venues, teams and artists sell directly to brokers in this fashion, they have indicated by their actions that they are ok with this. 

But selling tickets in bulk to a broker does not seem to be happening here. According to its own "Notes", in the image above, this is something shadier: aribitrage. It seems Box Office Tickets  lists the tickets they know they can get, with a markup for their own profit that, presumably, aligns with what they think demand is. In an internet-selling world, its not as hard as it once was to keep track of the market.

And they get away with it because the venue is mispricing its event. And worse, because they're doing it, they have $332 to pay to Google to get better placement than the Opera itself gets:

box-officetickets_vs_sf_opera_ad_teardown_.png

Paying Google more helps, but isn't everything. Box Office Tickets also appears to be much more sophisticated with Google search ads because it's likely their lifeblood. They also are:

  • Making better use of sitemaps and robots.txt to create a more compelling ad
  • Targeting their ad to ticket buyers
  • Capturing more sales, because Google watches to see if users bounce back to this search page. While beautiful and visual, the SF Opera's ticketing flow may not be converting as well as the competition (frequently pretty sites convert worse than ugly ones)
  • Converts at a higher price point, as discussed, making this a virtuous cycle for them with generous budgets

Isn't that illegal? 

Your first reaction might have been, "That should be illegal!" 

But should it, really? Of all the things to legislate, are rich people's opera tickets worth it? 

First, it isn't illegal.  While laws do vary state to state, here in California (the home of StubHub.com) there is nothing necessarily illegal to reselling tickets.  Chances are, the opera is selling some tickets through channels like Box Office Tickets because it chooses to, for cash flow and risk mitigation reasons. 

Second, any laws to make it illegal would only make life more complicated for the venue–and worse for consumers. Someone out there wants to go so badly they would pay $600. Perhaps they spent $3,000 to fly from London and that Saturday night is their only chance to see the San Francisco Opera in a once-in-a-lifetime trip, and that $300 is (to them) far less significant than missing the opera. Why should government be involved? These are adults, making adult decisions. They don't need to be protected; if you're buying opera tickets, and want to overpay, you can afford to.

Imagine if the opera now has to hire a full time compliance officer, to police their ticketing so that they are sure that they are compliant with new regulations to protect their rich, opera-going clientele. Is there a better way?

How the Opera can fix it–and bring in new customers 

So if it isn't illegal, and shouldn't be, what then? Clearly, the opera itself should price its tickets to more accurately reflect demand. And the great irony is that, by doing so, more often than not lower prices will bring new people into the opera, while high prices will capture demand from the price insensitive. Here are a few strategies the Opera might consider right away. 

Dynamic pricing

For a few tickets, pricing is probably reflective of demand. But for the majority of tickets, it is likely off. Even just being off by an average of 5% could cost the opera millions of dollars per year in profit. And an average of 5% likely hides examples like the one above, where they are in fact off by 100%. 

Pricing dynamically can seem too complex for an organization to think about. However it can be boiled down to two very simple actions to take:

1. Price for expected demand for each time, show, and seat. That is, good seats cost more than worse seats, in a precise way (not one price for an entire section) and any given seat cost more on a popular night (Friday or Saturday) and for a popular show (Carmen) or star than the same seat without those positive characteristics. 

2. Adjust prices as soon as you are confident demand is not as expected. For example, if you expected Carmen to be a huge hit, selling out at very high prices, and in the first couple of weeks bookings are half what you expected, lower the price. And the reverse is true: if you've sold twice the tickets you expected to, raise the price. And do so carefully–not on every seat equally, but on certain seats more than others. 

Do people get angry if prices change? There are many, many examples out there. Take Kobe Bryant's last game in the NBA, where seats cost $20,000. Why be outraged when you can watch it on ESPN–with a pause button on your DVR? 

Tickets and Fees

There is more the Opera can learn from Box Office Tickets beyond simply changing the price of their seats. Specifically, they can increase their booking fees. Booking fees have long been something that consumers grumble about–but pay. Box Office Tickets' booking fees are nearly 1/2 the price of the ticket on the Opera's site. With some testing, the Opera could be making 20-30% more revenue without reducing demand. 

Memberships

If you're the director of the Opera and you're reading this, by now you're probably terrified about what will happen to all of those loyal supporters who pay for memberships every year. Simply put: nothing. And now you have yet one more benefit to membership: exemption or relief from dynamic pricing. Just as corporations get better rates by negotiating with airlines and rental car companies, you can let your members do the same with you. 

Implementing this requires thought, and should be done carefully. However the combination of dynamic pricing and memberships carries additional benefits:

  • Higher conversion rates for memberships because of the additional value
  • More single ticket buyers, with lower prices for certain events or seats
  • Higher lifetime value for premium single ticket buyers, taking profit from brokers and keeping it in the Opera

The Opera's next season?

Were the opera to price their tickets to meet, or even be closer to demand, the arbitrage opportunity would evaporate. Even if their prices were only halfway between their current price and the broker's market price, the arbitrage opportunity would be vastly diminshed and likely disappear–and the Opera would increase its box office take dramatically, enabling it to do more programming, reach more people with marketing, and so on. 

There are unquestionably good reasons to stick with the status quo. Pricing by section makes it easier for consumers to decide which shows to go to (price isn't a factor); it also creates a "deal" mentality when the consumer's value from going to a show is much, much higher than the price the Opera charges. Standard pricing is also easier to manage, when prices are low, because everything sells out and you never see the money you lost. 

But dynamic pricing does much more than simply capture more profit. It brings new customers into the fold, creates direct relationships with customers who otherwise would buy through ticket brokers, and recaptures control of the market for your product. Things will always come up, and some people will sell their tickets on the secondary market. But why let them do so consistently at a Wolf of Wall Street profit?