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What Pricing Is Right?

September 18, 2012

by:

Joe Patti

Back in June the MIT Sloan Management Review had an article in pricing strategies. The bulk of the article discusses research on practices of companies that have sales forces that goes out to solicit business and has some degree of control over the pricing.

However, the research found some basic elements of price setting that are common regardless of industry and geography. (my emphasis)

1. Cost-based pricing. Here, pricing decisions are influenced primarily by accounting data, with the objective of getting a certain return on investment or a certain markup on costs. Typical examples of cost-based pricing approaches are cost-plus pricing, target return pricing, markup pricing or break-even pricing. The main weakness of cost-based pricing is that aspects related to demand (willingness to pay, price elasticity) and competition (competitive price levels) are ignored. The main advantage of this approach is that the data you need to set prices are usually easy to find.

To a certain extent, this is the pricing strategy used by many non-profit organizations–and their critics. I say it is used by critics of non-profits because one of the common refrains one hears is that if non-profits can’t make enough to support themselves, they should be left to fail rather than supported by government funding.

Non profits use this approach to determine what level of revenue they need to cover their costs in the context whatever other funding sources (donations/sponsors) exist. But as the authors say, it can ignore the level of demand that may exist potentially increasing the revenue stream if the price were set higher (or perhaps ignoring the lack of demand and setting the price too high.)

2. Competition-based pricing. This approach uses data on competitive price levels or on anticipated or observed actions of actual or potential competitors as a primary source to determine appropriate price levels. The main advantage of this approach is that the competitive situation is taken into account, and the main disadvantage is that aspects related to the demand function are again ignored. In addition, a strong competitive focus in setting prices can exacerbate the risk of a price war.

I am not aware of too many price wars among arts organizations, but it can be a mistake to taking your pricing cues from competitors. For one thing, just because you perceive your product to be of equal value to your competitor’s doesn’t mean your customers necessarily do.

3. Customer value-based pricing. This approach, which is also often called “value-based pricing,” uses data on the perceived customer value of the product as the main factor for determining the final selling price. Instead of asking, “How can we realize higher prices despite intense competition?” customer value-based pricing asks, “How can we create additional customer value and increase customer willingness to pay, despite intense competition?” The subjective and quantified value of a purchase offering to actual and potential customers is the primary driver in setting prices. Customer value-based pricing approaches are driven by a deep understanding of customer needs, of customer perceptions of value, of price elasticity and of customers’ willingness to pay.

The advantage of customer value-driven pricing approaches is their direct link to the needs of the one constituency paying for the respective goods or services: the customer. The big disadvantage of such approaches is that data on customer preferences, willingness to pay, price elasticity and size of different market segments are usually hard to find and interpret. Furthermore, customer value-based pricing approaches may lead to relatively high prices, especially for unique products. Though that may seem optimal in the short run, these pricing approaches may spur market entry by new entrants or create a risk-free zone for competitors offering comparable products at slightly lower prices. Finally, it is important to note that it is an error to assume that customers will immediately recognize and pay for a truly innovative and superior product. Marketers must educate customers and communicate superior value to customers before linking price to value. Customers must first recognize value in order to be willing to pay for value rather than base their purchase decision solely on price.

Despite these shortcomings, many pricing scholars consider customer value-based pricing to often be the most preferable way to set new product prices or to adjust prices for existing products

Now I don’t have any real evidence that non-profit arts organizations use customer values as the basis of their pricing decisions, but damned if the language the authors use doesn’t match the language being used in discussions of arts management issues: increasing value and customer willingness to pay for it; the necessity of understanding needs of customers/community; high prices for unique products (unique at least from the NP org point of view); audiences not recognizing truly innovative and superior product; need to educate customers/community about the superior value of the artistic product.

Factor in movies/internet/video games as competitors offering what is perceived to be comparable product with lower monetary/social/time, etc. costs and it sounds like they are describing a the situation facing the non-profit arts and culture industries.

Except that these factors are rarely connected with discussions of pricing for non profit arts organizations. While creating the perception of value in audiences does often enter the discussion, I don’t know that it is necessarily accompanied with a “deep understanding of the customer needs, of customer perceptions of value, of price elasticity and of customers’ willingness to pay,” but rather with hopes and assumptions. How many pricing decisions arts and cultural organizations make every year are based on this understanding?

This may be due to lack of will as much as lack of funds to conduct the research necessary to achieve the deep understanding. Since customer value-based pricing seems to be recognized as the best approach, perhaps research into the intrinsic value of the arts should include a greater focus on pricing to see how value and pricing are connected.

Though I am not sure if the knowledge will be of practical use to a significant number of organizations. The authors point out the information is difficult to gather and interpret. I imagine the results will probably be specific to an organization or geographic region.

Business Models, Leadership, Marketing/PR, Terms and Ideas

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Info You Can Use: Playing With Your Volunteers

September 17, 2012

by:

Joe Patti

About a month ago I wrote about how our accreditation team used games to get the leadership ready for the accreditation process coming up this year. I had noted that while accreditation is a pretty oppressive and mind numbing subject, the games made learning about it easier. I had suggested that this was a good approach for tackling administrative and governance processes.

This weekend, we actually used a similar approach during the much more pleasant process of volunteer training so I thought I would share what we did.

We held a brunch in our lobby. My assistant theatre manager and I made Belgian waffles and pancakes to order for our volunteers (we also had eggs, breakfast meats and a pretty good toppings bar.) After eating our fill, we talked about the upcoming season of shows and why each was so interesting.

Then we had a scavenger hunt which actually proved to be a good tool for making people more aware of many aspects of their jobs and the theatre building. Some of the questions were just fun and silly like getting a picture of a prop backstage and some information from a set model. Others were more directly related to things we wanted our volunteers to know.

For example we asked how many theatre seats were in a row that had empty spots for wheelchairs so they were aware that the number on the right most seat wasn’t actually the seat count for the row.

Because there is construction next to the theatre we had them take a picture of one of the large signs directing people along the detour from the disabilities parking to the lobby which forced the volunteers to walk the path a wheelchair would have to follow.

We asked for the name of the person who sponsored the Green Room so that the volunteers knew where the green room was and were familiar with the name of one of our important donors.

And of course, we made sure they knew that most crucial of all information–where the bathrooms are–by making them count all the stalls available for use by audience members. (Which also helped them know which restrooms had the most capacity.)

I think this was a much more effective technique to simply giving a tour and pointing things out because it forced the volunteers to pay closer attention to the surroundings as they sought out our grand piano and the 2005-2006 season brochures hidden around the building. It also promoted team work and helped the volunteers bond over activities other than ripping tickets and stuffing program books.

Though to be clear, this doesn’t replace our orientation tours. Every volunteer is given a tour of the facility which points out the location of emergency exits and life safety equipment along with instruction about the procedures.

Nearly all of the volunteers are interested in going around the building again if provided the opportunity. Opening all the doors and turning on all the lights to let them scurry around looking for things changes their relationship with the facility and infuses the experience with a bit of the playfulness and fun that characterize the arts.

Art(ist) Education, Info You Can Use, Volunteers

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Go To The Theatre, Smell Like A Man!

September 12, 2012

by:

Joe Patti

A little fun speculative post today.

It has been widely recognized that women generally initiate the decision to attend an arts and cultural event. Now given that the vast majority of playwrights, composers, visual artists, choreographers, etc have been Caucasian males and most audiences are comprised of Caucasians, I wonder what it is in their work that seems to speak to Caucasian women more than any other group.

As much as you can point out that it is no longer true that Caucasian male creative artists are responsible for as large a percentage of creative output as they once were, I can link to tons of blog posts and articles that note that the ratio is still too large. I am sure there will be many who will suggest that an even larger number of women would attend if the creative content was actually geared to them.

So I ask, albeit with a little tongue in cheek, how have Caucasian male artists failed Caucasian male audiences and how can we get those men back?

This is where I want to play my speculative little game. I am not going to advocate for more White male centric art. I think its good that what is out there appeals to a wider spectrum of the community. Given that people have shown the capacity to identify with art created by those who are unlike them and that doesn’t speak directly to their experiences, I think there is room for more to be created by artists of diverse backgrounds.

But in fact, I am not going to really argue directly for artistic content at all but rather suggest maybe we need to think about how the experience is positioned.

Earlier this month, Smithsonian.com had a piece about how the United States was sold on using deodorant. It an interesting story about how deodorants and antiperspirants were formulated and ultimately advertised to the American people by playing on their insecurities about smelling bad.

However, the earliest efforts were aimed at women which resulted in deodorant use being regarded as feminine. A man was supposed to possess a manly odor!

But with half the population not buying the toiletries, manufacturers felt they were missing out on untapped potential. Early attempts were made to get women to buy deodorant for their husbands but it was still largely seen as a female product.

Comments in a 1928 survey read:

““I consider a body deodorant for masculine use to be sissified,” notes one responder. “I like to rub my body in pure grain alcohol after a bath but do not do so regularly,” asserts another.”

Now if rubbing your whole body with pure grain alcohol isn’t manly, I don’t know what is. I feel less of a man for only splashing it on my face after shaving.

Later attempts were aimed at male insecurity as well.

In the Great Depression of the 1930s men were worried about losing their job. Advertisements focused on the embarrassment of being stinky in the office, and how unprofessional grooming could foil your career, she says.

“The Depression shifted the roles of men,” Casteel says. “Men who had been farmers or laborers had lost their masculinity by losing their jobs. Top Flite offered a way to become masculine instantly—or so the advertisement said.” To do so, the products had to distance themselves from their origins as a female toiletry.

For example, Sea-Forth, a deodorant sold in ceramic whiskey jugs starting in the 1940s, “because the company owner Alfred McKelvy said he ‘couldn’t think of anything more manly than whiskey,’” Casteel says.

At this juncture, I think it is pretty much a moral imperative that I insert the following:

[youtube http://www.youtube.com/watch?v=owGykVbfgUE&w=560&h=315]

I think if the arts and culture industry is going to take its cues from deodorant advertisers, (and why wouldn’t you?), it is going to need to move beyond depending on women buying tickets for husbands and boyfriends and reframe the experience in some way.

While I am not necessarily above using someone’s insecurities to motivate them into action, I think I would rather take a more constructive approach to making men believe initiating a trip to an arts and cultural event is socially acceptable and perhaps even expected.

Obviously, the arts and culture industry needs to replace the word “men” in the previous sentence with other segments of their community in an effort to serve a greater portion of their potential audience.

And while we no longer get our deodorant packaged in whiskey jugs, (pity), reformulating and packaging the product for wider audience segments is still going to be required. Can’t get away selling the same old stuff.

While it is a lot of fun equating theatre and deodorant, I have to confess I don’t really have a lot of ideas in regard to what an effective approach might be. Anyone have any thoughts?

Audience Relations, creativity, General Musings, Marketing/PR, State of the Arts

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Info You Can Use: Various Things Arts Orgs Are Doing To Connect

September 11, 2012

by:

Joe Patti

This past weekend the students held their annual fund raiser for the Fall Mainstage production in our Lab Theatre. The event is entirely student generated and produced. Basically my only involvement over the summer is to unlock the door for them. Our technical director ensures nothing will burst into flames and everything is generally safe, but the work is largely done by the students.

I am very proud of the student who has essentially acted as the producer for the last 4 years because he keeps upping his game every year. Last Spring a new instructor introduced him to a different approach to developing a show and to the credit of all the students, they dedicated themselves to following the approach even though it meant a longer, more involved rehearsal process.

A fair segment of the audience tends to be students and for many of them, this is their first experience in a theatre of any kind. In some respects, it is a great introduction for them because it provides a less orthodox attendance experience and reveals the potential inherent in live performance. (Speaking of which, check out this baby by Great Canadian Theatre Company) On the other hand, it can make a more orthodox attendance experience seem all the more boring and disappointing by comparison.

Typically the entrance, stairway and hall to the lab theatre are heavily decorated. A woman in front of me on the ticket line who takes dance classes across the hall from theatre wondered aloud where the dance studios went. The performers also do a pre-show where they move about interacting with other performers and the audience members according to the backstory of their particular character.

My aim is to try to infuse a little more interesting and interactive experience to our mainstage space. There the expectations and context of the space creates a wholly different environment. We have added some new experiences and are continuing to think of others.

So in that vein, I wanted to point out some interesting programs I have been reading about lately that aim to change the experiences people have at arts and cultural events.

A Wall Street Journal this week had a story about silent disco parties that are being held at zoos in England and the US. It is something of an after hours party at the zoo where people are given headphone receivers. Attendees can dance to the same music without actually disturbing the animals with loud noise (though since many dress up as animals, it may make some of the predators hungry for a midnight snack as they flail silently about).

Nina Simon, Executive Director of the Santa Cruz Museum of Art and History seems to be so dedicated to providing participatory experiences in her museum, she even has opportunities in her restrooms. Reading her blog, Museum 2.0 provides a trove of great ideas and reflections on how they worked.

Back in May, ArtsFwd featured a number of audio postcards from arts organizations around Cleveland. I confess I only recently got around to listening to them after having bookmarked it all those months ago but I am glad I did. There are some great stories being told by the arts leaders in Cleveland. One related to this topic that caught my attention was told about the Great Lakes Theater.

The artistic and executive directors talks about how they designed the Hanna Theater to facilitate social interaction between the audience and performers. The bar is in the seating area and they have different seating areas- traditional seating along with loose club chairs and lounge and bar seating.

The theatre is open 90 minutes before the show and stays open until up to 90 minutes after to provide a place for people to gather and interact rather than simply showing up a half hour in advance, watching and leaving.

A few years ago, I wrote about Alan Brown talking about Gen Y’s vision of an ideal performance venue:

He said he asked them to describe what they would envision as a perfect jazz club. They said it would be a coffee house during the day but a bar at night with a separate room where those who wanted to be full immersed in the music could go. However, there would also be an anteroom where people could talk with friends and still listen to the music and still another anteroom where people could interact with friends more and listen less.

Though this sort of arrangement is highly unlikely, Great Lakes Theater seems to get pretty close. I am curious to know if anyone has attended at the Hanna Theater and what the experience is like. There aren’t a lot of review on Yelp that I have seen. My biggest fear is that someone would knock over their glass at the bar during a highly dramatic scene or there would be some other disturbing occurrence.

creativity, Info You Can Use, New Initiatives

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