SBJ/May 23-29, 2011/Opinion

Impact on secondary market a challenge for dynamic pricing

There have been two major shifts in ticketing strategy in the past decade. First was the growth of the secondary market. Then, more recently, came the emergence of demand-based pricing. Variable ticket pricing got its start more than a decade ago and continues with Qcue’s partnership with the San Francisco Giants and the recent announcement that Ticketmaster will develop its own dynamic pricing technology.

While ticket resale has largely been established as an industry norm, dynamic pricing elicits polarizing opinions about regular price changes for sports tickets. Indeed, while some see this as a logical strategy to increase organizational revenue, others question the strategy’s fairness, particularly as prices for certain high-demand games may soon be unaffordable for some fans.

Although dynamic pricing appears to be a novel idea, its roots are decades old. Revenue management is a demand-based pricing scheme that has been successfully implemented in airline and hotel pricing. The fact that this strategy has gained acceptance over the years in those industries has led us to consider the future of dynamic pricing in sports.

There are several key considerations when determining whether dynamic pricing is a viable strategy for sports properties. The first is consumers’ perception of the fairness of this strategy. People make conclusions about the value and quality of a product based on the relationship between what a product is worth in their mind and what it actually costs. Further, research indicates that previous transactions serve as a reference for the perceived fairness of future transactions. Thus, changing prices continuously becomes a risky decision. However, the research on revenue-management strategies for hotels and airlines indicates that perceptions of fairness increase with education, information and price transparency. This suggests that as consumers become more familiar with this pricing structure, negative responses are likely to decrease.

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Secondary ticket prices did not suffer from the Giants’ use of dynamic pricing at AT&T Park in 2010.
While there are risks involved with the implementation of dynamic pricing, this strategy brings tremendous revenue potential. In our research of secondary market prices in the NFL, we were able to identify major pricing inefficiencies in the primary market, which resulted in millions of dollars in lost revenue for each organization. This consumer surplus is being captured by sellers in the secondary market. By having the flexibility to charge additional money for high-demand events, teams can expect a significant boost to ticket revenue (for the Giants, this figure was 7 percent, according to Barry Kahn, CEO of Qcue).

Further, by having the ability to reduce prices for low-demand events, teams have an additional opportunity to maximize attendance and earn additional revenue from sales of concessions, merchandise and parking. Dynamic pricing also offers an opportunity for teams to market to a new segment of bargain hunters who may want to actively shop for the best deal.

An additional consideration that has, to date, been overlooked is the impact of dynamic pricing on the secondary market. Virtually all professional sports leagues and teams now have established partnerships with secondary market platforms such as StubHub and RazorGator. However, dynamic pricing could directly reduce the profit margins of secondary market sellers. How dynamic pricing influences secondary market sales and, subsequently, the value of secondary market sponsorship deals remains to be seen.

In our preliminary analysis of Giants’ tickets in 2010, there appeared to be a strong secondary market despite the presence of a dynamic pricing strategy for all seats in the stadium. For our sample of 1,316 ticket price observations collected for 12 games throughout the season, median secondary market ticket prices were 42 percent higher than comparable tickets on the Giants’ website. This suggests that despite dynamic pricing’s more aggressive approach, ticket prices for the Giants were not completely free to change within any range of prices.

For example, any unsold ticket in the moments before the game would theoretically be given away in order to gain at least some ancillary revenue. Of course, the Giants did not adopt this approach. Conversely, the Giants did not price tickets as high as possible for high-demand games. In our analysis, this was evidenced by considerably higher secondary market prices for notably high-demand games. The price restrictions in either direction were probably due to the Giants’ efforts to maintain perceptions of fairness and quality while providing an opportunity for additional ancillary revenue. So while dynamic pricing is a more aggressive approach to pricing, the overarching philosophy for sports managers is likely to retain a focus on attendance maximization and not shift entirely to a revenue-maximizing approach. This unchanging philosophy is likely to result in price restrictions within the dynamic pricing structure.

Finally, dynamic pricing also faces the challenge of identifying the appropriate factors to consider when changing prices and how much each factor should influence ticket prices. The demand for professional sports is contingent on a variety of factors, many of which can be very difficult to quantify. For example, while team and player performance may be easy to measure, the impact of player popularity or potential record-breaking accomplishments are factors that may have significant impact on consumer demand but have no historical comparison on which to base price changes.

The evolution of pricing is apparent in our comparison of the factors that affected the Giants’ prices and secondary market prices. Our research identified a number of factors that affected primary and secondary market prices differently, which suggests that sellers in each market evaluate fluctuations in demand differently. These factors included measures of team performance, weather, and the number of days before the game.

In the end, it appears that dynamic pricing is a trend with significant staying power. As the industry leader, Ticketmaster’s decision to embrace it may standardize this practice in much the same way its embrace of ticket resale helped legitimize that industry.

As pricing models improve and consumers become more comfortable with the new structure, dynamic pricing seems likely to soon become the industry norm. n

Joris Drayer (jdrayer@temple.edu) is assistant professor of sport and recreation management at Temple University, and Stephen Shapiro (sshapiro@odu.edu) is assistant professor of sport management at Old Dominion University.

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