CNBC | Original article by Mark Koba, Senior Editor | Published: Wednesday, 18 Jul 2012
Complaints and confusion over the nearly 9 million tickets for the 2012 Olympic Games in London have been rampant, according to reports.
The complaints have focused on pricing—with the advertised top value of more than $5,000 for a prime event seat—while the confusion has centered on how and where to buy them.
Sports ticketing has always been under pricing and availability pressures—and subject to the wrath of fans.
But a new way of doing business, especially in the U.S., is being tried by sports’ leagues with the aim of fair market value and fan access: dynamic pricing.
“It’s a new way to bring in fans and sell tickets to games that wouldn’t ordinarily sell,” says Mark Conrad, associate professor at Fordham University’s school of business. “You can fill in seats at a reduced price and maybe get those fans to come back and pay more at another game.”
The theory behind dynamic pricing—letting demand set the ticket price—is hardly new. Airlines and hotels have been using it as far back as the 1980s. It’s even hit Broadway and other cultural events.
But during the last two years, sports teams and more leagues have embraced dynamic pricing including Major League Baseball, the National Basketball Association, the National Hockey League as well as some colleges and universities.
Here’s how it works. A team like baseball’s San Diego Padres, which began using dynamic pricing this year, sets a ticket price on each baseball game played at home before the season begins. The current average price for a Padre ticket is around $16, while premium tickets go for $38. Both are among the lowest figures in MLB.
However, as the season progresses, a scheduled game with a another team may lose interest among fans. That could be because the visiting team is not playing well or has lost a star player to injury. Los Angeles Dodger outfielder Matt Kemp — considered one of the best players in the league—was on the disabled list twice before the All-Star break and missed 31 games.
So a game with the Dodgers—and without Kemp—may need a ticket sales boost. To do that, the Padres would lower ticket prices for some seats right up until game time.
Conversely, a game on the schedule that didn’t have much importance is suddenly popular because the rival team may be playing well, or has a rookie player, whose drawing fan interest—such as Bryce Harper of the Washington Nationals. So ticket prices may spike.
It’s this pricing flexibility—and the chance to make money— that’s intriguing for teams, says Jarrod Dillion, vice president of ticket sales and services for the Padres.
“You can look at games that might be in high demand and adjust prices accordingly,” Dillion goes on to say. “If your team is suddenly in first place, you need to change the prices to reflect that reality.”
Another reality is when a game of lesser interest has a chance to sell out, says Anthony Perez, director of business strategy for the Orlando Magic of the NBA whose regular season ticket prices are advertised between a low of $695 to a high of $11,699.
“We were in the conference finals last year and did well financially. But our single-game revenue has almost doubled in the past two years since we started using dynamic pricing,” Perez explains. “To do that, we’ve done a lot on learning how to price tickets.”
To get a “right” price for tickets in the marketplace, teams use computer software to keep track of overall ticket demand and which seats are selling the most—or least—right up until game day. Price changes usually average around 5 to 10 percent, either way, according to experts.
Tickets are then sold online—through the teams’ websites—or at the stadium walk-up window—reflecting the rise or fall in price. This helps teams keep revenues that would have gone to a third party, says David Butler, president of Paciolan, a ticket product and service firm that counts the NHL’s Philadelphia Flyers, the University of Southern California and the Padres as its clients.
“Teams were selling tickets to a broker and they in turn were selling them to fans at a higher price,” Butler says. “Scalpers and online ticket selling sites won’t go away but dynamic pricing cuts out the middle man so to speak and allows fans to get a better deal. Teams can keep more money to improve the fan experience.”
But not everyone sees fans as a winner in dynamic pricing.
“The downside is that people can feel ripped off or alienated by the process,” says sports marketing analyst Steve Herz, who is president of IF Management, a broadcasting and marketing representation firm.
“Nobody wants to pay $100 a seat, when the guy sitting next to him is paying $10. It’s been happening in the airline industry for 30 years,” Herz argues. And some analysts say dynamic pricing might not even be a good revenue model for teams.
“It can discourage fans from making a long-term commitment to a franchise,” says Wayne McDonnell, a clinical associate professor of sports management at New York University.
“Instead of spending thousands of dollars on season tickets, fans can cherry pick their games at a lower price,” McDonnell contends. “It’s a way to create their own season package.”
But cross industry analogies and fan reactions don’t always factor in the reality of the marketplace, says the Magic’s business strategist Perez.
“We have to see a reason to change prices and we don’t go crazy with it,” Perez explains. “We adjust to the best price, which means we go down as much as up. We haven’t seen any evidence of that frustration of someone paying a lot more than someone else for a ticket.”
And for a team like the San Diego Padres, the goal with dynamic pricing is to get more people to buy preseason tickets and focus on those fans.
“We have limits on how our prices can go up or down because we want to protect the season ticket holder who bought early,” says Jarrod Dillion. “We don’t lower tickets on a big scale. Maybe it’s 10 to 15 dollars at the most. We’re not going to undercut those that paid in advance because we want more of those customers.”
So far, some 15 NBA teams, nine NHL teams and six MLB teams use dynamic pricing. The National Football League is looking into it. But with a limited amount of games and a revenue sharing deal that splits 75 percent of the profits among teams, experts say the NFL is unlikely to embrace it soon.
But dynamic pricing has always been around in one form or another in sports — whether through scalpers or ticket-selling firms. It’s just now in the hands of some teams, say analysts. Whether fans embrace it or not may still be in doubt, but most agree it’s here to stay and likely to evolve.
Going forward, “prices will reflect such things as traffic and weather on a game day and not just which team is hot,” says John Walker, president of tickets.com. The ticketing solution firm has clients using dynamic pricing including the New York Mets, Kansas City Royals and Chicago Cubs. “It’s just going to get more dynamic going forward.”