Eye on the ball: the opportunities and potential pitfalls of dynamic pricing in sports

dynamic pricing

By Addesse Haile
Analyst, SATOV Consultants

Barry Bonds’ record-breaking 762nd home run cost the San Francisco Giants hundreds of thousands of dollars. On an absolute financial basis, the 2007 game was a resounding success. The stadium was packed; memorabilia sold like hotcakes. Yet amid the thunderous applause of 40,000-plus fans, one man was fixated on the opportunity cost of this historic event.

No, it wasn’t Bonds lamenting the endorsement deals he would later lose to steroid abuse. It was Russ Stanley, the Giants’ managing VP of ticket services. “A ticket in the upper deck was $10,” Stanley later reflected. “If that ticket was $100, people would have bought it.”

To fix this pricing gap, Stanley turned to the travel industry for inspiration. He partnered with upstart analytics firm Qcue to launch the first major-league sports implementation of dynamic pricing.

Dynamic pricing is a process to monitor and manage pricing on a real-time basis. Teams will analyze variables such as the weather, a winning streak, player records, star player debuts and secondary market prices. Pricing specialists create an algorithm to measure demand and price sensitivity and teams use these as tools to adjust prices by game, seat, and time.

Today the secondary ticket market, led by StubHub, continues to leach billions of dollars in gate revenue from teams. Through online resellers, fans can buy sold-out tickets at above face value (costing teams potential surplus) and unpopular tickets at below face value (leaving teams with excess inventory). Used properly, dynamic pricing is a powerful tool for sports franchises to recapture value.

The pitfalls of dynamic pricing

Call it Moneyball 2.0: In seven years since the Giants’ pioneering move, 21 out of 30 Major League Baseball clubs have launched dynamic pricing, and other pro leagues are jumping on the bandwagon. Like most early-stage management principles, this one has room for improvement. Based on the latest research and our own pricing and customer segmentation experience we’ve identified three areas where teams drop the ball on dynamic pricing.

1. The science isn’t perfect

Dynamic pricing is an impressive tool but you need to be aware of its limitations. For starters, it doesn’t always work. In a seminal 2015 University of Pennsylvania study of a real-world dynamic pricing implementation, researchers found the use of dynamic pricing actually lowered the MLB franchise’s total gate revenue. Their explanation? Prices weren’t low enough to match fan demand during a lackluster season.

This wasn’t a botched rollout by a rogue team. Qcue manages dynamic pricing modelling for more than half of MLB franchises, so the club in question probably relied on the same algorithm as its competitors. The bottom line: Dynamic pricing comes with hidden downside risk.

Also, the upside of dynamic pricing isn’t as consistently positive as proponents would have you believe. Qcue’s own marketing materials present a modest outlook when demand is low: gains of 5 to 10{a23d3e3aff46d689b50c88cc1d7606a7a28ed4b695b585c6bb0ea43784184748}, versus 30{a23d3e3aff46d689b50c88cc1d7606a7a28ed4b695b585c6bb0ea43784184748} or more in high-demand situations. Ironically, the sad-sack teams that are most desperate to increase revenue will earn the lowest financial returns.

The Cleveland Indians are a perfect example of a small-market team that got caught up in the dynamic pricing hype and alienated fans. In 2014, average attendance fell 6.3{a23d3e3aff46d689b50c88cc1d7606a7a28ed4b695b585c6bb0ea43784184748}, even though the club was coming off a 92-win season. After seeing a drop every year since the 2012 implementation, the Indians now sit second-last in MLB attendance. The team doesn’t reveal revenue numbers, implying there’s a chance total revenue may still have grown since 2012 due to price hikes. But a former Indians president conceded that management is “certainly not satisfied” with the current value proposition.

2. Teams coddle their season’s-ticket holders

In its most popular form, dynamic pricing mitigates but doesn’t eliminate underpricing. Teams typically set a floor – the season’s-ticket price – and pursue consistent increases. The idea is to reward fans who prepurchase, ostensibly their most valuable customers.

By setting a price floor in the name of customer experience, though, teams shoot themselves in the foot. Once willingness to pay falls below the season’s-ticket price, demand will flow to the secondary markets, leaving clubs powerless to compete.

Still, every team we’ve studied uses the same buy-early-and-save pricing strategy. It’s time to question this core assumption, even if customers complain. Besides, season’s-ticket holders are already well aware that they could get hosed by the secondary market.

Even if price is critical, there are viable workarounds:

  • Reframe your price decreases – as limited-time discounts, for example, rather than as lower face value. These changes have the same net effect but don’t feel so unfair.
  • Include events such as concession discounts or player meet-and-greets in the season’s ticket package; these could offset the impact of resellers undercutting prices.
  • Use secondary markets to minimize perceived channel conflict. Last season, six MLB teams collectively listed more than 1 million tickets with resellers. Clubs could flood that market with inexpensive tickets to capture the bottom end.

3. Teams confuse their customers

A 2012 Forbes article called “Is Dynamic Ticket Pricing Hurting MLB Attendance?” slammed the system as “too confusing” – and rightly so. When the Cleveland Indians brought in dynamic pricing, much of the consumer backlash hinged on the club’s baffling online ticket portal.

Conventional wisdom suggests that humans prefer to have as much choice as possible. Yeah, right. As psychologist Barry Schwartz explains, presenting too many options tends to paralyze decision-making, leaving people overwhelmed and dissatisfied. That’s true of ticket sales, especially when they include daily and even hourly price fluctuations across thousands of seating choices.

Dynamic pricing shifts the burden from the team to fans, who must project the fair market value of their tickets. Anxiety builds as they try to forecast price movements, and frustration persists if they buy tickets at a suboptimal price.

With that in mind, keep things as simple as possible. SeatGeek, an emerging secondary ticket marketplace, cites its user interface as a differentiator. Using a heat map, SeatGeek’s Deal Score algorithm graphically displays the combination of best available price and seat location for a particular event. Travel resellers like Priceline have also striven to simplify their interfaces. Teams should take cues from these efforts and try to minimize consumer anxiety through their sales portals.

Next steps: Knock it out of the park

Despite our concerns, we believe dynamic pricing is the future in sports. Ticket resale giants such as Ticketmaster and analytics providers like Qcue have navigated the technological barriers across every major global sports league. Years of secondary market activity have gotten most fans used to the idea.

The path forward is clear: teams need to take their time to develop a thoughtful pricing strategy. They need to balance short-term profitability with long-term customer value. They need to track algorithm performance and tinker with assumptions. And while it may be complicated on the inside, the system should be simple to end customers. It can be a long road but it will be worth it.

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