Ticket pricing: Let’s get creative, people

Major league baseball teams are constantly seeking to grow revenues: devoting energy to landing that next corporate sponsor, getting a large group to come to a mid-week game, or unveiling new merchandise to sell in their team shops. However, one of the biggest revenue growth opportunities may be to capture a larger portion of an existing revenue stream—the price fans are willing to pay to attend games.

While baseball has evolved from the “one size fits all” general admission prices during the deadball era, it has stopped far short of reaping the financial benefits of pricing segmentation. My analysis indicates there may be a $300 to $500 million revenue opportunity, collectively for all MLB teams, if they were to price their tickets more efficiently. This is not about padding the pockets of owners, but about generating resources to invest in international scouting, player development and payroll to be more competitive on the field.

The secondary ticket market gives us a window into the revenue opportunity. For instance, a quick survey of transactions on eBay and Stub Hub provide ample evidence that there is a large gap between a ticket’s face value and the price some fans are willing to pay. Recently, the Indians hosted the Yankees to three sold-out Jacobs Field crowds. Based on Team Marketing Reports ticket price info, the team grossed about $2.9 million in ticket revenue for the three games. However, by sampling ticket transactions from various secondary market sources over the last several months, I estimate the 125,000 fans attending those same games paid a collective $4 to $5 million for their seats.

This example is far from the exception, as similar scenarios can be found throughout MLB all season long. What drives the prices people are willing to pay to attend a game? How do MLB teams get more of the gate revenue from the games they produce? Let’s take a closer look at these secondary markets.

The secondary ticket market provides two functions—convenience and pricing arbitrage. It reallocates tickets from people who can’t use the tickets, to those who can. For example, a full season ticket holder who is too busy (or chooses not) to attend all 81 home games can resell tickets in the secondary market. In this example, convenience, rather than price, may be the driver of the decision to sell.

The second function is to profit from the simplistic pricing practices of MLB teams, by finding buyers willing to pay higher than face value for tickets. This arbitrage opportunity is enabled by MLB teams’ inefficient pricing policies, which fall short of segmenting pricing to capitalize on the various types and levels of demand for individual games.

The primary ways in which teams segment pricing today are generally limited to:

• The quality of the seat/view of the game
• Volume discounts
• Season ticket pricing—discounts for buying 81 games or some partial-season package
• Group pricing for large groups to attend one game
• Individual game discounts—student pricing, proof of purchase of sponsors’ products, military discounts, etc.
• Day-of-Game premium, which is presumably intended to be an inducement to purchase tickets in advance, at a lower price.

Some teams have ventured into other forms of price differentiation. The two most common are:

• Ticket and all the food you can eat
• Premium pricing for selected opponents. In the AL, it’s often a team’s game against the Yankees or Red Sox, or an intra-division rival.

A New Way to Think About Ticket Pricing

While that may seem like significant pricing segmentation, pricing in the secondary market for tickets tells us that teams are too conservative with the premium prices they’ve set, and there may be opportunities to differentiate ticket pricing along some additional criteria. Some other reasons fans will pay more to attend a ballgame are:

• Potential Milestone Games Bonds setting the home run record, A-Rod’s 500th and Glavine’s 300th wins are recent examples of “hot tickets.” At the extreme, an outfield seat at AT&T Park on August 6 was a lottery ticket for a $500,000+ jackpot—the price tag mentioned for the ball from Bonds’ record-setting home run.
• Marquee Pitchers Pitchers such as Johan Santana, CC Sabathia, Daisuke Matsuzka, Carlos Zambrano, etc. have a substantial following and fans gravitate to games in which they pitch. When pressed, fans would likely pay a bit more to see their stud hurler take the mound, in part because they like the player and appreciate an expected well-pitched game, but also because they know he gives their team a greater chance to win, making it an overall better ballpark experience.
• Weekend vs. Weekday games Weekend games typically are in much greater demand. The demands of the workweek make weekday night games inconvenient for a portion of fans. Also, the drawing radius expands on the weekend to include fans from several hundred miles away that have the leisure time over a weekend to make the trek to attend a ballgame or two. This group often includes visiting teams’ fans, which can dramatically expand the market for weekend tickets.
• Mid-season vs. Early- and Late-season A couple of factors are at play that may place the Memorial Day-to-Labor Day games in higher demand. During “tourist season” there is increased ticket demand from the influx of travelers to MLB cities. Also, school is out giving kids and parents more time and flexibility to attend games, opening up the family market to teams. In northern cities the weather can be appreciably better in the summer months, further expanding the potential pool of attendees. Finally, strong attendance in September is usually reserved for the contending teams, as the .400 winning percentage ballclubs’ fans are already thinking about “next year.” All of these factors combine to present an opportunity to price mid-season summer games at a higher level than April or September games. Today, only the Phillies currently practice this form of price segmentation.
• Promotional Days A high value promotional giveaway night can be worth a premium to some fans. Some promotions have become overdone in today’s MLB environment, and items such as wristbands with a local bank’s logo to beach blankets compliments of your favorite wireless carrier hardly leave fans with a sense that they’ve received extra value for their ticket price. However, promos like bobbleheads of your team’s star players can be big hits among fans. In analyzing the effectiveness of the Orioles’ 2006 promo calendar (in my book, Diamond Dollars: The Economics of Winning in Baseball) I concluded that the Brian Roberts bobblehead giveaway was responsible for about 16,500 additional fans, after adjusting for day of the week, opponent, the weather at game time, how the Orioles were playing leading up to the giveaway date and other factors that impact attendance. A high impact promo is an opportunity to at least consider charging a premium price for a ticket to the giveaway day.

These are just a sampling of situations in which fans will pay more to attend a game, but just because fans may be willing to pay a premium doesn’t necessarily mean there is a pricing opportunity for the team.

One way to determine which segments offer true pricing opportunities is to evaluate them against several criteria—the degree to which fans will pay a premium, the ease (or difficulty) of executing a different price and the size of the overall opportunity. In addition to the untapped segments, we’ll also consider the differential pricing based on the opponent, as well as the day-of-game premium that some teams currently implement.

By analyzing several months of pricing history for tickets sold on Stub Hub, I was able to create some estimates of the amount of price premium and the volume of tickets that might be sold at a premium. Despite the lack of rigor in my sampling methodology, it should provide a perspective on the relative size of the opportunity. The following graph displays the results of the analysis, with the y-axis representing the degree to which the segment can command a premium (% above face value), while the x-axis is an assessment of a team’s ability to execute a unique pricing strategy for a given segment. An estimate of the size of the opportunity—the sheer volume of tickets and dollars transacted for each segment—is represented by the size of the bubble.

Two opportunities on the left side of the grid—milestone games and games started by marquee pitchers—may be impractical to capture through a team’s pricing practices, no matter how innovative they’re inclined to be. Often a milestone game becomes one (or loses its status) with one swing of the bat and marquee pitcher starts may not provide enough predictability, regularity or lead time to be the basis of a pricing plan.

This is where the recent MLB-Stub Hub relationship comes in, as it allows for teams to participate in the revenue opportunity by sharing in the transaction fees generated in the secondary market. Even prior to the Stub Hub arrangement, many teams created a ticket exchange on their own website as a service for season ticket subscribers to resell tickets, charging a fee for the transaction. The MLB-Stub Hub alliance formalizes and standardizes this arrangement for all teams, allowing them to share in the transaction fees charged by Stub Hub.

The Opportunity

The biggest pricing opportunity is likely to be the premium price teams can charge for certain opponents. Today about 60% of MLB teams have a differential price for selected opponents—their geographic or division rivals or marquee teams like the Yankees and Red Sox. However, most teams charge a modest premium, when compared to prices in the secondary market.

Having the Yankees in town for a three-game series has the potential to be the revenue equivalent of an extra home game. That’s tantamount to 20% of the seats reselling at an average premium above face value of 150%. An estimate of the annual size of the premium-price-based-on-opponent segment is $100-$150 million for all MLB teams. Current premium pricing practices capture only a small percentage of this opportunity, while the remainder is lost to the secondary market.

Fans would likely bear more aggressive premium prices, particularly for the best seats. Another mechanism to capture the price premium is for teams to hold back inventory of some of their highest price tickets and release them into the secondary ticket market at periodic intervals in the months and weeks prior to the big game or series. A team can net an additional $300,000 by releasing 3,000 (1,000 per game) of its best seats for an otherwise sold-out Yankee series, at an average $100 premium per ticket—a modest premium given the transactions I’ve recently observed on Stub Hub.

Another high opportunity segment is weekend games, particularly in the summer months, when visiting fans and families tend to schedule road trips to see their favorite team at an out-of-town ballpark. The Giants seem to be a best practice in this category by pricing Friday, Saturday and Sunday games at a 10% to 60% premium over weekday games. (Some teams attempt to address this opportunity in the reverse by offering a variety of discounts for weekday games.) An estimate of the weekend market places the premium pricing opportunity at more than $75 million, collectively, for all MLB teams.

Promotional giveaway nights may be an untapped opportunity for teams to secure higher revenue per ticket. If a bobblehead of your star player can sell on eBay for $10 or $20, is it unreasonable to charge a $5 premium price to a bobblehead giveaway game? As mentioned earlier, many of today’s giveaway promotions are not worthy of a premium priced ticket, making this opportunity considerably smaller than some others.

Two other ticket pricing opportunities are charging a premium for tickets that are bought on the day of the game and the all-you-can-eat (AYCE) ticket offers that some teams have recently instituted.

Game day premium pricing is a tricky strategy. For teams like the Marlins and Pirates—two of the teams that employ this approach—that play to small crowds, incentives should be geared to promoting a strong walk-up crowd on game day. Raising the game day price seems to fight that goal. The assertion that it motivates advance ticket purchases for these teams is dubious at best.

I believe game day premium pricing makes the most sense in a high capacity utilization scenario, i.e., 90%+ of the stadium is occupied, as is the case with two other teams that employ this approach: the Yankees and Dodgers.

The AYCE strategy that has gained popularity among teams this season is a bit more complicated to evaluate. While most of the other pricing opportunities we’ve discussed have virtually no cost component, there are food costs (and potentially food waste) associated with an AYCE ticket offer. As a result, this is more of a value price, discount strategy than a premium pricing opportunity.

Each of these demand differentiators creates a potential pricing arbitrage opportunity. Teams can either re-price to capture the difference in value, or rely on Stub Hub and its counterparts to reach the open marketplace and re-price. Teams can argue that they are addressing the higher fan demand for these premium games, by selling additional tickets—the other variable in the demand equation—instead of getting more revenue per ticket. But even in non-sellout situations, substituting higher attendance for a premium price is an inefficient solution that leaves money on the table.

The opportunity is not to move to a different point along the demand curve, but rather to shift to a higher demand curve brought about by one of the higher demand segments we identified earlier. Figure 2 shows a hypothetical demand curve for Field Box seats at Camden Yards. The solid line is a demand curve for a Tuesday in April against the Devil Rays, while the dotted line represents a Saturday in July against the Yankees. Baseball’s pricing opportunity is all about tailoring pricing to various segments to get closer to the price each fan is willing to pay. The result can be both higher revenue per ticket and higher attendance (Price B vs. Price A).

Pricing segmentation has its risks and some industries have arguably gone overboard, such as the airlines, where it’s common for one passenger to pay five times as much for the same flight as the passenger in the next seat. Airline pricing may be a poor model to emulate as their lack of pricing transparency and the arbitrary appearance of their pricing practices erodes customer trust and chips away at the airline’s brand equity.

The Solution

The key is to develop a manageable pricing strategy that capitalizes on the revenue opportunity. There are a few “musts” that are critical for any successful pricing segmentation plan.

The plan needs to have an appropriate level of transparency that builds trust with fans, accounts for the capacity of a team’s stadium, and is capable of being flawlessly executed. Another important consideration is to balance a team’s need for revenue certainty and stability with the upside of slicing and dicing pricing to capture pockets of demand. It would start with analyzing the local market to determine which of these opportunities are likely to generate the biggest impact.

If teams believe the MLB-Stub Hub agreement “takes care of the secondary market opportunity” and they don’t need to give it a second thought, they’re missing the point. The only ticket transactions teams should concede to the secondary market are the impractical to execute (e.g., milestone game premium prices) and tickets that are reallocated to meet the “convenience” need of the seller (i.e., a seller wanting to put the tickets in the hands of someone that can use them, rather than a profit-motivated seller). Beyond those types of transactions, teams should strive to set prices that make the need for the marketplace to re-price tickets obsolete.

For teams that believe this is a project for another day because they don’t feel the time is right to capture pricing upside, don’t confuse absolute prices with relative prices. Think of the “baseline” as the price for a Tuesday night game in April against a perennially losing team. At Camden Yards, tickets to a weekend series in July against the Yankees should command a 60% to 100% premium price versus a Tuesday in April against Tampa Bay. If the resulting price premium is too aggressive, I would make the case that the April price is too high, not the other way around.

The goal of pricing segmentation is to leave fewer dollars on the table by setting prices much closer to the amount fans are willing to pay. If all MLB teams implemented a solid, well-thought-out segmented pricing plan, I estimate the revenue opportunity to be $300 to $500 million. In the uneven world of MLB economics that means a team would benefit by $10 to $50 million annually—enough to buy more than a few wins in the free agent market, or invest in the player development system.

References & Resources
I excluded some segments from my analysis, such as corporate demand for tickets to entertain clients, which is partly satisfied through luxury suites, and the premium that could be charged for teams that are ascending in the standings or have exceeded fans’ performance expectations. In the latter example, during the course of a season a team that is playing .650 winning percentage baseball may have ticket pricing upside—particularly if fans anticipated a .500 season. However, it works both ways. For every team that has pricing upside, there is likely another underperforming team who may have “overpriced” tickets.