Demand elasticity and variable pricing as illustrated by the Rolling Stones

To someone with a deep interest in both music and procurement, the news that the Rolling Stones have had problems selling tickets for their latest US tour was exciting, giving us a chance to combine both here! Here’s the NME:

“On Friday (May 3) it was reported that the band had failed to sell-out the allocation of their high priced tickets ($600) for their opening night at the Staples Center in Los Angeles. They also released more $85 (£55) tickets to fill out the arena”.

This takes us back to some interesting aspects of economic theory. The economic ideal for the seller of goods and services would be to sell at variable prices to maximise your revenue. So let‘s say you produce 100 units a year of your product. There may be 10 potential customers prepared to pay £500 for it. With the price at £400, you can sell to another 50 buyers. At £300, a further 100 buyers are interested, and so on. As the price comes down, clearly more buyers would pay that price.

In an ideal seller’s world, you would be able to charge the 10 customers £500, another 50 customers would pay the £400 (or prices in between to be precise), then your remaining 40 units go to those prepared to pay only £300. That maximises your income. Now that’s difficult in the real world, for a number of reasons. Firstly, just organizing how you offer the variable pricing, and knowing who will pay what, is tough. Then you have the issue that the 10 who pay £500 will be pretty annoyed if they find out others paid £300 for the same product!

So one thing that suppliers do to partly address this is differentiate their products - this makes both offering the range of prices easier, and makes the buyers happier. Sometimes the differentiation is only slight but it justifies pricing differentials. The other factor that has made all of this more relevant today is technology, which has made it more feasible to offer different or changing prices to a wide audience.

For instance, the travel industry has probably embraced this more enthusiastically than any other. If you want to book a particular hotel, on a particular date, choose your room (or similar for a flight), you may well pay the premium price. If you are flexible, not too bothered about which precise flight you’re on / how large your room is, you will pay much less. And the multiple classes on a plane is a great example of a supplier offering differentials to maximise overall revenue.

Selling concert tickets is another example, with different price bands for different areas of seats. But to maximise their income, the Stones would ideally auction off the tickets for each gig, a seat at a time, starting with centre front row – which might go for $10,000. By the time you’re half way back, the price might be $200, and it could be $50 for the worst seats. Now although seats are priced in bands, no-one as gone as far as seat by seat auctions – technology must be available to achieve this, but how would fans react? However, if you look at a website like Viagogo that sells tickets in the secondary market, every seat has a different value, and you can see just how much more a front row ticket is worth compared to a second or third.

Anyway, because the Stones don’t do this sort of auction, they priced the tickets in a pretty aggressive manner thinking there would be enough willing buyers in each band. But basically, some of those seats were not “worth” the $600 or whatever they were charging. The Stones therefore now have to offer them through another route at something more like their “true” market value.

The other interesting point to note in the tickets market is the growth of premium tickets. That might mean you get into a “VIP area”. Or even a meet and greet with the band, a signed picture or something. Having read this far, you will understand that this is positioning to capture those customers who are prepared to pay far more than the standard pricing. The marginal cost to the band is negligible, but it justifies charging hundreds or thousands of $ / £ to those who can afford it!

Now, as you might have expected, I’m going to claim that as well as being generally interesting, this has implications for business and procurement people. But having gone on for quite long enough today, that will have to wait for part 2.

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