Ticket Price Increases: Do They Help or Hurt Profits?
Businesses strive to maximize revenues, and for our clients, ticket prices and fees are the primary means to that end. The law of supply and demand dictates that a shift in price will have a correlating shift in demand. However, this isn't always the case. Sometimes the reverse is true, and price increases can increase ticket sales. Therefore, it's important to evaluate a ticket price increase effect on ticket sales.
A good pricing strategy indicates how much can you raise prices before the lost sales have a net negative revenue decrease. It turns out that we can determine just how high we can raise prices before the increase in prices actually hurts our bottom line. Let's work through the steps to learn where that critical point lies.
You'll need to start with a copy of your profit and loss (P&L) or income statement. Download this from your accounting program so you can calculate your gross profit. Gross profit is the total revenue you have after you've paid for the cost of producing the goods you sell. This cost to produce is known as the cost of goods sold (COGS), and it is different from the other overhead expenses that are not associated with the product itself.
As a simple example, let's say you're manufacturing and selling a fidget spinner that sells for $2 each. The materials involved to produce the fidget spinner -- plastic and ball bearings -- cost $1.25. You have no sales or delivery costs since you're selling them yourself on the street therefore there are no other COGS. With that knowledge, let's put the numbers together using a quantity sold of 100 spinners to calculate the gross profit:
Total Sales - Cost of Goods Sold = Gross Profit
(100 spinners * $2) - (100 * $1.25) = $75.00
COGS varies from venue to venue, but if costs can be traced directly to the event -- lighting and box office personnel on event night, ticket stock or handbills, and the people associated with delivering the act itself, they are considered part of COGS. The cost to manufactured goods often rises in lock-step with total sales count, whereas a theater spreads the cost of the production over multiple patrons and performances. The higher the number of patrons in a given run, the lower the COGS.
To simplify things, we'll assume a cash basis where the costs and revenue were collected in a single month. On your P&L, you subtract COGS from the total revenue in that period. With your gross profit determined above, let's derive your gross profit margin:
(Gross Profit / Total Sales) * 100 = Gross Profit Margin
$75 / (100 spinners * $2) * 100 = 37.5%
Gross profit margins signal the general health of an organization's business model and vary greatly by industry. For example, supermarkets average a mere 1% GPM due to high merchandise costs while the software industry with its low product delivery costs (mostly customer support) tend to have higher GPM percentages. In our example above, the fidget spinner's GPM of 37.5% beats the average GPM across all industries which stands at 25%. Whatever your GPM, this is an important metric to monitor as you try to drive down product and delivery costs to increase your GPM.
Here's where we get to the fun stuff. You can use your GPM to determine how much business will be lost due to price increases. The higher your GPM, the greater the effect of price increases on ticket sales. Let's look at the chart below:
|IF YOUR GROSS MARGIN IS...|
|THEN YOUR SALES MUST DECLINE BY THE AMOUNT BELOW TO BREAK EVEN|
|And You Increase Prices By 2%||9%||7%||6%||5%||5%||4%||4%||4%||3%|
|And You Increase Prices By 4%||17%||14%||12%||10%||9%||8%||7%||7%||6%|
|And You Increase Prices By 6%||23%||19%||17%||15%||13%||12%||11%||10%||9%|
|And You Increase Prices By 8%||29%||24%||21%||19%||17%||15%||14%||13%||12%|
|And You Increase Prices By 10%||33%||29%||25%||22%||20%||18%||17%||15%||14%|
|And You Increase Prices By 12%||38%||32%||29%||26%||23%||21%||19%||18%||17%|
|And You Increase Prices By 14%||41%||36%||32%||29%||26%||24%||22%||20%||19%|
|And You Increase Prices By 16%||44%||39%||35%||31%||29%||26%||24%||23%||21%|
|And You Increase Prices By 18%||47%||42%||38%||34%||31%||29%||26%||25%||23%|
|And You Increase Prices By 20%||50%||44%||40%||36%||33%||31%||29%||27%||25%|
|And You Increase Prices By 25%||56%||50%||45%||42%||38%||36%||33%||31%||29%|
|And You Increase Prices By 30%||60%||55%||50%||46%||43%||40%||38%||35%||33%|
Let's say your GPM is right at the industry average of 25%, and you are considering an increase in ticket price by 10%. Locate your GPM column in gray, and the 10% in the yellow row on the left that represents the price change. We can then find the intersections of the two columns in the blue. In this case, even if your sales declined by 29%, you'd still break even. If they declined by anything less than that number, say only 14%, you will find yourself much more profitable. Conversely, if sales drop by 30%, then your price increase negatively effected profitability.
You can choose how to raise prices: by the ticket price itself or through an added fee. Today, patrons are accustomed to paying an added fee. Many of our clients recognize that this represents an opportunity to add an industry standard fee but retain 100% of those fees with ThunderTix. (A small fee can completely offset the cost of ThunderTix and raise profits, too!)
Whatever the case, consider the effect of a price increase on how your tickets sell online carefully, but if you routinely sell out, go ahead and marginally increase rates and check the effect on sales. If events continue to sell out, there may be room to increase prices a bit more or even add a second price tier along with a higher level of service and make your business even stronger. When selling tickets online, watch your ticket sales and pay attention to ticket sales trends. Happy selling!
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