Capturing the value of technical innovation

Article by Michael Hurwich, President of SPMG

In many industries, technical innovation is essential in order for companies to remain competitive. But innovation alone is not enough…

Despite their success in creating new products or services, many companies in industries where innovation is a required trait have problems in turning the technical value of their innovations into added profits. The promise of a return on investment for the research and development invested in new products seldom materializes, frustrating both management and shareholders alike.

There are several reasons why this occurs:

1. Focus on market share: There is often a temptation in organizations to use technical innovation solely as a method of capturing market share from competitors. This strategy typically undervalues technical innovation because it fails to recognize that while not all customers will value the innovation, those who do are usually willing to pay a premium for it. As a result, the market share lift usually occurs only within those segments that would have been willing to pay a higher price for the innovation, had a higher price been set. Among other market segments, there is little impact.

2. Misreading customer acceptance: Some organizations are too optimistic about the value of innovation and place a higher value on it than their customers do. This can occur when managers become wrapped up in product innovation and see customers as equally enthusiastic about technological breakthrough, without any grounding in research for the opinion.

Another less common problem lies in underestimating customers' willingness to pay a premium for the value of the innovation. Typically this occurs because a company fails to recognize the ancillary benefits that might arise from using new products, or because they fail to understand all the reasons that customers choose a product or service in the first place.

Take, for example, the case of a major chemical supplier who recently introduced a new product that significantly reduces the quantity of the product that customers have to use in order to achieve the same results as the older version provided. While the pricing formula took into account the reduction in volume required, it did not adjust for changes to transportation or storage costs. Consequently, customers received an added value through lower shipping and inventory costs. This value could have been reflected in the price of the product, leading to higher profits.

3. Ill-advised discounts: Many companies establish inappropriate volume discounts for innovative new products with a premium value. These discounts erode most of the value and reduce the profitability of the innovation. Partition pricing - reviewed below - can provide an answer to the discount dilemma.

4. Cost plus pricing strategies: Companies using cost plus pricing strategies may fail to achieve the higher prices warranted by higher value products. This results when new product innovation leads to lower production costs, but the manufacturer fails to take into consideration that the value of the product to the customer has been enhanced. As companies adopt more effective means of making the product, or achieve the same product characteristics with a smaller package, those who use cost plus pricing strategies will automatically lower the price for the product without considering the increased value of the product. These pricing formulas may also lead to a reduction in absolute profit.

Take, for example, a product that sells for $1.00 per unit, with a current production cost equal to $0.80, and a gross profit equal to $0.20 per unit. Gross margin is thus 20% and mark-up is 25%. Now suppose that a new product is introduced with a production cost equal to $0.60 per unit. If the company applies the same mark-up of 25% to this cost, the price for the new product would be $0.75, with a gross profit of $0.15 per unit. While the gross profit in percentage terms remains the same (20%), actual profits have declined by $0.05 per unit. If the company sells the same number of units, actual profits will have declined by 25%.

Capturing value from innovation

There are several ways a company can ensure that the benefits of innovation include increased profitability. Below are some of the steps to consider in implementing a more effective pricing strategy.

Establish and communicate clear strategic objectives

As with any strategic issue, setting the price for innovation should start with a clear understanding of what it is you want to achieve. In many organizations there will be some internal conflict over the objectives for the new product. These differences of opinion need to be aired at an early stage and resolved before the pricing strategy is implemented.

Once established, the strategic objectives need to be communicated to everyone within the organization, from finance to sales, to ensure that the strategy will be implemented properly. This step, more than any other, is critical to ensuring that whatever the price set for technical innovation, it will be maintained through to the customer.

Measure customer value

Measuring customer values and trade-offs is a key step in the process of determining the value that customers will place on a new technology. Discrete choice analysis can be used to measure specific customer values, and to compare buying decisions against existing products. Having a clear understanding of customer value is often critical to the process of establishing and maintaining premium prices for technical innovation in the field. This research can be used to support and direct the sales organization. Consequently, it is important to communicate clearly the results of any measurements throughout the organization.

Review the advantages of value based pricing

Value based pricing strategies will more often lead to higher profits than either cost plus or competitive based strategies when applied to new products or services. This is because value based pricing is designed to take into account the added value that innovation provides customers and to capture a portion for the innovator. Even where market share gains are a priority, value based pricing is a more effective method of establishing a price that balances market share gains with optimum profits.

Consider using partition pricing

Partition pricing is the practice of separating elements of a total price from one another. For example, technical fees or other charges might be separated from the base fee of the product or service. This approach is particularly useful when there are existing discount programs that may apply but which may erode profitability if applied to a product/service innovation. By using partition pricing, a company can reduce or eliminate the negative impact of discount programs on the profitability of new technological innovations.

With partition pricing, companies separate the technology from the base product or service only on the invoice, where a technology fee or other charge is added to the base price. These fees are based on the value of the new technical innovation that has been added to the product and are not subject to discounts.

DIAGNOSING THE PRICE FOR A NEW DRUG: THE PHARMACEUTICAL INDUSTRY'S GREATEST CHALLENGE by Michael Hurwich

An aging population, technical innovation and more informed patients with better access to medical information are driving the demand for new and innovative therapies.

While many companies put more and more resources into the back-end of R&D, they often ignore opportunities to increase profitability through the front end by using a value-based approach to new product pricing. The challenge is to alleviate pricing pressures by establishing customer-perceived value for the drug before establishing a new product line.

STEP 1: Target and Focus. 

Examine the value the product offers and determine how this will benefit customers. Careful analysis of the new drug should be undertaken in order to establish a realistic prediction of revenue and profitability for the company. To determine the expected value the product offers, the attributes that comprise the product value need to be confirmed and evolved. These attributes will help determine the drug's value, which in turn will perform as a predictor of future sales. Many methods are used to identify these attributes, such as customer surveys, conjoint measurement, focus groups, internal forecasting, historical regression, reference and price metering.

STEP 2: Competitive Environment. 

A close examination of the retail competitive environment aids in determining the price placement of a new product. Customers considering similar products or alternatives will scan their product options or non-product options, in developing a consideration set. Within this consideration set, customers will develop a hierarchy of brands/products based on their assessment of value towards relieving various symptoms. In addition, a reduction of side effects most commonly influencing quality of life contributes to a value weighting. Typically, customers will choose the brand or product at the top of their hierarchy, if it's available. Perceived competition, therefore, assists in the evaluation of product pricing and positioning.

STEP 3: Price Metering. 

A price metering survey should be an initial step in determining the optimal price of a new drug. Price metering provides a range of prices customer may be willing to pay for the drug, depending on a series of tradeoffs:

-	Will the product decrease the time spent in the hospital?
-	Will the product eliminate the need for surgery?
-	Will the product permit more days on the job rather than off?
-	Does the product have minimal side effects?
-	Does the product increase quality of life?

If the majority of these answers are positive, it can be assumed that customers will be willing to pay a higher price for the value the product offers, to the extent it alleviates all or most of their symptoms.

STEP 4: Value/Price Mapping. 

The information acquired in the price metering survey is used to present the value of your company relative to that of your competitors, as well as the value the company is perceived to offer by the key customer set for each of your product offerings. A series of value maps are created that reflect customer value perceptions of different features and bundles relative to price.

STEP 5: Discrete Choice Analysis. 

Our elasticity tool and methodology effectively provides a snapshot of your customers' willingness to give up something in return for something else. It's often used to predict the choices that a consumer will make between drug attribute alternatives. This is an optimum methodology to sue for predicting price and the likely outcome in the marketplaces in a competitive situation.

STEP 6: Pricing Methodology Alternatives. 

Providing several strategic pricing and product attribute alternatives will assist in clarifying your company's goals and objectives for market share, profitability, revenue growth or ROI. Benefits, risks, advantages and disadvantages of various alternatives are provided to determine which approach meets your corporate objectives. Pricing these alternatives helps identify opportunities for increasing profitability and minimizing risk with your chosen customer segment and channel strategy.

STEP 7: Pricing Approach. 

The pricing strategy alternative selected must be consistent with your corporate, marketing and sales objectives.

What was once seen as a challenge is now an opportunity to build value perception in order to set a new product price. This step-by-step methodological approach provides your company with the tools and structure to effectively price the new drug. Utilizing this value-based pricing technique will help your company achieve optimal revenue and profitability.

Why Adopt Fixed, Value-Based Pricing Now? - http://www.thecompletelawyer.com

written by thecompletelawyer.com admin

In all my years of practice, I have never had a client say, “I’d like to buy ten six-minute increments of your time, please” and I have never met an attorney who did. That being said, it is a wonder that since the late 1950’s the legal profession has adopted a billing model that has us selling something that nobody wants to buy: units of time. The sad consequences of operating on the billable hour model are that it pits the economic interest of legal professionals against their clients (we end up weighing whether we want to get paid more to take our time, or to be more efficient and be paid less); and it causes the perceived commoditization of the practice of law.

In today’s economic climate, lawyers who bill hourly are facing significant price competition and pressures on profit margins because their business models do not translate their work into value as it is seen through the eyes of their clients. However, there are many things you can do immediately to add significant value to clients, prevent client attrition, and keep your profits in line through these tight economic times.

Explain Value In Pre- And Post-Action Reviews

A best practice for attorneys is to have clients define, in their terms and at the beginning of the engagement, what success means to them. This allows you to make sure their expectations are reasonable and that you understand what they really think they are paying for. Remember, they are not buying your time and effort. Make sure to have clients identify what they value, how they desire to work together with you, and what communication style they prefer: this way, you will be more likely to hit the bull’s-eye.

If you do not plan to change your pricing model anytime soon, this is a great way to keep your clients happy and reinforce your unique value. Many lawyers get so caught up in creating the outcome for the client that they forget to tell the client all of the great things that they did to get there, and I don’t mean in the form of an itemized bill.

Finally, before giving clients your bill, have a detailed discussion with them reviewing the process you went through. Reveal the thought and expertise that you put into the matter and connect that with the outcome that you achieved. Sometimes, you might even tell a story about how you successfully used a negotiating tactic with opposing counsel or explain that you crafted a unique argument to the US Patent and Trademark Office and prevailed. This will reinforce your unique value and keep clients from focusing on itemized bills for emails, phone calls, and vague line items that they do not understand or value. As a general rule, if you do not first reinforce value to clients, they will look at your bill to find it. When they don’t find it there, the first thing they will do is complain about line items—or even worse, say nothing and never return.

Designate The Scope Of Outcomes

If you’re a bit more adventurous, include in your engagement letter a definition of the scope of the project defined by desirable outcomes rather than by process. When clients see their own definition of success in your engagement letter, they will see that you “get it” and that you have your eye on their prize rather than on a process that you find intellectually stimulating. With proper communication, clients will understand that an outcome is not guaranteed, but they will also be significantly less likely to blame you for not achieving their desired outcomes if they know that you were aiming for the right goal to begin with.

Give A Value Guarantee

A few innovative firms have begun to offer a value guarantee to clients, ultimately putting the “perceived” power in the hands of the client. This may seem scary, but it isn’t. First, a value guarantee is not a guarantee about outcome. It is a value promise of the firm to make sure that what clients pay is ultimately no greater than what it was worth to them. This has several benefits: it keeps you constantly thinking of how the client perceives value; it also significantly reduces client attrition and complaints, and ultimately prevents you from losing referrals.

If you think about it, clients already have a value guarantee: we call them write-downs, write offs, non-paying or slow-paying clients, etc. By offering a guarantee, you create an incentive for clients to talk to you about what they value and how much they value these qualities. This is valuable intelligence for a firm to have. The alternative is a silent killer. All of the research we have done shows that unhappy clients are unlikely to tell you how they really feel, but they will not hesitate to pay less, not pay, or tell everyone they know how horrible their experience with you was. To a great extent, they already have the power to control your profits, which is why it’s a great practice to give them an incentive to address issues with you that allow you to maintain a long-lasting relationship and avoid the silent killer. Remember, it costs five times more to acquire a new client than to maintain an existing one.

Adopt Fixed, Value-Based Pricing

Fixed, value-based pricing is the most effective way to align your economic interest with the success of the client in a manner that can earn you significantly more in the long run. It’s also the most value-aligned pricing model that, done well, almost assures client satisfaction. There are a few firms nationally that have completely abandoned hourly billing in favor of this model, and many others are exploring the possibilities in light of the earnings pressures faced by the industry today. 1

Value pricing is a form of fixed pricing that sets a price for work based on its subjective value to the client. There are significant resources online and in print to help professionals navigate the inevitable change to fixed-pricing in the market. 2

In order to price based on value, attorneys must work with the client up-front to discover the value-drivers, desired outcomes and preferences, and then carefully scope out an engagement around what the client wants to achieve. Next, ask your client to attribute a value to the engagement and get your money up-front. That way, you don’t need to manage your entire life in six-minute increments and you can work effectively and efficiently to achieve the outcome in a manner that increases, rather than decreases, your profitability.

Your client’s last memory of you will be your achievement for him or her rather than your bill. If you feel as if you need some courage to try this model, remember that the reason you are in business is to be profitable, not to make exactly the same profit margin on every job you do or to know exactly how many pennies you made on each engagement.

With careful scoping, great communication about value-drivers and good project management, you should be able to successfully implement a value-pricing system that will differentiate your firm and make you a provider of choice. As many innovative professionals have discovered, clients highly value what we do and are willing to pay a premium for certainty, allowing us to focus on value creation and quality lawyering instead of timesheets, billing, and collections.

In this economy, the uncertainty of hourly billing makes value pricing more compelling than ever before. After all, who can afford to write a blank check?

Article found at: http://www.thecompletelawyer.com/why-adopt-fixed-value-based-pricing-now.html

Pricing In Uncertain Times: Weigh the Options

Article by Michael Hurwich, President of SPMG

Buffeted by turbulent economic times, businesses need to re-examine their business and pricing strategies to deal with the uncertainties that lie ahead. But remember, all recessions come to an end. Make your pricing decisions with an eye to the future. While some will find opportunities in short-term tactical pricing; others will develop an entirely new business strategy to take advantage of competitive weaknesses; others still, will choose to simply "weather the storm." Regardless of which tactical approach is selected, every company in turbulent times must re-evaluate the issue of price and value as it relates to their customers.

Time For a Value Driven Approach

Turbulent markets bring with them a new level of competitive intensity. Companies face not only a shrinking market as customers cut back operations and put projects on-hold, but also new competition as nontraditional competitors look for ways to offset losses in their traditional businesses. More competition, a shrinking market -if ever there was a time to take a "value-driven" approach, this is it. If a company is to remain competitive in this new dynamic environment, it must examine how it adds value for its customers and how it can help mitigate the potential losses and slowdowns that loom ahead. Suppliers should also note that in tough economic times, the tangibility of benefits becomes a real issue. Customers need to know and appreciate that they are indeed receiving a benefit. Typically value is highest when the customer realizes some hard savings (whether in time or money), where the numbers are easily measured, and to a lesser extent when the product or service contributes to the customer's market share. Conversely, intangible benefits equate to less value.

Check Your Options

How can companies respond to turbulent markets?

Some introduce tactical short-term measures while others revise their entire value proposition and pricing strategy to position themselves to take full advantage up the inevitable upturn. Others may decide simply to "weather the storm". "Turbulent economic times can offer significant opportunities for companies with the resources to position themselves for the upturn that is bound to follow. Well positioned companies can engage in acquisition strategies, seek new customers and markets, and use their strategic advantages to contain competitor growth." Each response needs to be evaluated in terms of the market, the customers, the competitive dynamics and whether or not the anticipated duration of the downturn warrants short-term or long-term strategic moves.

Tactical Discounting: In the short term, most companies reduce prices to reflect economic conditions and maintain volumes in the face of declining demand and increased competition. They should not, however, neglect to get something in return. Customers may be more than willing to make a commitment that they will accept a return to normal pricing after tough times are over. Many companies opt to be even more promotional, introducing larger discounts and better payment terms (including in some cases financing packages). This will allow sellers to reduce their "final" prices to their customers while maintaining the integrity of their list prices. 

Once the economy recovers, discounts can be gradually reduced until normal pricing is reestablished. Companies may also want to consider "locking-in" prices. If suppliers expect prices to continue to drop in the future, it may well be worth "locking-in" customers at current levels. While current price levels may generate some immediate losses, they will offset potentially greater losses over the longer term. Get Strategic: Business slowdowns and shaky economic conditions should set off alarms that the business and pricing strategy needs to be re-visited. Companies need to make a full internal and external analysis of their products and product mix in order to revise the value proposition through "value-added" means and/or price changes. They also need to consider what other strategic alternatives may be available. Turbulent economic times may offer significant opportunities for companies with the resources to strategically position themselves for the upturn that is bound to follow. Well-positioned companies can engage in acquisition strategies, seek new customers and markets, and use their strategic advantages to contain competitor growth. 

Weathering the Storm: Doing nothing can be as valid a strategic decision as any other. However, the decision to weather the storm must take into account two key factors: the switching behavior of customers and the potential impact of losses on the company. A shrinking market and new non-traditional competitors will inevitably result in losses in market share. At the heart of "weathering the storm", therefore, is a risk assessment of switching behavior. The question that companies need to ask is "to what extent can we expect to re-gain the customers that we lose today?" It is not an easy question to answer and depends very much upon the loyalty of one's customers and the value that they perceive in the products and services that a supplier offers. In doing the risk assessment, one factor that often gets overlooked is the life cycle of the product. Products early in their life cycle have a significantly higher probability of regaining lost customers than those in the latter stages of their life cycle.

Make Your Assessment

Which strategic approach a company adopts depends on numerous factors and often a sensible argument can be made for any of the three alternatives. One factor companies should consider is the anticipated duration and depth of the downturn, which will determine the balance between short and long-term initiatives. Companies should also remember that downturns, as painful as they may be, always come to an end. Any pricing initiatives taken in turbulent times should always be done with an eye to the inevitable upturn. Pricing in a shaky economy requires more not less strategic thinking than in good times. Success depends upon both attitude and approach. The experience of the last recession shows that companies that viewed turbulent times as a pricing opportunity succeeded far better than those who regarded it as a threat.

Analysis: Pricing hit unlikely to deter Netflix growth Article by Lisa Richwine (Reuters - www.reuters.com)

(Reuters) - Netflix Inc's star darkened briefly this week after a rare stumble on pricing incensed investors and triggered an unusually dim growth projection.

But longer-term, Wall Street remains enamored of a company expected to ride an expansion beyond U.S. shores and a bigger streaming push that will cushion rising content-acquisition costs.

The company surprised investors by projecting a pause in its normally explosive subscriber growth, sending its shares plummeting as much as 10 percent on Tuesday.

Yet many industry experts and analysts accepted Chief Executive Reed Hastings' view that the slowdown is a mere hiccup before user-growth returns to year-over-year increases.

"There is certainly plenty of room in the market for them to grow," Gartner analyst Michael Gartenberg said.

The new prices "still represent a good value for consumers," who are increasingly turning a wide array of Internet-connected devices to watch television and movies, he said.

Still, a few analysts, including Wedbush's Michael Pachter and Morgan Stanley's Scott Devitt, sounded a note of caution on Tuesday, echoing concerns Netflix had come too far too fast.

Netflix shares were trading nearly 800 percent above levels in early 2009 and the stock has drawn heavy short interest. Reuters Starmine data ranks the stock higher than 86 percent of the stock in its group in how vulnerable it is to a short squeeze.

Devitt expects Netflix shares to "exhibit weakness" relative to its peer group over the next three months."

"Confusion around the impact to the long-term subscriber growth trajectory in the U.S. market will linger on investor minds," Devitt said in a research note, reiterating an "equal-weight" rating on Netflix shares.

Wedbush's Pachter, who has rated Netflix "underperform" for more than a year, thought the company overestimated the number of people who would trade up to costlier plans, which separate costs for DVDs-by-mail and streaming plans. Subscribing to both services will cost more.

Pachter's current 12-month price target is $110, up from his previous $100 target, but far below current levels.

Apart from the price increase, some say the company -- despite touting an international expansion just getting in gear and more revenue for streaming offerings -- will find content increasingly costly as it shores up its library to compete with the likes of Amazon Prime, Hulu and even Wal-Mart's Vudu.

"Their biggest challenge is their content costs are escalating dramatically," Pachter said.

SOME RAISE PRICE TARGETS

Netflix said on Monday it would essentially end the third quarter with the same number, or slightly more, subscribers it had at the end of the second quarter. The company expected cancellations following a vocal backlash over a price increase as high as $6 a month for some customers.

Some analysts see room for its shares to rise further.

Even Barclays analyst Anthony DiClemente, who lowered his Netflix price target to $285 from $315 on Tuesday, kept an "overweight" rating and urged investors to "take advantage of any weakness."

Netflix "continues to execute very well," he said, adding he was optimistic about plans to expand to Latin America later this year and another market early next year.

The company that started sending DVDs by mail in red envelopes has quickly built a streaming service offering movies and television shows. It has grown to 25.6 million subscribers, more than Comcast Corp, the largest U.S. cable company.

Cancellations from the higher prices "will be more than offset" in the fourth quarter by a gain in average revenue per user, Credit Suisse analyst John Blackledge said in a research note. He raised his price target to $310 from $280.

"We view weakness on the results as a buying opportunity," he said.

CEO Hastings said the fourth quarter would show a return to year-over-year growth of new subscribers. The higher pricing will help the company secure more streaming offerings to attract new customers.

"Fewer people are canceling than we expected. Our deals are coming together," Hastings said in an interview.

Netflix shares fell 5.2 percent on Tuesday to close at $266.91 on Nasdaq.

ARTICLE FOUND AT WWW.REUTERS.COM

Optimum Dynamic Pricing Has Application Beyond The Airline Industry

Article by Michael Hurwich, President of SPMG

Background

Have you ever asked the person sitting beside you on an airplane what airfare he or she paid? If you have, it‘s likely you learned that your neighbor‘s ticket price was different from yours. We‘re all familiar with price differences for tickets by type of seat (business vs. economy) and even by flexibility of ticket (refundable vs. non-refundable). Less well known, however, is the fact that ticket prices for similar seats on the same flight can vary every day that tickets for that flight are sold. It‘s all due to a pricing technique called Optimum Dynamic Pricing, and the concept has application well beyond the airlines.

Price follows demand

Optimum Dynamic Pricing was developed by American Airlines in the 1980‘s to address the issue of seat pricing. American Airlines‘ management realized that revenues would be maximized if they could sell every seat on a plane, regardless of the actual price charged for the last seat sold. The problem they faced was that demand for airplane seats varies for every flight, every day. Charging a fixed price per seat cannot provide enough flexibility to ensure that all seats on an airplane will be sold. American solved the problem by developing a computer model that assesses the demand for seats by flight on a daily basis and adjusts price accordingly.

Here‘s how it works. At the outset, each airplane is assigned several fare classes, such as business, economy, and discount. The number of seats in each class is fixed. From the day the flight is first available for reservations, the number of seats sold is compared with a forecast of demand for that flight. If the number of seats sold is below forecast, the program will adjust seat prices downward to encourage more sales. If it is above forecast demand, prices remain unchanged. Although prices could be increased when seats on a given flight are selling more quickly than forecast, the rationale used is that the lower priced seats are always the ones sold first and, therefore, those buying later will automatically be pushed to a higher priced seat. Individual pricing decisions are handled entirely by computer, with algorithms that have been developed solely for this purpose. Data input is provided by the company‘s reservation system.

Profit maximization at American and elsewhere

The impact of this type of pricing on profits was substantial: American Airlines estimated that the benefits over a three-year period exceeded $1.4 billion. Since it was introduced, Optimum Dynamic Pricing has become a standard practice in the airline industry, largely because of its impact on profits and competitiveness.

The principle of Optimum Dynamic Pricing has application beyond airfares. In the hotel industry, for example, room prices vary according to demand, vacancy rates, and type of customer. A last minute customer without a reservation typically pays a higher price for a room than someone with a reservation – especially if the hotel‘s vacancy rate is low.

Likewise, the same methodology has been effectively applied in the self-storage industry to adjust prices based on vacancy rates and forecast demand. In each of these cases, the same principle applies: the incremental value of selling a service that would otherwise not be sold is always positive, regardless of the price charged.

Furthermore, and perhaps most importantly, customers are willing to accept that prices vary according to some ground rules, and those who are price sensitive are able to adjust their buying behavior accordingly. The same approach can also be applied to electronic commerce, where sales levels can be tracked and prices changed on a daily basis. For example, a bookseller might establish sales targets for a particular title and, depending on sales, adjust the price accordingly. If sales fail to reach the expected volume within a certain period the price can be gradually lowered. This approach could well have a better impact on profitability than waiting until the book has been on the market for some time and then trying to dump excess stock at bargain prices. 

You paid how much for that ticket!? By Mike Boehm, Los Angeles Times

Article found in the LA Times http://www.latimes.com

A last-minute good seat for a hot show is going to cost you, as arts groups in L.A. and elsewhere adopt dynamic pricing. However, if demand is low, prices will drop accordingly.

How much does it cost to see a live performance in Los Angeles? Increasingly, the answer is "it depends."

Under Center Theater Group's new dynamic pricing, the best seats were priced at $120 when it was first announced that the Ahmanson Theatre's staging of the dark comedy "God of Carnage" would feature the original Broadway cast. But those who waited wound up paying as much as $200 for the same seat locations as Jeff Daniels, Marcia Gay Harden, James Gandolfini and Hope Davis reprised their roles.

But dynamic pricing works both ways. For "God of Carnage," orchestra seats under an overhang turned out to be relatively unpopular, and early birds who'd scored them for $120 may have found themselves sitting next to latecomers who paid $49 each.

Taking its cue from the airline industry, more arts groups are adopting dynamic pricing, in which the cost of a theater or concert ticket escalates for hot-selling shows, while slack demand brings bargains. The concept, which Ticketmasterwill soon be using at pop concerts too, has arrived in a big way on the L.A. scene with its adoption by Center Theatre Group. Starting this fall, the struggling UCLA Live performance series will look to dynamic pricing to help revive flagging box office proceeds for concerts, dance and celebrity speaking engagements at 1,800-seat Royce Hall. The for-profit Pantages Theatre has used dynamic pricing since "Wicked"hunkered down in 2007 for a nearly two-year run.

Ten years ago, the Broadway musical "The Producers" opened commercial theater producers' eyes to the benefits of charging a large premium for the most coveted seats. It's not clear who first tried the concept in the nonprofit arts world, where the decision to go with dynamic pricing can be far more fraught, given the fact that the nonprofits' mission is not to maximize earnings but to stay solvent while serving their community. Experts say Seattle's Pacific Northwest Ballet and the Chicago Symphony were among the early nonprofit users during the early 2000s.

In Southern California, Center Theater Group already has reaped some eye-popping returns: "God of Carnage" grossed $7.8 million, more than double the previous box office record for a nonmusical play at the Ahmanson. Without dynamic pricing, the take would have been $1.5 million less, said Jim Royce, CTG's longtime marketing director.

In the most sophisticated versions, the price fluctuations are guided by computers programmed to constantly sift sales data compiled from online and telephone purchases. Algorithms are applied to information on how fast each seat is selling, compared to past norms. The result can be a parade of price revisions from the day tickets first go on sale until the last curtain falls.

With "God of Carnage," "we were selling tickets like nobody's business," at the opening price of $120 for the best seats, Royce said. As dynamic pricing kicked in, the cost of a premium, front-and-center seat moved to $130, then $175, and eventually to $200. The increases helped drive the average ticket price to $79.89.

Now playing is another hot show, "Les Miserables," and the best seats for weekend performances again are going for $200.

"But," Royce notes, "as a nonprofit, we also have a mandate to make sure that some prices are affordable."

So, while it raises prices for the most desirable seats, the company still reserves some at $20 for each performance under its Hot Tix program. Also, CTG has refrained from applying dynamic pricing to the 515-seat Ahmanson balcony, keeping prices at $42 and $65.

Jeff Loeb, associate general manager of Hollywood's for-profit Pantages Theatre, says that even though dynamic pricing is in effect, a policy of selling some orchestra seats at $25 for each performance hasn't changed. Loeb said there hasn't been any backlash from patrons. "We focused on communicating that the price you're buying at today is not necessarily the price it was yesterday, or what it will be tomorrow," he said. "Hopefully, we've put the right offer to the right patron at the right time."

Performing arts presenters have watched warily over the last decade or so as their customers have been less willing to buy subscriptions, and have waited longer to purchase tickets to individual shows.

Among other things, dynamic pricing is a way to re-train all but the least price-conscious arts-goers to start buying early again. If customers know that prices for the hottest shows will rise if they wait, they would be motivated to get in at the ground-floor price, or to buy a season's subscription before single tickets go on sale and the roller coaster ride begins.

Royce doesn't say so explicitly, but there's a kind of Robin Hood aspect to dynamic pricing. If a company extracts more of what the market will bear from high-rollers, it can use the revenue gains for other purposes — such as maintaining some lower prices to ensure access for the less well-off, or using the additional earnings to float edgier productions not intended to have mass commercial appeal.

For Center Theatre Group, the Ahmanson, with its typical parade of touring Broadway productions and new musicals aspiring toward Broadway runs, has always been a cash cow that helps support less commercial plays at the 739-seat Mark Taper Forum and the 315-seat Kirk Douglas Theatre.

But not all companies are going for it. South Coast Repertory in Costa Mesa says it has no plans to get on board. The Segerstrom Center for the Arts, which looks to touring Broadway productions to generate extra revenue that can support its classical music and dance series, says that it has tried dynamic pricing on a few of its Broadway shows, that it but won't extend the practice to all musicals or to other genres.

The Los Angeles Philharmonic stuck a toe in the water this season, applying dynamic pricing to "a handful" of concerts, spokeswoman Sophie Jefferies said. Although "it's something we're watching and monitoring," she added that it's not being adopted as a business model.

Los Angeles Opera, however, is "seriously considering implementing it," said marketing vice president Diane Rhodes Bergman.

Philippe Ravanas, who chairs the arts, entertainment and media management department at Chicago's Columbia College, said he's been preaching dynamic pricing to nonprofits since seeing the role it played in helping the Chicago Symphony dig out of a financial hole in the early 2000s. He notes a vast increase in receptivity since late 2008.

"Before the financial crisis, the idea was perceived as rather inappropriate for all sorts of reasons," Ravanas said, "from 'this would never work' to 'it's completely unethical' and 'we don't have the time.' I've seen a radical change in the willingness to experiment, to explore and adopt more sophisticated pricing policies since the economy collapsed."

Rick Lester, a former orchestra administrator who is chief executive of TRG Arts, a Colorado Springs, Colo., consulting company, said clients he steered into dynamic pricing last year saw a 24% average increase in their earnings because of higher prices for some seats and increased sales for others.

"I don't think there's anything inconsistent" about nonprofits wanting to improve their earnings, he said. "As business people who work in the arts, we have an obligation to the long-term health of our organizations, and to pay our artists as much as the community can afford."

mike.boehm@latimes.com

Article found at: 

http://www.latimes.com/entertainment/news/la-et-dynamic-pricing-20110706,0,2760675.story