Fair enough, but the consequences of this mistake are profound, so even if the last time you voluntarily came into contact with calculations more complex than ‘buy six cappuccinos and the next one’s free’ you should still listen up.

I read recently on a blog that a theatre producer can’t afford to sell tickets at a certain price because it’s “below his cost.”

Hmmm.  Let’s dig into that a bit.  Suppose your play starts at 8 pm.  You’ve sold 457 tickets (don’t worry…457 could be any number.  No math required.)  Just before the doors close, somebody runs up to the box office huffing and puffing and buys tickets number 458 and 459.

What is your cost to serve these two last-minute patrons? That is, what is the CHANGE in total amount of money you’ll be spending to put on tonight’s performance?

If you said “damn near zero,” you’re right.

The fact is that serving one more patron causes almost no CHANGE to your costs.  The word economists use for this is “marginal.”  In other words, there is no marginal cost to serving a last-minute patron.

In fact, if you think about it, there’s no marginal cost to serving the previous customer either, or customer 406, or customer 322, or customer 189, or customer 66.

Or possibly even customer 2.

In the short run*, your costs are almost all “fixed.”  A fixed cost is a cost that doesn’t change with the number of people you serve, and the live entertainment industry is mostly fixed costs: rent, lighting, costumes, that kind of thing.  And within the context of a single performance, even things like actors salaries are fixed costs.  It doesn’t matter how many people come through the door.  In most cases, you’re paying the performer the same amount.  (One conspicuous exception to this is the concert business sometimes.)

So what’s the mistake I’m talking about? Theatre producers in particular seem to make all kinds of errors in judgment about what to do based on the notion that tickets have a “cost” to them.  If I truly believe that my 412th seat “costs” me $25 to provide, then I will behave very differently than if I realize that the 412th seat is instead NOTHING MORE THAN A REVENUE OPPORTUNITY.  This will eventually be reflected as a $0 revenue or something greater than $0.

And if you don’t believe me, do this mental experiment:

-Make a list of all the costs to put on tonight’s show.  Write them down if it helps.

-Now estimate how many people are coming to your show and the average price they’re going to pay to be there.  Tabulate the total amount of revenue you’re expecting.

-Now subtract the costs from the revenue.  That the “marginal” profit from tonight’s show.  (Hopefully, it’s positive.)

-Now add five to the total number of people coming to your show.  Change the revenue as a result.

We’ve definitely added revenue, but are there new costs?  What exactly would they be and what’s the total you added to your cost line above?  My guess is that “damn near zero” is what you came up with again.

So if these last five people cost you next to nothing to serve, ask yourself this: what’s the difference between them and the previous five or the five before that or the five before that?  The answer is there’s no difference.  Only the very first patron has more than a trivial cost to serve in the great majority of cases.  And really, that’s just another way of saying that deciding to do the show at all is the only thing that has significant costs.

Through this lens, the challenge is completely different.  It’s not about selling the ticket above cost, because we now know that the marginal cost of providing that ticket is zero.  In reality, the idea of a marginal cost on the ticket is absurd.

What you should be doing instead is managing revenue per available seat to be as high as possible.  Every seat in the house is an expiring opportunity to improve the financial performance of your show.  It’s a potential revenue-bearing asset, not a liability with a cost.

So go easy on yourself if you’ve made this mistake in the past.  You’re not alone.  Big companies all over the world made this kind of mistake for most of the 20th century.  In fact, before good modeling software came along, it was pretty difficult to think “marginally” because it was too time-consuming.

But now, it’s easy.  Even for theatre majors! BTW, if there’s anyone who has questions about this or could use some help making sure they understand it, feel free to contact me.  While not a theatre major, my MBA was proceeded by a degree in English Language and Literature major.  You’ve been warned!  I do my spreadsheets in iambic pentameter.

*In the longer run, more costs are variable.  You could cancel nights, bring in less usher staff, buy a smaller sound system, or whatever other decisions you might make to reduce the cost structure of a show.  Even then, though, these costs are fixed relative to an individual ticket buyer.  You’re still basically deciding to do a show or not do a show, even if you have reduced the fixed cost structure.

To summarize (though you should definitely go read the piece), Ken shows a picture that he took of a “guest services” desk at a movie theatre and asks why the live theatre business can’t do as least as well when it comes to serving people in this way.  I couldn’t agree more.

Good service is, essentially, free, but you have to have the will to provide it.

Here’s a thing I did way, way back a number of years ago that illustrates that.

Showtime isn't just on the stage. It's in the lobby too.

I worked for a company called Noah’s Bagels here in California.  It was (and is) a high-end bagel place mostly located in nice neighborhoods around the state’s big cities (and in WA and OR, too).

We had a consistent problem in many of the stores where at rush times, mostly the mornings and lunch, people were waiting too long.  After some digging, it became obvious that it was because the staff at those was not fully focused on serving customers and was doing some prep and other kinds of work that could be done outside of rush hours.

So I came up with a program called “Showtime.”  All it was, really, was that the manager would designate “showtime” hours in the morning and at lunch, and all employees would work in the front from the start to the finish of those periods of time.  They organized the prep around those peaks so that none was necessary during the peak times.

Finally, we made it a little bit fun.  We created special “alternate” nametags with ’showtime’ themes that the employees would switch to during showtime, and just before the start of Showtime, the manager would have a very brief (2 minutes or less) meeting with everybody right there behind the counter to give them any product news, info or whatever might have been happening that day, but also to announce that Showtime was starting.

It really cost virtually nothing, but it made a big impact.  More people got energetic, focused service and the employees felt they were doing something important by making a special effort.

Funny that it was called “Showtime.”  Maybe I was destined to be in this business (live entertainment) even when I wasn’t…

Ok, so about Entertainment Marketing, this is a blog created by the super awesome Damian Bazadona of Situation Interactive.  He’s invited me, Ken Davenport, and several other great people to contribute to the blog, and I think it’s fabulous.  There will be some things here that show up there, and some things there that don’t show up here, so you should read both!  I posted the “More Pie Now!” article yesterday as my inaugural contribution.  It’s still in soft launch, but the content that’s coming out is terrific.

The panel was great…led by Jim Royce of Center Theatre Group, but also with representatives from Allied Live, Situation Interactive (see you on Tuesday in NYC), Davidson Choi and the Pantages.

I mention it because of a question we got from the audience that I’ve probably heard 1000 times in my Internet career, and it’s really worth repeating.  Someone (didn’t catch his name, sadly) asked if there were any tricks to “going viral” with a video or other piece of content.  In fact, I think he specifically asked if there was anything he could do to increase his chances of “going viral.”

You should be able to prevent 'going viral' by washing your hands frequently.

I thought, but did not say, never wash your hands.

I then thought, but did say, “You will never go viral.”

Never.  Give it up.

Of course, neither will I.  In all likelihood, there will never be a morning where you post a video or something and wake up to find that a million people have viewed it.  Could it happen?  Sure, it COULD happen, but it probably won’t.

And anyway, that’s missing the point of this content.  The point is to create a tool for engagement with your committed audience so that their enthusiasm grows and spills over to other people.

In effect, what it means is that while today your videos may get 50 views, in a year they should get 200 or 400, and then the year after that, maybe 2 or 3 thousand.  And then the year after that…well, you get the idea.  This is not viral growth, but it’s still pretty awesome.  What you’re building, instead of hoping for a miracle, is an increasing level of engagement with more and more people, and if you can continue to build that ball of activity, then you’ve got something.  It can be predicted, managed and most importantly, counted on.

Or you can have a marketing plan based on hoping for miracles.  Up to you.

What’s interesting is that even some of the supposed organic ‘viral’ phenomenon aren’t as organic as they seem.  The famous ‘dancing wedding’ video from a year or two ago was real, but it got promoted like crazy by Sony to rehabilitate the career of the truly loathsome Chris Brown.  (I’ll let you examine the ‘forensic evidence’ of this.)

And the big-time pros who do an outstanding job creating highly-polished content and have had ‘viral’ hits realize they can’t just capture lightning in a bottle either.  Remember “This Land is Your Land“  during the 2004 election from the creative geniuses at JibJab?  They’ve done great work since, but nothing has rivaled the original.  They know this and aren’t staking their business on another runaway ‘viral hit.’

What you CAN stake you business on though is the connection you can build between your best fans and supporters and you by virtue of creating content that is genuinely for them and related to what they like about what you’re doing.  It doesn’t have to cost that much money.  Here at Goldstar, we produce a video or two a week, and sometimes they get 100 views and sometimes they get more like 1000 views.  That overall number is on the rise, but we don’t make them in hopes that tomorrow morning, suddenly 1,000,000 will be watching me announce the winners of our ‘Dreamgirls’ contest.

We make them because we want to make sure our best, strongest fans know we care and are working to make their Goldstar experience more interesting.

I’ve always hated the term ‘going viral.’  It makes you sound like an amateur if you say it, and it leads people to this “jackpot” marketing mentality that is silly and destructive.  You’ve got to earn attention by delivering value.

But, hey, if I’m wrong and a video of your tap-dancing to a Beastie Boys song at the airport gets 10,000,000 views, great.

Now prove it wasn’t blind luck by doing it again.

I was on a panel with a group of really interesting folks, and the topic was “Innovative Ways to Sell Inventory.”  My prepared notes had me talking about the importance of addressing a female audience, since 85% of all branded products are bought by women in America.  (Frankly, I’m not even sure I believe that stat, but I believe it’s directionally accurate.)  I asked the audience how many people believed women bought 25% or more of all tires in the US and about half or perhaps a little less said they believed that.

But the number’s really 60%.  That one blows me away.  It implies that either women are buying tires for men, men don’t replace their tires, or women have more cars on which tires must be replaced.  But this statistic, I wholeheartedly believe, because it’s true of just about every other segment of the economy.

And that’s how the panel was going until I got sidetracked.

One of the other panelists said a couple things that I felt had to be refuted.  He asserted that discounts are better when the person buying the discount doesn’t know they’re getting a discount and that the challenge of getting people into more shows is that the shows are too expensive.

Let’s take those one at a time.

How much does it cost to fly from wherever you are to Chicago?  Or Miami?

You don’t know.  I don’t know.  If I said I just bought tickets to Miami for $1000, you probably wouldn’t be surprised.  If I also said I bought tickets to Miami for $200, you also probably wouldn’t be surprised.  You have no idea what a ticket to Miami or Chicago costs.  You know what you’d pay and you know what feels expensive, but you have no mental interface into thinking about what these things should or do cost.

Because, really, who doesn't like pie?

This isn’t good for the travel industry.  Despite decades of smart, high-powered dynamic pricing, the industry has done nothing but lose money.  In fact, a few years ago, the airline industry lost more money than the industry has collectively ever made put together.  But the exceptions to this are the airlines (like Southwest) where the pricing is far more transparent.  Sure, there are different prices, but it’s straightforward:  it’s cheaper if you buy early; it’s cheaper if you fly on certain days; but there’s a table and it’s all laid out for you.  I know that flying to the Bay Area on SWA from Burbank should cost me about $180 to $200 round trip if I book for a couple weeks out.  (What do you know?  I just checked southwest.com and the “internet only” fare for a roundtrip ticket from Burbank to Oakland in two weeks is $180.)

Ask yourself this:  do you think consumers like the fact that it’s impossible to know how much a plane ticket is going to be worth?  My feeling is that they don’t.  They accept it, perhaps, but they don’t like it.  And flights are, often times, necessities.  They’re more or less a commodity that people buy because they either MUST go somewhere or WANT TO go somewhere.  Tickets to live entertainment aren’t that.  The live entertainment is the point.  By blinding people to value, there’s a good chance that the live entertainment industry will step over dollars to pick up dimes, just like the airline industry has done.

Again, except Southwest.

Which brings me to my next point.

I went on a bit of a rant at the panel (which I could tell from body language that about 1/3rd of the crowd really supported) about my belief that the real issue isn’t optimizing what we’ve got.  It’s growing the audience for live entertainment.

It’s growing the audience for live entertainment.

It’s growing the audience for live entertainment.

This is a battle that in many ways, we are losing.  There’s great live content all over the place that is under-enjoyed and undersold.  There are 10 times as many qualified potential live entertainment buyers as there are live entertainment buyers.  It’s well and good to slice the pie more efficiently, but the pie’s not big enough.

And the tragedy of that is that there’s a nation of people who love pie!  Live entertainment is what everyone likes to do, but there are barriers that we need to help them overcome.  We need to give them more reasons to go out, help them understand what’s great and fun about what is happening out there, and of course, design the experience FOR them, rather than just expecting them to cotton on to how great it is.

The fallacy is that every consumer has perfect information, and this is a typical ivory tower fallacy.  Consumers, the assumption goes, make rational decisions based on all their options and primarily decide whether something is worth the offered price.  Well, that’s sorta true at best, but what’s even more true is that for the most part, consumers don’t give a moment’s consideration to going to your event (or the ones that we sell on Goldstar.)  We’re not winning enough of the battles for mindshare to become the first thing that people think of doing.

That’s the real issue.  Price optimization is a nice tool, but it’s inherently inward-focused.  The gold mine is beyond the people who are already there, although of course, they are very important too.

Which brings me back to Southwest Airlines.  This is a company worth more than the traditional major American airlines put together, and why?

Because “you’re now free to move about the country.”  The whole founding idea of Southwest is this:  people should fly more.  They should fly to more places more of the time.

Has it worked?  I think the question answers itself.  Southwest hasn’t had an unprofitable year in decades, even after 9/11.

Was it pricing?  It was in the sense that in order for people to fly more, it had to be something they could afford to do more, but more than that, it was making it easier, quicker, friendlier, as reliable as the Japanese  Rail, and letting them know that it could be done.

So the choice is pretty straightforward: Southwest Airlines or Delta?  Micro-optimization on the existing pie or a much bigger pie?

That is, of course, unless we’re aware of it and manage to choose the present that we actually want.  Easier said than done, obviously.

In business, though, the process of picking the present instead of living the past has gotten a boost in the last couple of years.  This recession is brutal, but it is definitely doing what recessions are supposed to do, which is to trim the dead weight of the past and make the tree, eventually, ready for healthy growth again.

Phone sales could be the Miss Havisham of ticket selling

I saw that Continental Airlines is laying off hundreds of phone-based reservations agents, and while it’s always tough for people to lose their jobs, I think most of us would agree that the idea of hundreds of people sitting in a room, logging onto the Continental website on your behalf, taking the same information you’d be typing into that website and then “issuing” you a ticket is not a particularly good use of human capital at this point.

In the last decade, you “had” to keep a legacy staff of phone sales people.  For a long time, it was this: “the web is great, but most people still book by phone.”  Then it was, “the web is where most people book tickets, but we still have a core of patrons who book by phone.”

Live entertainment faces the exact same thing.  Phone sales are part of the past, which is dead and gone and never coming back.  A few years ago, a survey that Goldstar did showed that even among the 65+ co-hort, the web was the preferred way to buy tickets.  Things will have evolved significantly since then.

I’m not saying no one buys tickets or wants to buy tickets via phone from you any more.  I’m just saying that for most venues, it’s close enough that if you dropped it, they’d probably just go use the web.

It’s hard to let go of the past in ways big and small.  It’s much more comforting to think of the future as a gradual continuation of the present, but it’s not always the case.  I’m not really overly concerned about whether venues do phone sales or not.  But what I do think is important is that they confront the present not through the lens of the buried past, but of current and future reality.

Here’s my view of this.   There’s nothing inherently wrong with the secondary market.  Secondary markets are an indication of healthy demand for a product.  But I don’t like the blurring of the line between primary and secondary markets for two reasons: it tends to create bad customer experiences and it’s bad business.  It’s much better for them to stay clearly separate.

For example, there are times when a good broker is a life saver, getting you tickets you really need to get at the last minute or finding you that special, exact seat you want for a show that sold out.  There’s a value added there, and that’s good.  There are also times when brokers try to make their money by creating clouds of obscurity about the availability and price of tickets in the regular market.  The fact is that most consumers don’t fully understand what ticket inventory is available and where to buy it, and some of them naively buy from the first broker site or broker ad they see, thinking that’s the one and only place to buy tickets.

Should they be more circumspect before buying?  Of course, but the fact that some brokers work hard to create that confusion means it’s a business that still, for many, has an ethical asterisk next to it.

For TM, I think we’re going to see them divest this business for these reasons and others, but who knows?  I believe strongly that while a robust ticket buyer and seller marketplace (a la Stubhub) is incredibly valuable, there’s considerably less value in a site primarily made up of broker ticket listings, and I would add to that that we had a secondary market bubble a couple years back.  It has most definitively popped.

For the record, I don’t believe that TM deliberately steered people to its Ticketsnow site in order to deceive them.  The upside for them in doing that is so small that it beggars belief, and their reasons for acquiring Ticketsnow had nothing to do with selling secondary market tickets instead of primary market tickets.  It was to add revenue, not replace one kind of revenue for another.  Now, that may or may not have worked out, but it seems obvious to me that this isn’t in line with any kind of corporate strategy that would be worth TM’s time, considering the scale of its business concerns.  It’s just small potatoes and fraught with trouble, as evidenced by what happened.

Still, I question the emphasis on the secondary market in TM’s corporate strategy.  I think it’s misplaced, based more on competitive matching with eBay, and basically puts them in business with a lot of people (brokers) they can’t control, which means they can’t control the customer experience.

And that’s something you always want to be able to guarantee.

“In early 2003, ACT Theater was down to its last $3,000. Only an aggressive fund–raising campaign and ruthless budget cuts kept the theater afloat. Despite the belt tightening, over the past five years ACT has piled up another big debt: more than $2.5 million. On top of that, like every nonprofit arts group in town, ACT has had to cope with the recession, a downturn in season subscriptions and a drop off in corporate giving.

[Carlo] Scandiuzzi: “A lot was riding on us balancing the budget this year.”

Note to anybody running any organization: a lot is ALWAYS riding on balancing the budget (and preferably a little better) every year.  It’s just that in Carlo’s case, the accumulated financial problems of the organization meant that the stakes were much higher than usual.

Remember the feeling of having your own clubhouse as a kid? ACT in Seattle has created that feeling again with its membership program.

But I digress.  Belt-tightening and aggressive fund-raising helped the organization stop the bleeding, but they still identified a significant problem: they had a building with four stages.  Now, this is nice, but it’s also expensive, and nothing’s worse from a maintenance and mood point of view than a building sitting empty.  It’s like living in the plague years, and believe me, I know the feeling.  At the end of the dot-com boom (you know, the ‘bust’ part), I spent a lot of time in office buildings set up for 200, but occupied by 20.  You feel like the guy who can’t make his mortgage payment but still drives the Bentley he leased when times were better.  It’s nice  to have the Bentley, but it’s killing you.  Which makes it a lot less nice to have the Bentley.

So ACT took two really interesting steps.

First, it threw open the doors to having other, often smaller organizations use the building: “ACT has teamed up with everyone from dancers and musicians to smaller theater companies. It also started a new works series. Those initiatives helped the company increase artistic offerings from 12 shows in 2006 to 45 last year.”

A propos of our discussion about not shutting down the factory, this is exactly right.  Utilization!  You’ve got a fixed cost in the form of a building that’s not easily disposed of (and you don’t want to.  It’s a valuable asset in the creation of content.)  The answer’s not shutting down; it’s gearing up, but in a new way.  This move alone shows me what kind of people work at this organization.  Not committed to the past, not arrogant, not closed minded, focused on solutions, and fired up to move forward.

And that’s before I mention the next thing, which is one of those concepts that it’s nice to see someone finally trying:

“In addition to its traditional season subscriptions and individual ticket sales, ACT launched a membership program. For $25 a month, members can see anything at ACT, as often as they like.

Scandiuzzi: “Like a gym membership. What it does, it appeals to a younger constituency that wants flexibility, doesn’t want to be tied to let’s say, I have to be here every other month. It frees them, they can call the day before, see a play, a dance, whatever.”

Brilliant.  Absolutely brilliant.  Again, it’s about utilization, but it’s also about breaking with the failed past.  A number of years ago, a friend of mine had a job he really hated.  I mean, it was the kind of job where waking up every day made him miserable, but he wouldn’t quit because he was afraid of what came next.  Not that he was afraid that he might not be able to get a job, but that he didn’t know if he would like the job he got next.

“Well, you know you hate the one you’ve got, don’t you?  Even IF you just just randomly jumped to a new job, you’d stand pretty good odds it was better than your current situation,” is what I said to him.

The financial situation of the ACT was terrible.  Absolutely abysmal and it brought them to the brink of disappearing.  Therefore, a dramatic change in a new direction, especially one as smart as this, could hardly be anything but an improvement.

Scandiuzzi says, “”It seems like it’s a fire sale, but when you really look at the numbers, we come out far better in the long run than we would otherwise.”  It doesn’t seem like a fire sale to me.  A predictable, monthly $25 per month from hundreds of “members” sounds like the basis of a good business model.

And they balanced the budget for the year.

I approve.

They went from being banks to providing “Financial Services.”

I guess that’s fine, but ask yourself this: when was the last time you said to yourself, “You know, I’d really go for some financial services right now.”

You think these would still be popular 50 years later if they'd been sold as a "personal transportation vehicle"?

Never.  It was never when you last said that.

I saw an outdoor advertising campaign today that said “Discover the Arts” in your local city, and I had that same empty reaction to the term.  Sure, some people support “the arts” generically, but that’s a thin slice, and really, “the arts” aren’t what move people.

General Motors has the same problem.  It’s too, well, general.

By contrast, all I have to do is say “Corvette” and for some people, the drool begins to form on their lips.

The point is that people don’t respond to generalities; they respond to specifics.  Few people get fired up about team sports; but a lot of people bleed Dodger Blue  or the color of their own favorite team.  Just a handful of high-minded people are actually moved by the concept of “modern dance”; but Alvin Ailey’s dance troupe brings the house down.  It tends to be just purists and insiders who think about “the Theatre”; but I’ve sold tens of thousands of tickets to a show called “Wicked” and millions more to thousands of other specific shows.

And so while I applaud the general goals of campaigns to get people to enjoy “the arts,” I also suggest that these campaigns keep the goal, but change the tactics.  You can’t sell a generality to anybody who isn’t already convinced.  Sell them not “theatre,” but a specific, mind-blowing show like “Avenue Q.”  Don’t tell them to go enjoy the virtuosity of classical music; tell them that this incredibly cool young conductor named Gustavo is conducting some great music under the stars at the Hollywood Bowl.  Don’t tell them to enrich their lives with “the arts.” Show them what you mean when you say “rich.”

“Many arts managers are angry with me. They do not appreciate my advice not to cut programming during this recession. I continue to say that creating large, important projects is central to creating fiscal health. Especially when there is less money for the arts (and there is less money for the arts today), arts organizations must compete harder. As donors decide which organizations to continue to support, the institutions that are doing vital, important work are the ones who will continue to be supported. Not only must the work be interesting but the marketing of that work and of the institution as a whole must be aggressive and creative.”

And I fully agree.  When you take an introductory economics course, you learn about when and and how to make a ’shutdown’ decision.  Now, life’s not as simple as an Econ 101 course, but you can still learn a lot from this way of thinking, which I’ll try to explain.

Keep that "Factory" Humming

Imagine you’ve got a factory that makes skates.  Whenever you run your factory for a day, it costs you to pay the workers, the electricity, to ship the skates, etc.  These are called variable costs because you only have them if you produce something.  The other costs are called fixed costs because you’ve got to pay them whether you produce or not.

The ’shutdown’ question is this: does operating your skate factory produce more revenue than variable costs?  You can’t count the costs you’ll be paying anyway because, well, you’ll be paying them anyway.

So if producing 10,000 pairs of skates brings in $200,000 (at say, $20 per pair), then the question is what does it cost you per day, not including rent, salaries, insurance, taxes, and all the other things you have to pay regardless, to produce those skates?

If the number is less than $200,000 you should produce.  If not, Econ 101 would tell you to shut down.

So let’s stop talking about skates.  If you’ve got a venue to run, your fixed costs are pretty high: building costs, salaries, taxes, maintenance, whatever.  The variable costs of having the show can also be high, but obviously, they’re only a certain part of the overall cost structure.

And honestly, if your variable costs exceed your revenue on a show, you should really be rethinking what you’re programming.

Because in my view, your job as a marketer of live entertainment is to put something interesting in the building every night (and every hour) possible.  You want a non-stop stream of people coming to see what you’re up to.  You want to leverage the very significant fixed costs that go into running an organization in as many interesting shows as you can.

You want life in that building 24/7 or as close to it as practically possible.

The only reason to shut down in my view is this: you’re losing money badly and you need to rethink your programming.  Take 2 or 3 months off and do that, but when you come back, you’d better have some better ideas about what goes on the stage.

Because if you can’t do that, your real ’shutdown’ decision is just a matter of time anyway.

In the meantime, you can watch the interview we did. It was fun to do so hopefully, it’s fun to watch.