Restructuring Ticket Pricing Policies by Implementing Innovative Pricing Strategies for Bundesliga Clubs

Table of Contents

1. Introduction

2. Conceptual Approach
2.1. Situation Analysis and Benchmarking of the Sports Industry
2.1.1. The European Sports Industry
2.1.2. Ticket Pricing Situation in Europe
2.1.3. Demand Drivers
2.1.4. The American Sports Industry
2.2. Theoretical Pricing Approaches
2.2.1. Price Strategies as Profit Driver
2.2.2. Price differentiation
2.2.3. Price Strategies Managing Demand and Capacity
2.2.3.1. Revenue Management
2.2.3.2. Dynamic Pricing
2.2.3.3. Dynamic Pricing Attempts in America
2.2.3.4. Usability of Dynamic Pricing Policies in the Soccer Industry

3. Price Setting of Borussia Mönchengladbach
3.1. Season Tickets
3.2. Match Day Tickets

4. Empirical Evaluation of the Price Setting
4.1. Bias Analysis
4.2. General Information for Clustering Purposes
4.2.1. Evaluation of General Information
4.2.2. Conclusion of General Information Survey Results
4.3. Van Westendorp Approach
4.3.1. Evaluation of Survey Results
4.3.1.1. Evaluation of the Stadium as a Whole
4.3.1.2. Evaluation of the North Curve
4.3.1.3. Evaluation of the South Curve
4.3.1.4. Evaluation of the West Tribune
4.3.1.5. Evaluation of the East Tribune
4.3.1.6. Evaluation of the Whole Stadium Except North Curve
4.3.2. Conclusion of Van Westendorp Survey Results
4.4. Dynamic Ticket Pricing Approach
4.4.1. Evaluation of Survey Results
4.4.2. Conclusion of Dynamic Pricing Survey Results
4.5. Discussing the Possibility of a New Pricing Strategy
4.6. Price Implementation Recommendation

5. Conclusion

6. Recommendation for Further Research

7. Reference List

8. Appendix

Table of Figures

Figure 1: Comparison of European Ticket Prices

Figure 2: Share of season and match day tickets oft he sold tickets in the Bundesliga from the season 2004/2005 to the season 2014/2015

Figure 3: Levels of Price Differentiation / Price Discrimination

Figure 4: Development of Demand Driven Pricing Theories

Figure 5: Comparison of Static and Dynamic Pricing

Figure 6: Ticket Prices of Borussia Mönchengladbach 2015/2016

Figure 7: Ticket Prices of Borussia Mönchengladbach - Comparing Season and Match Day Tickets

Figure 8: Match Day Ticket Prices - A Regional Comparison

Figure 9: Evaluation of General Evaluation

Figure 10: Evaluation of Reasons for Attending Match Days

Figure 11: Van Westendorp Price Sensitivity Meter

Figure 12: Van Westendorp Price Sensitivity Meter - Whole Stadium

Figure 13: Van Westendorp Price Sensitivity Meter - North Curve

Figure 14: Van Westendorp Price Sensitivity Meter - South Curve

Figure 15: Van Westendorp Price Sensitivity Meter - West Tribune

Figure 16: Van Westendorp Price Sensitivity Meter - East Tribune

Figure 17: Van Westendorp Price Sensitivity Meter - Whole Stadium Except North Curve

Figure 18: Evaluation of Van Westendorp Price Sensitivity Analysis

Figure 19: Impact of Demand Drivers - Whole Stadium

Figure 20: Impact of Demand Drivers - Seat Location

Table of Appendices

Appendix A: Deloitte Sphere of influence - Comparing the European Leagues 70 Appendix B: Stadium Utilization Figures in Europe According to the Bundesliga Report 2015

Appendix C: Price List - 1.FC Köln 2015/16

Appendix D: Price List - Bayer Leverkusen 2015/16

Appendix E: Price List - Schalke 04 2015/16

Appendix F: Price List - Borussia Dortmund 2015/16

Appendix G: Survey Design of this Master Thesis

Appendix H: List of Survey Results

Appendix I: Evaluation Data of Survey Results

Appendix J: Claims of the Fan Initiative "Kein Zwanni"

1. Introduction

For hundreds of years people have been highly affine to any kind of sports. Thousands of people regularly watch sports events online and offline and in society the topic of a team’s or an individual’s performance is always passionately discussed. Taking a look at Europe the most popular sport is football. Mughai (2016, p. 13) elaborates that football - or sometimes called soccer to avoid interchanging with American football - is globally ranked first in terms of popularity. Supporters that are very passionate about their team are visiting the huge football stadiums week by week. As the capacity of a stadium is limited sometimes fans are even purchasing their entrance tickets weeks or months ahead of the event itself. Especially the German Bundesliga has been facing an enormous interest growth within the last years resulting in an average of 42.609 visitors per match day making the league the most visited one in Europe. (DFL, 2015, p. 22f)

Similar to the ever-growing popularity of sports, the costs are rising. This is caused by mounting player salaries, increased transfer fees and other operational expenses. (Drayer, Lee & Shapiro, 2012, p. 184; Breuer & Kemper, 2015, p. 142) Sport clubs therefore need to steadily open up and augment their sources of revenue: match day revenues, advertising, broadcasting, transfer fees and merchandising. (DFL, 2015, p. 26f) Some of these revenue streams can be actively influenced by the Bundesliga clubs whilst others are hard to affect. One of the determinants that can be modified is ticket pricing.

Ticket pricing, however, has always been delicate because the amount of seats is always fixed and there are no marginal costs related to vending additional ones. Fans are frequently referred to as being highly sensitive in terms of changes in prices. Initiatives demonstrating against top match pays are one of many examples proving this assumption. (Sport1, 2016; Herold, 2015) In addition the demand can hardly be predicted, thus pricing theorists developed concepts which allow firms to set prices more suitably to the given circumstances, namely dynamic pricing, variable pricing and revenue management.

Currently the sport industry is approaching ticket pricing with a very traditional and straight-line strategy. Evangelista (2010) as well as Kobritz and Palmer (2011, p. 118) identify the pricing strategy of soccer clubs as represented in three very basic categories: “one price for season tickets, one price for individual game tickets, and another price for group tickets.” Whereas Drayer, Lee and Shapiro (2012, p. 184) and Breuer and Kemper (2015, p. 142) highlight that the strategies for sports are either based on the seat locations or identically for “every ticket and every game.” Consequently it is stated in literature that the pricing structure is suboptimal and leaves room for improvements. (Drayer, Lee & Shapiro, 2012, p. 184; Breuer & Kemper, 2015, p. 143)

While the airline and hotel industry - also being reliant on capacity constraints - has been repeatedly changing prices in order to cope with natural fluctuations of consumer demands, the sport industry has been heavily depending on a cost-based pricing approach with the identified goal of “maximiz(ing) attendance and promote fan satisfaction.” (Drayer, Lee & Shapiro, 2012, p. 184) Ignoring the influence of consumer demands on ticket prices, sports clubs seem to be lacking flexibility and thereby missing a chance of increasing revenues. “An understanding of consumer demand can help teams increase attendance and ancillary revenue for low-demand games and maximize ticket-related revenue for high-demand games.” (Drayer, Lee & Shapiro, 2012, p. 184)

Therefore the objective of this Master Thesis is to explain the prevailing pricing strategy in the German Bundesliga and to present innovative, value-based pricing approaches which can be tested. Creating an understanding of the fans’ willingness to pay and factors having impact on the purchase decision making process, a gap in research is supposed to be filled. In this Master Thesis the author aims to find sufficient, relevant, reliable and empirically proven answers to the following research questions:

Why have innovative value-based pricing strategies like dynamic pricing not yet been implemented in the German Bundesliga?

To what extant are fans willing to pay different prices depending on dynamic factors?

What determinants need to be taken care of when changing the prevailing pricing strategies of Bundesliga clubs?

This Master Thesis is structured as followed: It starts with an analysis of the performance of the major European soccer/football leagues. The leagues are analyzed in terms of their stadium attendance and utilization figures and concerning their financial development during the last seasons. After analyzing the given situation the ticket prices - both season and match day tickets - of major teams in each league are identified, presented and compared. The focus is set on the pricing situation of Bundesliga clubs and is in detail discussed on the basis of the benchmarking of other leagues. Afterwards the author describes the role of fans and pinpoints demand drivers that lead fans into the stadiums. Taking a look at the American sports industry ends the situation analysis.

Next, the theoretical approaches of price differentiation, dynamic pricing as well as the belonging concepts of revenue management and variable pricing are explained. However the center of this Master Thesis is laid on the dynamic pricing approach. Showing the characteristics, prerequisites and usability of these concepts the author provides a detailed understanding which is the basis of and can be transferred to the empirical part.

Initiated by an analysis of the current pricing strategy of Borussia Mönchengladbach - being the chosen representative German Bundesliga club - the empirical part begins. The selected research technique of a survey is explained and the questionnaire itself is introduced. The survey is based on two fundamental concepts: the price sensitivity approach of Van Westendorp and the dynamic pricing approach. The evaluation of the survey results is followed by a critical discussion about the possible impact and relevance of a new pricing strategy from the club’s and the fans’ perspective. Afterwards a recommendation for the implementation process is provided.

2. Conceptual Approach

This part of the Master Thesis includes a situational analysis of the European soccer industry in terms of financial performance, stadium utilization and ticket prices. The European teams are then going to be compared to the German Bundesliga. Consequently a detailed look is taken on pricing concepts. In addition the American sports industry is briefly monitored.

2.1. Situation Analysis and Benchmarking of the Sports Industry

In order to be able to critically analyze the pricing situation of German Bundesliga clubs it is necessary to examine the situation in other European soccer/football leagues and to benchmark them. This part of the Thesis thus is designed to illustrate the performance of other leagues and teams in the major European leagues providing an insight on other approaches to ticket pricing.

2.1.1. The European Sports Industry

Sport has always been of great interest for a vast majority of the population in Germany and Europe which can be observed by looking at TV viewing figures or stadium attendance figures. This interest is spread throughout almost every form of sport leading for example to an average stadium attendance of 15.000 spectators at the French Open finale in Paris every year or an average amount of 4.500 viewers during the German handball season. (HBL, 2014) As highlighted in the introduction, the German Bundesliga is on top of the list of sports with high attendance rates, with 42.000 fans visiting the German stadiums every week. (DFL, 2015, p. 22f)

Comparing the European soccer/football leagues it can be observed that the German Bundesliga is ranked best in terms of stadium attendance. According to the DFL (Deutsche Fußball Liga, 2015, p. 22f) the British Premier League is ranked second with 36.600 spectators, followed by the Spanish Primera División with 26.800, the Italian Serie A and the French Ligue 1 with 23.300 and 20.900 respectively. This distribution is on the one hand caused by extremely modern and extended stadiums in Germany and the superb infrastructure, which was a side product of the FIFA World Cup in 2006, but also by the exceptionally high stadium utilization rates. Fischer and Nufer (2013, p. 50) illustrate that the average stadium utilization in the Bundesliga is 93%, whilst in England 92%, in Spain 73% and in Italy 55% are utilized.

The impressive interest in soccer/football in Europe is naturally mirrored in the turnovers of each League. According to the Deloitte Annual Review of Football Finance (Deloitte, 2015, p. 8; Appendix A) the revenues of all European soccer/football clubs in 2014/15 have risen tremendously up to €11.3 billion which represents a 15% increase compared to season 2013/14. All previously mentioned leagues have benefitted leading to revenues of €3.9 billion in England (+32%), €2.3 billion in Germany (+13%), €1.9 billion in Spain (+3%), €1.7 billion in Italy (+1%) and €1.5 billion in France (15%). (Deloitte, 2015, p. 8)

Nufer and Fischer (2013, p. 49) try to generalize the revenues by rooting them back to three very basic revenue streams: “broadcasting, commercial activities, and ticket sales”. The DFL Bundesliga Report 2016 (p. 26) compares the revenue streams of the Bundesliga and divides them into six categories: match day, advertising, broadcasting, transfer, merchandising and miscellaneous. Broadcasting is responsible for the largest part of the total revenues of €2.622.561 with a 27,88% contribution. Advertising generates 25,65% and match day revenues 19,85%. (DFL, 2016, p. 26) Focusing on these three revenue streams it can be said that almost three-quarter of the total Bundesliga revenues is generated by the categories highlighted by Nufer and Fischer. In comparison the British Premier League generates £1.605.232,900 from selling broadcasting and commercial rights. (Premier League, 2015b) The sale of broadcasting rights for Premier League matches generates almost half of the revenue that is created by all of the Bundesliga revenue streams. The Premier League (2015a) claims that “the mechanism for distributing this revenue is the most equitable of Europe’s major football leagues” using a 1,53:1 distribution rate between teams at the top of the table and the ones at the bottom.

Soccer/football clubs are highly dependent on their revenue streams as their business is related to high expenditures and volatilities (caused by the team performance). The European leagues need to cope with ever-growing financial obligations such as stadiums maintenance costs, transfer fees or player salaries. (DFL, 2014; Drayer, Lee & Shapiro, 2012, p. 184; Beuer & Kemper, 2015, p. 142) In order to stay competitive with other leagues, clubs are forced to purchase players with enormously growing transfer fees which results in the requirement of ever-growing revenue. Especially the tremendously increasing difference in revenue coming from selling broadcasting rights leads to a certain degree of inequality amongst all European leagues. This situation demands for a constant search of best ways to improve revenue streams.

2.1.2. Ticket Pricing Situation in Europe

Ticketing in general includes all activities that are directly or indirectly related to selling tickets. The process of ticketing starts with the preparation and ends with the vending itself. The preparation phase seeks to develop an offer that significantly increases the purchasing probability of customers. According to Chatrath (2014, p. 3) four categories are important in this context: product, price, distribution and communication policies. The product policy deals with the kind of tickets that are offered meaning season or match day tickets - in a sport context. How the tickets are sold is regulated in the distribution policy. The price policy deals with price strategy, setting, implementation and discounts or bonuses. Addressing the target groups most effectively is done by the usage of communication policies, including websites or Facebook for example.

Despite having the highest attendance and utilization rates in the European comparison the previous section showed that Germany is lagging behind in terms of revenue creation. Some of the profit drivers such as broadcasting payments cannot be directly affected by the Bundesliga clubs. Therefore clubs need to focus on those streams that can be actively impacted. However literature refers to the ticket pricing policy of the clubs - being actively influenceable - as significantly underprized. Nufer and Fischer (2013, p. 49) state that “the Bundesliga ticket prices are the cheapest among Europe’s top leagues. As the price is the most effective profit driver, better pricing decision can drive revenues and profits up without any upfront investment.” This statement shows that the Bundesliga seems to fail concerning their pricing policies. But how does the pricing situation in Germany and Europe look like?

Nufer and Fischer (2013, p. 51) compare the ticket price ranges of matches categorized as normal and top matches during the 2011/2012 season throughout the European big players: Real Madrid, FC Barcelona, Manchester United, Arsenal London, AC Milan, Inter Milan, Borussia Dortmund and Bayern Munich. As shown in Figure 1, for normal matches the price range of the Bundesliga clubs was between €15 and €67 whilst Spanish clubs were charging €34 to €165, Italian clubs €20 to €155 and British clubs €38 to €80. This comparison proves that the Bundesliga is setting significantly lower prices.

Figure 1: Comparison of European Ticket Prices

Abbildung in dieser Leseprobe nicht enthalten

Source: Author’s own work in imitation of Nufer and Fischer (2012, p. 51)

Within the Bundesliga itself the ticket prices were even lower averaging from €13 for the cheapest ticket up to €48 for the most expensive ones. (Nufer & Fischer, 2013, p. 52) A vast majority of ticket sales of Bundesliga clubs derive form season tickets, which are including entrance to all home matches and a discount compared to ordinary match day tickets. In Dortmund for example 55,000 season tickets were sold for the season 2015/16 at a price of €207. (Burt, 2015) All season ticket prices for standing areas range between €130 and €240 which can be broken down to less than €10 per match for the cheapest one according to Burt (2015). However higher prices can be found in the Bundesliga as well. Burt (2015) also presents the price of a season ticket in the Premier League - of Arsenal London - which is sold at a price of €1461. Naber (2015) supports these figures highlighting the cheapest season ticket to be priced with €1300 and complains about the tremendously higher prices compared to the Bundesliga.

Taking a look at the season tickets of the European soccer/football leagues it can be seen that the most successful team in Germany, namely Bayern Munich, sells its season tickets at a price of €140 and up to €720, FC Barcelona and Real Madrid sell their tickets for €95 to €790 and €220 to €1670 respectively, Paris St-Germain sells for €400 to €2700, AC Milan sells tickets for €200 to €2000 and as previously mentioned Arsenal London offers its season tickets at a price of €1461 to €2570. (BBC, 2015) These season ticket prices reveal that when comparing the best European football teams the German Bundesliga is offering the lowest prices.

Although this seems to be fair to the fans, Nufer and Fischer (2013, p. 53) highlight that clubs with underpriced tickets are losing huge amounts of consumer surplus which consequently leads to high opportunity costs for the clubs. This is especially true for the season tickets as Bundesliga clubs are giving between 14% and 53% discount. (Nufer & Fischer, 2013, p.53) Increasing or maintaining fan loyalty by offering discounts is of course beneficial in terms of customer lifetime value but it also diminishes the revenue that could have been earned by selling tickets on the daily ticket market.

All football teams are dividing their ticket contingent between season tickets and match day tickets. As it can be seen in Figure 2 in the Bundesliga the greatest amount is sold as season tickets. These tickets are generally offering large discounts but they are extremely limited and exceeded by the existing demand by far. Thus season tickets are usually sold out only a few days after the start of the sales process.

Figure 2: Share of season and match day tickets oft he sold tickets in the Bundesliga from the season 2004/2005 to the season 2014/2015

Abbildung in dieser Leseprobe nicht enthalten

Source: Statista, 2016

According to Philipp Biermann, consultant at consultancy Simon Kucher which is specialized on pricing, the Bundesliga is missing out on up to €100 million. (Mersch, 2012) Biermann also shares the opinion that clubs could make use of the extra millions to purchase top players in order to be more competitive internationally. The German soccer industry is famous for underpricing their tickets resulting in a loss of potential revenues. Courty (2000, p. 173) argues that “underpricing guaranties a sellout, and hence generates a certain amount of prestige that acts as a kind of explicit validation of the worthiness of attendance.” Nevertheless these insights highlight a specific room for improvement, as Bundesliga clubs are setting their prices significantly lower than any other European league. Another proof of this assumption is the behavior of British fans that are cheaper off when flying to Germany to watch a match than buying a ticket for their favorite Premier League clubs. (Mohammad, 2015)

2.1.3. Demand Drivers

When talking about ticketing it is crucial to take a look at fan behavior. Büch, Maennig and Schulke (2006, p. 1ff) argue that the role of spectators has changed from being a passive consumer to a co-producer of the sport event itself. Within the last decades the view on the event has drastically changed from being primarily focused on the team’s performance to focusing on the event itself, meaning the experience that can be gained by visiting a stadium, meeting people of same interest and enjoying every aspect of the event. Hence sports organizations aim to increase the time spent in stadiums. According to Büch, Maennig and Schulke (2006, p.1ff) the time spent in stadiums has risen from 120 minutes to 240 minutes. Having in mind that a match endures 90 minutes plus 15 minutes of break, this reveals that the viewers are spending most of their time inside the stadium without even watching sports. Clubs hope to generate correlated revenues from cross-selling merchandising and food or beverage. This is also proven by Pfaff (2000 p. 1) stating that the typical soccer stadium is changing to a soccer arena incorporating a different goal and atmosphere for both fans and clubs.

There are various opinions on factors that have an impact on the demand for sport events. Forrest and Simmons (2002, p. 229) point out that the competitiveness of the match and the uncertainty of outcome need to be considered when talking about stadium attendance. Consequently it means that in a league in which many teams are equally strong, a higher stadium attendance will be noticeable. But this scenario is rarely observed in the soccer/football industry as in almost all of the bigger European leagues there are up to 6 teams that compete every year for the championship.

Borland and Macdonald (2003, p. 478-492) take a different approach and focus on five determinants that lead to increased or decreased demand: consumer preferences, economic factors, quality of viewing, sporting contest and supply capacity. The additional utility that a supporter gains when attending a sports event - regularly or habitually - is determined as consumer preference. Economic factors include direct associated facts such as the ticket price, travel cost, food or beverage cost or the substituting benefits of watching the match at home or elsewhere. Quality of viewing concerns all factors that add value to the stadium visit (position of the seat, quality of food, toilet condition, weather or kick off time). Factors like current team performance, uncertainty of outcome or match significance are interpreted as sporting contest. The last determinant, supply capacity, concerns the stadium utilization.

Some of these factors can be proven when looking at the weekly match day attendances revealing that in the British Premier League for example the stadium utilization is significantly higher “for all 16 teams when they play matches against any of the big four” (Moore, 2010, p. 28) meaning Manchester United, Arsenal, Liverpool or Chelsea. Moore (2010, p. 28) illustrates that the stadium attendance increases by 5,75% on average if one of the big four is participating in the match.

Byer (Peel & Thomas, 2001) interprets another factor as one of the key drivers of demand: loyalty. In their research they accentuate that loyalty is often spread through generations and directly bound to the club’s history and tradition. Additionally it needs to be understood that loyal fans are likely to compare their match day utility of current matches with past experiences. Consequently a hard to measure fact derives as the feeling of identity and loyalty plays an essential role as determinant of match day demand. It is central to remark that a loyal supporter is very unlikely to change allegiance even though prices of another team are significantly lower. Moore (2010, p. 32) uses an oversimplified approach to explain how loyalty impacts the demand and concludes that “football supporters can be classed in two different categories; loyal supporters who will turn up for matches year after year no matter what results/successes the team experiences, and those supporters that vary their attendance considerably, depending on the demand determinants[…].” Nevertheless this segmentation is very simplistic as it leaves out several visitor groups. Lee and Won (2008, p. 639ff) also try to group the supporters into segments and share the opinion that with sport events there is always habitual and consistent attendance related.

2.1.4. The American Sports Industry

For detailed explanation purposes in the theoretical part of this research paper the American sports industry is shortly portrayed and explained. The mentality and purchasing behavior for sports events with special focus on attendance as well as the structure of the sports industry as a whole is presented.

Pijetlovic (2015, p. 38) focuses in his research on the structure of the US sports industry indicating that the sport industry is strictly and clearly divided into amateur and professional sports. Amateur sport is mainly found on a high school or college sports level where highly sports affine students are equipped with scholarships and promoted. The professional US sports leagues however are closed meaning that the same teams remain in one league and no team falls out at the end of a season and similarly no team is able to enter the league, “unless a super-majority of the participating members decide to expand and admit new members or expel existing ones.” (Pijetlovic, 2015, p. 39)

When comparing the US sports industry to the European one Pijetlovic (2015, p38f) emphasizes on one major difference: “Professional sport leagues in the US are honest and unambiguous about profit maximizing being their most important goal.”

Fans in the US are truly aware of this fact and hence are less price sensitive, as they are used to being charged ticket prices with profit maximization goals. The role of a team’s fan is therefore less important to the club in terms of atmosphere creation or loyalty, but highly matters as profit driver.

Rockerbie (2013, p. 4f) measures the American sports industry in terms of attendance figures and highlights that the Major Leagues Baseball games increased attendance from 1980 till 2008 by 4,2% annually. Looking at the whole sports industry in America Humphreys and Ruseski (2008, p. 12) describe the attendance on the basis of a report from the National Sporting Goods Association 2005 that ranks baseball and football as the most watched sports in the US. Throughout their work they identify the interest in sports of any kind as extraordinary and indicate the importance of ticket revenues in this context.

Throughout literature ticket sales for sports events in the US consequently are presented as being responsible for 20% to 50% of all revenues from the National Basketball League, the National Hockey League, the Major League Baseball and the National Football League. (Kim & Trail, 2010, p. 190; Badenhausen, Ozanien & Settimi, 2007) These percentages contribute enormously higher revenue than the revenues retrieved from ticket sales in the German Bundesliga. Kim and Trail (2010, p. 190) highlight that for newer and smaller leagues - just like the Major League Soccer - in percentage terms the revenue from ticket sales is even higher. Hence ticket sales are understood as key revenue stream whilst European soccer teams are even more focusing on the sales of broadcasting rights.

Another important aspect that is required to be mentioned concerns the cost structure and Pijetlovic discusses this issue as well presenting it as a big difference to Europe due to “the salary caps and draft system.” (Pjetlovic, 2015, p. 39) These characteristics of the American sports industry show a different influence of cost factors. Whilst European soccer leagues are facing and dependent on increasing player salaries and transfer fees, the US industry actively regulates these for fairness reasons.

2.2. Theoretical Pricing Approaches

Prices for sports events offer a wide range of pricing variations and price discriminations. Ticket prices differ depending on seats, seat location, date of performance, ticket type, or opponent, just to name a few examples. This consequently results in a very complex price strategy, price setting and price implementation process. Therefore the following sections are used to explain fundamental concepts of prevailing and innovative value-based pricing policies, namely price differentiation and dynamic pricing and the much related theories of revenue management and variable ticket pricing. This Thesis elaborates on the meaning and relevance of the given pricing policies after highlighting the importance of price as a profit driver according to the profit formula. Additionally common characteristics and prerequisites that are mentioned throughout literature are going to be enumerated and clarified. Consequently the usability of the concept in a sports environment will be discussed.

2.2.1. Price Strategies as Profit Driver

When talking about profit making it needs to be defined where it comes from and how it can be calculated. The most essential and popular profit equation is:

This formula reveals that profit can be driven and controlled by mainly three fundamental profit drivers: price, volume and cost. Husseini and Fassnacht (2013, p. 1- 5; Simon, 2004, p. 1084f) identify price as the most effective profit driver as a price increase - whilst all other determinants remain constant - will result in a 100% profit rise. Putting the scenario vice versa: an increase in volume will always be related to an increase in variable costs and hence lower profit rise for every additional turnover, since marginal costs need to be subtracted. In a study conducted by Ehrhardt, Tacke and Vidal (2013, p. 3) for the price consultancy Simon-Kucher & Partners this impact of price is presented even more drastically, indicating that “higher pricing power increases profits by 33%.”

Bell, Tang and Ho (2001, as cited in Husseini & Fassnacht, 2013, p.1) support this assumption and emphasizes that “there is nothing more important than the right pricing strategy.” But how do companies know which prices they should set? The essential pricing model called the ‘pricing tripod’ argues that there are basically three pillars on which a pricing strategy can be build: competition, cost and value. Micu (Micu, 2006, p. 44) remark that most companies base their pricing on the cost pillar which results in problematic issues concerning cost allocation because “unit costs change with volume” as “a significant portion of costs are fixed and must somehow be allocated to determine the full unit cost.”

Herrmann Simon - being one of the most significant researchers in the field of pricing - discusses that in times of uncertain volume growth companies focus rather on cost savings than on changes in pricing strategies to achieve profit growth. Colman, Greenwood and Schedl (2016) breaks down the profit maximizing possibilities in our today’s economy to: volume growth, cost saving and price improvement. “With the first of these now more challenging than ever in a low demand environment and cost saving opportunities hitting diminishing returns, price emerges as both the most powerful and most underutilized profit lever.” (Colman, Greenwood & Schedl, 2016, p. 2) Since cost- based pricing approaches frequently fail to concern value to customers and buyers’ willingness to pay which are of high importance when talking about the sports industry, the following sections will introduce several pricing strategies for price improvement purposes. These strategies belong to the category of value-based pricing approaches and try to identify the true value of a ticket and consequently to exploit the maximum willingness to pay.

2.2.2. Price differentiation

Throughout literature a variety of pricing strategies is introduced and explained. The most suiting and frequent strategy that can be observed in the soccer industry is the price differentiation strategy. This approach aims to extract the maximum individual willingness to pay of consumers by offering different prices centered on consumer segments with different levels of willingness to pay for a specific product. Hallensleben (2010, p. 12) divides price differentiation strategies into basically three categories: first level, second level and third level differentiations - sometimes also referred to as degrees of price discrimination. (Nufer & Fischer, 2012, p. 49f)

Figure 3: Levels of Price Differentiation / Price Discrimination

Abbildung in dieser Leseprobe nicht enthalten

Source: Author’s own work in imitation of Hallensleben (2010, p. 12)

In Figure 3 the price differentiation or discrimination model is illustrated. According to Hallensleben (2010, p. 12), the first level one is explained as price individualization that targets every consumer individually including direct price negotiations or auctions. The second level differentiation varies product prices so that they can be purchased at different price levels from different target groups. Customers are given the choice of self-selecting the most adequate product design and price category.

Hallensleben (2010, p. 12) further explains that second level differentiations can consist of either performance-oriented, quantity-oriented or bundle-oriented pricing strategies. A performance-oriented one includes offering the same product at various prices - seats in a stadium for example. Tendering season tickets, as a part of a quantity-oriented pricing strategy, supply consumers with discounts. A bundling- oriented pricing strategy might include a combination of a match day ticket and a stay in a hotel at the related weekend. The third level price differentiation presents different price levels depending on purchase location or purchasing date, meaning buying online versus in a ticket store or buying at weekends respectively. Hallensleben (2010, p. 12) includes discounts for students and pensioners in this level of differentiation.

Price differentiation is currently the only applied pricing strategy in the German Bundesliga. Quantity and performance oriented prices are primarily found and aim to charge different prices for different qualities of view on the pitch or concerning extra services such as VIP lounges or parking slots. Visitors are segmented into those interested in tickets for standing areas, seating areas and VIP areas. Buhl (2014, p. 27) illustrates that standing areas are mainly responsible for the atmosphere in a stadium and clubs have therefore a particular interest in filling these areas. Consequently in all Bundesliga stadiums the prices for this area are significantly lower than other tickets.

Seats are priced on a performance-oriented differentiation level as the view on the pitch is regarded as a performance criterion. If the view is better from a certain seat, it will be priced higher. The attribute of comfort in this context can be neglected as all seats are more or less the same. Prices for seats behind goals are lower as the view is restricted by ball protection nettings and the other goal is significantly far away. Similarly seats located at the center of the pitch are priced higher offering a perfect view. Fans purchasing seat tickets are typically willing to pay more and are more interested in enjoying the match in an enjoyable surrounding rather than participating in choreographies for example. (Buhl, 2014, p. 29)

Quantity-oriented differentiation strategies in the Bundesliga target season ticket holders as they receive noteworthy discounts for purchasing a ticket that includes all 17 matches on home ground or even all 34 matches of the season. According to Buhl (2014, p. 34) some clubs are offering a discount of up to 49% for season tickets. The aim is to reduce the clubs’ risk of uncertain demand, to build long-term customer relationships and to achieve a high level of customer loyalty.

2.2.3. Price Strategies Managing Demand and Capacity

Dynamic pricing - the main concept of this thesis - manages demand and capacity with the aim of revenue maximization and is frequently referred to as the latest advancement of revenue management as it incorporates the basic underlying thoughts but transfers the concept into a fast and modern market environment. Yet, when conducting different research approaches it can be observed that there is no clear and substantiated differentiation between four major concepts of managing demand and capacity through pricing techniques. In some papers the concept is referred to as revenue management or as yield management, as variable pricing or as dynamic pricing. For the purpose of this paper the concept is identified as dynamic pricing. However all other understandings and approaches will and need to be presented and shortly evaluated in this context.

Figure 4 illustrates and condenses the most important characteristics of the major concepts. It also reveals how the concept of dynamic pricing evolved showing that all pricing strategies managing capacity and demand with the goal of profit maximization show some very common features and characteristics. For the purpose of a better understanding revenue management is introduced first in an extra section whilst dynamic pricing and variable pricing are organized together in another one. The underlying characteristics and prerequisites that are relevant for these pricing strategies are presented and tested for the sports industry before the concept of dynamic pricing is explained in detail.

Figure 4: Development of Demand Driven Pricing Theories

Abbildung in dieser Leseprobe nicht enthalten

Source: Author’s own work

2.2.3.1. Revenue Management

The term revenue management or yield management originally derives from the airline industry in an attempt to forecast demand and capacity availability. (Göksen, 2011, p. 11ff) Chase (et al., 1998, p. 33) defines the underlying processes of revenue management as “determining prices according to predicted demand levels so that price sensitive customers who are willing to purchase at off-peak times can do so at favorable prices, while price-insensitive customers who want to purchase at peak times will be able to do so.”

Initially revenue management intends to achieve full utilization of capacity by matching the right price with the price elasticity of demand by applying price differentiation tactics for diverse market segments. However the main challenge is to achieve the overall goal of maximizing revenues while having fixed disposable capacities that cannot be extended - at least in the short run. In other words, the revenue that a firm is able to generate when having full utilization of the given capacity therefore seems to be limited. Consequently the concrete objective of this concept is to maximize revenue in consideration of the maximum capacity available. Chatrath and Voerste (2014, p. 8) elaborate on this intrinsic attribute and create scenarios in which the capacity is either lower or higher than the demand.

Though this concept has been developed for and most frequently applied in the airline, leisure and travel industry it is possible to find similarities to the sports industry. (Chatrath & Voerste, 2014, p. 8) Within a stadium the maximum amount of seats available is limited and is not extended in the short-term due to extremely high expansion costs. Hence revenue management is supposed to regulate the demand situation and sell the right amount of seats “at the right price to the right customers at the right time.” (Phumchusri & Swann, 2014, p. 240; Bitran & Caldentey, 2003)

One of the underlying key concepts is price sensitivity or insensitivity respectively which is used to define whether customers are willing to purchase a given product at an increased or decreased price level. Revenue management tries to sell as many tickets as possible to those customers who are willing to pay more in order to boost profits. Chatrath and Voerste (2014, p. 10) conclude that in the sports industry it is the maxim of revenue management to sell most of the tickets to those being price insensitive and fill the remaining capacity with those being price sensitive.

Throughout literature Kimes is frequently referred to as an expert in terms of revenue management and thus the characteristics and prerequisite formulations of this section will be based on her findings. In 1989 Kimes (1989, p. 14-19) outlined six prerequisites that favor the implementation of revenue management. These have been widely accepted amongst both researchers and practitioners.

-The ability to segment the market
-Perishable inventory
-Product sold in advance
-Low marginal sales costs
-High marginal production costs Fluctuating demand

In the research conducted by Kimes in 2003 (p. 126) these characteristics are redefined and evaluated in terms of their effectiveness and listed as “relatively fixed capacity, demand that is variable and uncertain, perishable inventory, a high fixed cost structure, and varying customer sensitivity.” If these components are fulfilled companies are likely to effectively implement a revenue management based price structure. However many firms are deterred from adapting this policy because of the risk of customer dissatisfaction.

2.2.3.2. Dynamic Pricing

The dilemma which sports clubs are facing is the relation between prices, demand and capacity. If the teams set prices too high, demand will decrease and the stadium might not be fully utilized. If the prices are being set too low, the demand will increase as well as the stadium utilization but the profit will be minimized. As the common goal of every company doing business is profit maximization, “stadium operators and promoters try their best to sell all the seats in the stadium for every event.” (Virtual Business Sports & Entertainment, 2016, p. 1) The concept of dynamic or variable ticket pricing aims to guarantee a sold out stadium whilst the goal of profit maximization is proceeded.

Brown (et al., 2007, p. 407) distinguishes variable ticket pricing as a change of ticket prices according to the expected demand for a certain event. Contrary to the traditional price setting in the sports industry where prices are set on the basis of solely few factors like place of the seat and opponent, this method includes additional aspects resulting in a variety of price levels based on “the time of the year […], day of the week […], holidays […], the quality of the […] opponent, or their opponents star players.” (Brown et al., 2007, p. 407)

The result of this pricing approach is an enormous seasonal spectrum of prices for the same seat in a stadium depending on the perceived value of the game itself. Basing the ticket prices rather on value than exclusively on the relation of demand and capacity, is a very modern thinking approach as the consumer acceptance of prices for products that provide a great amount of additional value is overall increasing. Brown (et al., 2007, p. 408) agrees by highlighting that it is smart to select prices according to value-adding components as it helps teams to create new sources of revenue.

The ticket prices of variable ticket pricing are set in advance of the season and include differing factors, mentioned previously. Though having many similarities, the precocious price setting process is one of the major differences to the concept of dynamic pricing. According to Dolgui (2010, p. 41) the fundamental idea behind dynamic pricing is based on the response of demand to changes in the price setting and thus the “relationship between price and consumers’ purchasing behavior.” This pricing approach deals with the fluctuations in demand in real time as well as with the assumption that companies can maximize their profit by adjusting price and demand. “With dynamic pricing the firm can exploit high demand by charging a high price, and can cope with low demand by charging a low price to more fully utilize its capacity.” (Cachon & Feldman, 2010, p. 1)

Shpany (2014) tries to illustrate this fundamental dynamic pricing attribute by comparing dynamic pricing to static pricing. In Figure 5 it is exemplified how a dynamic pricing approach differs from a ‘one-price-fits-all’ strategy. A static pricing policy assumes that if a company sets a price on a fixed level there will always be a correlating demand level which results in fixed revenues. In comparison a dynamic pricings strategy sets prices depending on different levels of demand and hence creates higher revenue by meeting different degrees of willingness to pay. With an increasing number of price points the amount of potential revenues increases as well. (Sahay, 2007)

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