This five-part series explores the value-based pricing model’s inner workings and breaks down the model’s most basic elements. The model focuses on competition and cost like other models do but also factors in an often overlooked aspect of your events – the customer. You will also see how this model can maximize your revenues and deliver an experience your customers won’t soon forget. In the first part, we cover the basics of the model. In parts two and three, we look at how the value-based pricing model reveals gaps, increases value, and how the prices should guide the cost. Finally, in parts four and five, we put the value-based pricing model into action and look at determining your ticket types and setting and increasing prices. Our primary goal throughout the series is to break down these various parts to make you comfortable implementing this model into your events.
We started by looking at the three components of value-based pricing – perceived value, actual price, and cost per ticket. Next, we looked at how those components can drive sales and revenue by identifying gaps and increase perceived value. Now, we will look at cost and profitability and how the price should guide the cost instead of the cost determining the price, but first, we need to look at all the factors that go into our events’ cost.
Fixed vs Variable Costs
Looking into some research provided by Eventbrite, they found that 80% of organizers don’t use a cost-planning tool, which is astounding as you would think everyone would want to know the costs of their event before going into it. If you fall into that 80%, I would highly recommend you take some time to figure them out. All you need is an Excel spreadsheet to help put the pieces of this puzzle together.
When looking at an event, the costs will either be fixed or variable. The fixed costs will not be affected by the number of attendees such as venues and guest performers, and the variable costs are the exact opposite. They are the costs that change as the number of attendees increases, such as show programs or food and drink costs. There are no guarantees, though. What may be a fixed cost for some might be a variable cost for another. For example, if you perform in a theatre on one level, your staffing costs might be fixed. Compare that to a multi-balcony theatre where the staffing needs change as you sell out one level and open another. Each case will be unique, so it is difficult to say with certainty which costs go into which category.
Now that we understand these categories, we need to see how these costs and the overall cost changes under various scenarios. Generally speaking, the more attendees you have, the lower the cost per attendee. Let’s say we do a dinner and a show. We sit down, look at the costs, and determine that with 100 attendees, the cost per attendee is $75.
Now, using our imagination, a truck runs into our venue and knocks a hole in the wall. Now we magically have space for ten more people to attend. Luckily, the only costs affected by adding these ten people are the variable costs. So, if your variable costs were only $45, you would only pay that per additional attendee. Put another way, you are paying $30 less than what you paid for the first 100 attendees. Granted, you will eventually reach a point where your fixed costs may also rise, but all this leg work allows you to find your ideal attendance goal and drive the cost per attendee down.
Identify Your Target Margin
Alright. Time for the fun part, or at least fun for me because of the numbers. Now that we have the cost structure, we can identify the target margin, but we don’t want to pick some arbitrary margin. We want to decide on a margin using the insights we gained from determining our perceived value and our costs.
Using the example from earlier, if we’ve calculated our perceived value to be $100 and structure our pricing to emphasize that perceived value, our target margin becomes 25% at 100 attendees. If you were using the cost-plus pricing model instead of value-based, you could be missing out on profits. If your break-even point is $75 per attendee, you figure a 10% profit margin, so you sell for $82.50, meaning you bring in a total of $8,250.
Now, here’s the kicker. If your perceived value is $100, you could have set the price at $95, meaning you bring in $9,500. That means you’ve left $1,250 on the table if you used cost-plus pricing! You could also look at other offers like early access. Say 25 attendees from the previous example are willing to pay $10 extra for early access. Even with a slight bump in costs to provide this, you still have increased your profits.
If you are still with me, even if you don’t fully understand all the numbers, that’s okay. The numbers just help illustrate that cost-based pricing alone will result in missed opportunities to maximize value, where value-based pricing shows you those opportunities. In cost-based pricing, we let the cost determine the price, and in value-based pricing, the price guides the cost. You have some time to look over all these numbers, but next month, we dive into the various ticket types common among events.
Jordan Busboom is a Technical Services Assistant at Indiana State University’s Hulman Center. He received degrees from Indiana State University in Music and Mathematics in 2018.