Thursday, November 30, 2006

Starbucks: implications for Valley ticket pricing

This morning, I perhaps truly felt like I'd 'arrived' in New York City. I was queuing as usual at my local Starbucks when, just as it was my turn to order, the server simply said, "...that'll be $1.90 sir."

One of the 'baristas' had recognised me in the queue and had gone to the trouble of making my regular black coffee before I'd even ordered it. Unfortunately for her, after perhaps ten years of regular daily doses of black coffee, she had only gone and chosen the one and perhaps only morning when I had decided to opt for a cappuccino. No doubt the poor girl had to have $1.90 deducted from her minimum wage, but at least the anecdote got me thinking about Starbucks pricing policy and implications for Charlton.

In Tim Harford's book The Undercover Economist, he discusses the clever methods that the likes of Starbucks use to identify those customers that are price insensitive, and those that are not. All retailers (and sellers in general) have to make pricing decisions based upon the trade-off between price and volume. If they price items too low, they'll sell tons of goods but make no profits. If they price items too high, they'll be left with too much working capital tied up in unsold stock.

The 'holy grail' for sellers is to somehow differentiate between customers that are price sensitive, and those that are price insensitive. The High Street retailers for example tend to just wait a suitable amount of time before making down the unsold stock (thus bringing out the price sensitive buyers).

The online retailers can be a little more cunning however. was criticised recently when it emerged that it charged different prices for identical items based upon careful assessment of prior buying habits. This type of 'price discrimination' is usually legal and particularly widespread in the travel sector (though some would argue an airline seat bought a month in advance is a different product from one bought the same day, even if aboard the same aircraft). However, the canniest retailers such as Starbucks use far subtler tactics than even et al. Rather than charging different prices for identical products, they slightly alter the product multiple times and then charge a similarly wide range of prices.

Starbucks has high fixed costs (due to the exhorbitant rent charged on their premium sites) but very low variable costs (because the cost of a portion of coffee, milk and a paper cup is minimal). As a result of this cost structure, they could charge just a few pence per coffee and still be profitable per cup sold (but in the long-term, they would never generate enough revenue to meet those high fixed costs). However this concept is key because it explains how they are able to justify the enormous cost difference between the reasonably priced basic black coffee, and the outrageous $4+ Peppermint Mocha Frappuccino.

So if they are happy selling me a basic black coffee for $1.90 (because it's still profitable), why bother with so many sizes (tall, grande, venti) and all those fancy drinks and the complex price list? Are they really worth the trouble? After all even the priciest drinks just represent varying combinations of coffee, milk and if you're lucky a few chocolate sprinkles worth all of a couple of pence or so.

Whilst I'd love to believe that Starbucks is simply embracing the wonder of coffee and all its derivative drinks, in truth that overly complicated menu is simply their way of persuading you (the customer) to tell them how price sensitive you are, and thus how much (or little) they can get away with charging you (whilst not alienating me, the black coffee guzzler).

Bear in mind of course that the marginal cost to them of providing you with any of their drinks is virtually identical ie. almost nil. So why not just charge say $3 for all of the drinks? Because the black coffee drinkers like me would go elsewhere, and they would miss out on the chance to generate an extra dollar or more from the Frapuccinno drinkers. In short, they play games with your mind....."I'm greedy - I'll have a venti please..."; "...I'm flashy, give me the Double Chocolate Chip Frappuccino." And because they are different drinks (albeit with similar ingredients and marginal costs), no-one feels as if they're being ripped off.

What does any of this have to do with Charlton and ticket pricing at the Valley I hear you ask? Rather a lot actually. Like Starbucks, Charlton has enormous fixed costs (the stadium, players wages, etc..) but very low marginal costs (the marginal cost of hosting a game is limited to a few low-paid staff, police costs, electricity etc..).

Moreover, with the club having sensibly chosen to halt their Valley expansion for now, matchday seats have a degree of scarcity value, particularly for the biggest games. Think of the Valley therefore as a bit like Starbucks at 8.30am.....they can't pack any more customers in, so they'd better make sure they're encouraging all of them to part with as much money as possible.

The situation at the Valley is complicated slightly because the bulk of tickets are sold in advanced via season tickets, and far fewer are sold on matchday. However somewhat strangely perhaps, the club discounts its North Stand behind-goal season tickets to £300 (versus £500/£525 for the East/West stands), yet charges a flat rate anywhere in the stadium for single match tickets (eg. £20 for Blackburn, £35 for Liverpool etc..).

Either way, it's fair to say that our pricing structure is simple and transparent, and I suspect that the Board are rather proud of those very traits. However I am inclined to argue (in the context of my Starbucks example), that they are doing their revenues a potential disservice by operating this way. By not even charging different prices for premium halfway line season tickets compared to those nearer the goal, they are not allowing those that are price insensitive to signal this fact to them via their actions. Moreover this information would be helpful to them beyond simply match tickets, for example with regard to sponsorship opportunities etc..

This is not the same as suggesting that low-income fans should be priced out, far from it infact. Given that the club exceeds its marginal costs per seat at just a couple of quid, the extra revenues generated from identifying the price insensitive fans might allow the cost of the 'small black coffee' seats in the North Stand to be cut in price whilst leaving total revenue higher overall.

To the extent that I can ascertain, the next step up from the £525 West Stand season ticket price is the whopping £2,600 Observatory Suite season package, but why no options in between? I'll hold my hands up and admit I'm a total snob when it comes to things like this. I would baulk at £2,600, but I might be persuaded to part with a grand per season to have a nice padded halfway line seat, a drink at half-time and a free programme. I'm far more price sensitive in other areas of my life, but not with regard to Charlton and I suspect there are thousands more like me. However absent the club advertising "Season Tickets: £525 (unless you're willing to pay more, in which case they're £700)" then they are losing out on the opportunity to find out who we are.

The airlines haven't been slow in spotting this type of opportunity; Virgin Atlantic's Premium Economy class is exploiting this middle ground nicely for example. Throw in a slightly bigger seat, a dedicated check-in queue and a glass of cheap champagne and hey presto, they get away with charging sometimes 300% more than an equivalent economy fare. Next time you're at Heathrow Airport wondering why they're not doing more to speed up the economy check-in queue, remember they'd prefer it to be even longer (just in case those lucky souls in Premium Economy are tempted to trade down next time).

Now I'm not suggesting that Charlton follow the airlines and knowingly make the match-going experience less pleasant for those in the cheap seats. And I'm certainly not suggesting perhaps just a quick preseason memo to fans on the lines of, "....unanticipated problems with the West Stand roof will require us to install view-impairing pylons at each end.....however those fans sat in our new exclusive Clive Mendonca Club will be unaffected, as will those fans contemplating a move to our soon-to-be-completed Mark Kinsella Suite..."

Ok, I'm being facetious with that last example, but I do firmly believe the club could be a little more imaginative with its ticket pricing and seating options. Implying via the season ticket prices that a North Stand seat is only 60% as good as an East Stand seat, suggests that their flat pricing structure for match-by-match tickets is as much laziness and desperation as much as anything else. It's the equivalent of the example $3 flat price for all coffees above. And if we get relegated and the benefits of scarcity value disappear completely (and season ticket sales fall too) then an extra 5-10% of ticket revenues via some artful pricing strategies might be the difference between bouncing straight back or doing a Millwall.


At 6:40 AM, Anonymous Simon said...

Hate to do this to you - but they did actually change the pricing structure this season!

Keep up the good work tho! ;o)

At 7:24 AM, Blogger New York Addick said...

I don't think that affects my main point ie. There is not enough variation in prices between and within each stand (nor enough types of add-on packages)

At 8:25 AM, Blogger Wyn Grant said...

Fascinating article. I must read the book. More profits for Amazon, although I always direct orders via my own site and get a commission. I'm sure the folks at the Football Governance Research Centre at Birkbeck must have done some work on this as some of them are economists. Next year my East Stand halfway season ticket will halve because I will be 60, although I am earning more than I ever have. Given that I do buy a player sponsorship each year, I don't feel too guilty about that.


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