A pair of professors at Northwestern University in Chicago are changing the way collegiate sports look at dynamic pricing.
Economics PhDs Jeffrey Ely and Sandeep Baliga are the brains behind Purple Pricing, a theory-based approach to ticketing that shares similarities with the same auction model used for hundreds of years in the Netherlands at flower markets.
Known as a Dutch Auction, the sales process begins with an auctioneer setting a high price, and slowly lowering the price over time to attract more bidders. Once enough bidders indicate they’re willing to pay a certain price for the commodity, the auction is closed and all bidders pay the last announced price.
Still confused? Here’s an example from the box office at Northwestern. Say the school has an upcoming game against Big Ten challenger Indiana, one of the highest ranked teams in the National Collegiate Athletic Assocation. The school has about 1,000 single tickets to sell for the game and announces tickets will start at $30 per seat. Immediately 600 people log in and indicate they are willing to pay full price. The price then drops two bucks to $28, and another 200 fans put their bids in. Finally, when the price is dropped a final time, to $27, the remainder is swallowed up.
The result — all 1,000 people who bid on tickets will pay $27 for their tickets, including those individuals who said they were willing to pay more (their credit cards will be rebated the difference). The focus on providing uniformity in price is a marked departure from dynamic pricing, especially within the airline industry where different buyers are charged different prices, often for the same aisle seat.
Ely said he got the idea from a popular eatery in Chicago called Next Restaurant. “They were doing something very innovative — instead of having reservations, they would sell tickets to the restaurant,” he said of the popular eatery. Originally developed as a way to hedge against diners who had canceled their reservations, Next Restaurants’ ticketing system began to spiral out of control as a secondary market around the reservations began to pop up. At one point Ely said, the reservation tickets were selling at huge markups on sites like Craigslist and the demand for reservation tickets was starting to outpace demand for the food, causing more chaos.
“We wrote a post saying they should use an auction system to determine the price of their reservation ticket,” Ely said. The post on his popular economics blog CheapTalk.org generated a lot of interest and got Ely thinking about whether the same principles could be applied to collegiate sports ticketing.
“Economic theory is usually about abstracting away from details and looking at ideal scenarios,” he said. “Tickets are one of the few perfect models that align with economic theory. There’s a set quantity of inventory, it’s a relatively homogenous product and there’s a well-defined set of consumers.”
And he had an Athletics Department at Northwestern that was willing to let him conduct his experiment on their Paciolan-powered ticketing platform. The school’s athletic department certainly needed the help — despite winning its first six games, the men’s basketball team went 13-19 for the season, including an abysmal 4-14 in conference play, losing its last five home games. Still, the school’s spot in the Big 10 means it’s regularly hosting some of the best basketball programs in the country.
And although the school utilizes the Paciolan platform and has access to numerous integration partners like dynamic pricing firm Qcue, Ely’s system was so experimental — and his own experience in ticketing so minimal — that he had to come up with a work-around to get Purple Pricing up and running.
“The experiment was so small that it was feasible for us to just do everything by hand,” he said. “We would collect the data each day on sales, crunch the numbers and email our guy in the ticketing office the price, and he would go ahead and change the price.”
So far, Purple Pricing is getting mixed reactions from the ticketing world. Embracing Ely’s experiment is a slippery slope for ticketer Paciolan, especially since Ely’s initial ticketing effort was a somewhat crude, manual enterprise and a stark contrast from the seamless one-touch integrations Paciolan has become known for. But at the end of the day, CEO Dave Butler said, the company’s mission is to help teams sell tickets “their way” adding, “We support our clients who develop new and innovative ways to drive their business,” including new pricing endeavors like Purple Pricing. We applaud Northwestern for their innovation and are excited to hear the results of their pricing initiative.”
Barry Kahn, CEO of dynamic pricing firm Qcue, said his company has looked at auctions in the past and concluded, “they are generally not a good way to mass-sell tickets. When fans try to buy tickets, they want to know right away” whether or not they were successful.
He pointed out that companies like Ticketmaster and StubHub have essentially stopped using auctions — many consumers don’t have the patience or flexibility in their schedules to use an auction system.
Ely disagreed and said the prevalence of sites like Priceline.com and ScoreBig have improved consumer sophistication, and he said that making a bid for a ticket using Purple Pricing essentially locks the consumer into a purchase and protects him from price increases since the cost can only drop.
So how did the system perform financially?
Ely said it’s unclear whether the program actually increased overall revenue because it used the experiment for only a portion of the arena, and not all games used Purple Pricing, although he did witness several milestones, including the first $40 ticket.
“We had very modest goals and we plan to be more ambitious next season,” he said, noting that shift in inventory game-to-game made it hard to track. The game against Ohio State meant 800 tickets were sold through Purple Pricing, while the home game against lowly Penn State flooded Purple Pricing with 3,000 tickets.
Kahn said a high volume of tickets like the Penn State game would give him pause — what if there weren’t enough bids to match the number of seats? Would the price go to zero?
Ely said there is a floor in place to prevent ticket prices from going too low and only box office staff know the actual number of tickets available on the market and could conclude an auction at the lowest price even if the tickets hadn’t been sold.
And, Ely noted, there is a big data play in all of this. Northwestern learns how much consumer demand there is for every price point. That information could be useful in helping the school determine how to price tickets in the future, whether through Purple Pricing or a more traditional approach.
“It’s a textbook economic demand curve, which is what every seller wants to know for his product,” Ely said.
Interviewed for this story: Jeff Ely, (847) 491-8208; Barry Kahn, (512) 626-5503; Dave Butler, (866) 722-4652