Springfield Nor'Easters Identification of Strategic Issues

Larry Buckingham needs to make some determinations about the pricing strategy for the Nor'Easters. The team needs to sort out its pricing strategy in the coming weeks. At present, there are a few different approaches that can be used with respect to ticket prices. The chosen approach should maximize profit, but there are competing views on how to maximize profit. Some feel that the ticket price should be low so as to increase attendance, and then make money on food, souvenirs and peripherals. Others feel that the bulk of the revenues should come from ticket prices. Complicating the issue is the fact that the main competitor for season ticket sales, the minor league hockey team, is going to have a season ticket drive that could potentially reduce the number of season tickets that the Nor'Easters can sell. The degree to which competition will be a factor in the ticket pricing must be determined -- there are limited sports dollars in Springfield but the hockey team's schedule does not overlap with the minor league baseball schedule. Buckingham must make his determination using an analysis of the external environment and some of the research that he has with respect to the price sensitivity of his target market. Mr. Buckingham has gained some of this information from a survey that he has completed with a section of the Springfield general public.

There are a number of key numbers to consider. There are 38 home dates from which to earn revenue. There is no stadium rent, but there is no opportunity to earn money on parking either. The parking is estimated to be $4, and this comes out of the total amount of money customers will be wiling to pay in total for a night at the ballpark. There are 2000 bleacher seats and 1600 open-air seats. There will be financial support from external sources of $21,000 in cash, plus a number of the different expenses that will be covered by the major league affiliate. There will be $25,000 in sponsorship and advertising. Given this, the fixed expenses for the Nor'Easters are as follows:

Fixed Costs:

Uniforms

League Dues

175000

Staff

124000

Office Exp

110000

Travel

455000

Advertising

175000

Total

1047000

The sunk costs of market research are not included in these figures. The $46,000 in expected external revenue sources should be taken off, so that the breakeven point is essentially $1 million. No alternative should be selected that will deliver net revenue of less than this amount. In order to evaluate the alternatives, Buckingham needs to determine a set of reasonable assumptions, and then run the numbers on the net revenues for each of the options. He has a baseline breakeven point of $1 million to work with, and he knows that if he pushes prices too high, he will lose sales. Thus, he is looking for the optimal point of marginal revenue, but considering multiple streams. This will require running a number of different scenarios. The assumption for gross margin on non-ticket revenues for each scenario will be 39%.

Analysis and Evaluation

From a qualitative perspective, the minor league baseball team is in an interesting situation. As a new entity, many factors can be considered both strengths and weaknesses. For example, the brand and the reputation of the club do not exist -- in a sense this is neutral. The newness of the team will be exciting and this will provide an initial opportunity to build a fan base from scratch. The major weakness is that the team's management does not have much experience at running a minor league baseball team -- this means there will be a learning curve to overcome. In addition the team is playing at a relatively low level. One of its strengths is the stadium lease -- this reduces the degree to which the team's financial health is determined by attendance because it reduces the fixed costs significantly, even at the expense of a revenue stream. That there is no summer sport in Springfield represents a significant opportunity. The primary threats are the potential loss of customers to the Springfield Falcons and the threats represented by the myriad other entertainment options that exist in Springfield. The state of the economy is also a threat, as Springfield is a relatively depressed town.

The survey results provide the basis for the bulk of Buckingham's analysis. Springfield has a population of roughly 55,000, 38% of whom consider themselves to be baseball fans (20,900). This is an important constraint, because the team is unlikely to win much business from people who are not fans of the sport, given the other entertainment options that exist. Indeed, 39% of those surveyed indicated that they would attend a game if a team came to Springfield -- the disparity being statistically insignificant....

Fewer people have attended a professional baseball game, but in part this is due to the fact that one would need to travel to another city to do so. Tickets to the Red Sox are expensive and hard to come by given their miniature stadium, and it is unlikely that Springfield residents would travel to see minor league ball. It is a reasonable assumption given the city's economy that most Springfield residents are from the area, so would not have had a local baseball team to see, meaning that the 28% figure could be taken as an encouraging sign of commitment to the sport from its loyal fans.
What is unclear from the survey is whether those answering questions 8 and 9 included all respondents (62% of whom would therefore be answering hypothetically) or just those who had already indicated a propensity to attend a game. Questions 8-13 are the most important questions for Buckingham with respect to his financial calculations, for which he will utilize his pricing matrix worksheet as a starting point. One important element of the calculations is the grandstand premium. There is significant price sensitivity with respect to this premium, so only a 10% premium is reasonable. At that level, 76% of customers would pay the premium, and 58% of the capacity is in the grandstand.

The following chart shows the optimal revenue for each product at a given price level:

Total Revenue Given Demand at Price Point

3

4

6

8

10

12

14

1

62700

83,600

122,892

155,496

167,200

122,892

64,372

5

313500

413,820

608,190

785,840

783,750

489,060

73,150

20

1254000

1,655,280

2,307,360

2,307,360

1,713,800

802,560

58,520

38

2382600

2,604,976

2,668,512

2,287,296

1,747,240

1,048,344

111,188

It is worth considering that the products are to some extent mutually exclusive. For example, if season tickets were priced at $3 per game, they would sell out. This would not leave any more potential revenue from other ticket packages, however. Thus, the optimal revenue comes from combining points on this chart until 3600 * 38 tickets are sold. The chart indicates that there is a steep dropoff in demand for package once the price exceeds $12. To find the total revenue for each of these price points, total spending must also be included. For each ticket sold, 81% of consumers would spend at least $6. The remainder cannot be counted on to spend anything. To be conservative, we will assume that 36% will spend $10 and 45% will spend $6. This means that the net aggregate marginal revenue per customer over the course of the season will be $2.46. It should be noted that a declining ticket price formula will be required. Nobody will buy season tickets at $14 per game if single game tickets are sold for $10, for example.

What we find is that the total stadium capacity is 38*3600 = 136,800 for the season. The order in which tickets are sold must also be considered. Season tickets are sold first, followed by packages, followed by single tickets. Season tickets are preferred because they offer the opportunity to lock in revenues. However, demand for season tickets is high -- at $10 the entire stadium would be filled with season tickets. Most teams prefer to have some daily sales as the per-ticket price is higher. This depends on the team's financial need. For example, total estimated season ticket demand at $10 per game is 4598, so this would mean 3600 seats per game at $10. This gives a total revenue of $1,368,000 + (2.46 * 136,800) = $1,704,528. This is sufficient to turn a substantial profit, given the breakeven point of $1 million.

However, the team can maximize revenues if it limits the number of season's tickets that can be sold. The team can sell 4598 single game tickets even at $14. After that, it can sell 8151 5-game packages at $12 per ticket, or $60 per package (60* 8151 = $489,060). This would leave 45,353 tickets yet to be sold. At $10 per ticket, the team could sell these as part of the 20-game package. Then the team would not need to sell any season's tickets. An important consideration here is that season ticket holders often miss games, which reduces revenue opportunities. However, there are administrative costs associated with managing 20-game packs, as the game dates would need to be selected in advance to avoid overcrowding on certain game nights. The team, however, could select these randomly at relatively low cost prior to the tickets being issued.

All told, the team should maximize revenues as best as possible. One option…