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What the Arts Can Learn from Starbucks and the Airline Industry
Episode 67

What the Arts Can Learn from Starbucks and the Airline Industry

Dynamic Pricing with Sean Kelly

This episode is hosted by Erik Gensler.

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Sean and Erik discuss what Sean's tenure at Starbucks taught him about using data to understand patrons, why people who work in the arts should not be choosing ticket prices, and what your patrons are telling you through their ticket-buying behavior.

Erik Gensler: Sean, thank you so much for joining me.

Sean Kelly: Oh, it’s my pleasure. Thanks for having me.

Erik Gensler: So, you worked at Starbucks and I’m curious, what did you learn in your role at Starbucks to inform your work as an arts marketer?

Sean Kelly: That’s a great question. So, when I was at Starbucks, we used to have a phrase called, “talking to ourselves,” and it was anytime we would kind of nerd out on some particular aspect of the coffee business and then, eventually, someone would come along and say, “You know what? We’re just having a conversation with ourselves because this isn’t what’s important to our customers,” and that obviously happens a lot in the arts and it’s hard. It’s hard for us because we’re supposed to care about our art, right? We’re supposed to be passionate about it, but that often means that the patrons are kind of left to the wayside.

Erik Gensler: Yeah. You did some fun work at Starbucks, from what I understand, in terms of looking at the food that they serve. Can you talk a bit about that?

Sean Kelly: Yeah, yeah. So, my big project there was, I pulled a year’s worth of data on bakery—and this was when they had about 10,000 stores in the US—and all of those stores’ bakery programs were run regionally. And so, that meant that there was a different selection of pastries by region and then by store because store managers had the power to choose what to do and what not to do with their pastry case. And that meant that we had 376 SKUs in the system—stock keeping unit is what a skew is—that’s way too many.

Erik Gensler: (laughs)

Sean Kelly: And it meant that if you went into one Starbucks, you would have one kind of experience with bakery and if you went into a different one, you’d have an entirely different one. But we only had one kind of latte and we only had one kind of frappuccino. So, what I did was I pulled this year’s worth of data and I started to look for patterns, right? Because that’s ultimately what we want to do. We want to see what we can mine from the data so we can create a narrative for it because it’s often hard if we’re just doing it kind of abstractly. And what I found was that 80% of their revenue was coming from 24 SKUs and this was surprising for everyone. They didn’t realize that those other 300-plus, which are obviously taking up a lot of room in the system, were not driving significant revenue and so we were able to set a plan for the organization that not only set those 24 SKUs up as core to that bakery case, but also said to store managers, “These have to be in your case,” cause we had store managers who decided they couldn’t sell a blueberry muffin. It’s the number one SKU in the system-

Erik Gensler: Oh, yeah?

Sean Kelly: … but they couldn’t sell blueberry muffins. Well, if you don’t order them, you absolutely cannot sell them.

Erik Gensler: (laughs) Right.

Sean Kelly: So, all of that, all of that work helped inform the work that I do now, which is really trying to look at data and then understand what’s going on with the patron better.

Erik Gensler: So, going from Starbucks, you worked in arts administration. Tell me about some of your roles working in the field.

Sean Kelly: So, my very first job, I worked at a little, tiny theater in Pittsburgh called City Theatre. I was a staff of one. I did PR, subscriptions, single tickets. I drove the talent to the radio station for their interviews-

Erik Gensler: (laughs)

Sean Kelly: … and I tended bar whenever the bartender didn’t show up for the performance because it was a tiny little theater and you just had to be able to do-

Erik Gensler: So, from big, corporate Starbucks to a staff of one in the marketing department?

Sean Kelly: Not even really a staff of one. It was just me.

Erik Gensler: Wow. (laughs)

Sean Kelly: Yeah, I mean, it was a big jump, but I learned a lot and it was a great experience. Clearly, I loved what I was doing.

Erik Gensler: Mm-hmm (affirmative)

Sean Kelly: And so, from there, I moved onto a kind of a mid-size regional theater and then to a much larger regional theater and then for the past five and a half years I was at the Dallas symphony.

Erik Gensler: You left that to start Vatic?

Sean Kelly: Yes. Vatic is Latin. It means, “To look into the future.”

Erik Gensler: Oh, great. So, and this tool really was to scratch your own itch around pricing.

Sean Kelly: Yeah, when you’re running marketing for an arts organization, you always need money. It’s not like the costs suddenly start covering themselves. There’s a reason we’re called nonprofits. And I had a Christmas production called, improbably, A Civil War Christmas, and it sold out early inexplicably and I felt like I had left money on the table. And so, I started looking around for, “Oh, is there somebody who’s created a dynamic pricing system that’s specific to the performing arts?” and I couldn’t find one that did what I thought it would need to do and I had left Starbucks cause I wanted to use my evil skills for good. And so, here was my opportunity. I actually had the skillset to do this and so I built my very first dynamic pricing system there at Theatreworks.

Erik Gensler: Wow. So, what did you think the dynamic pricing system needed to do?

Sean Kelly: So, we think that there are three foundational principles that people need to use when managing their pricing to make it really effective. One is that it can’t just be about maximizing revenue; it also has to be about being able to build capacity. In other words, sell more tickets. Two, it can’t just be about raising prices. That’s not actually dynamic pricing; that’s just jacking prices up. You need to be able to move prices up or down, depending on what’s going on with demand. And then, lastly, we really feel that dynamic pricing needs to be predictive. And I think this was the most important feature of what I put into the initial model and what is still there, which is, what we’re trying to see is, “Because of what happened today, this is where we think you’re going to end up,” so that you can make smarter decisions, right? Rather than what a lot of folks are doing is they’re saying, “Well, I’ve gotten to this capacity target, 70% or 80%, and so I’m going to raise all the prices by five bucks.” But that’s not a good predictor of what’s going to happen later because that may be all the tickets you’re going to sell-

Erik Gensler: Right.

Sean Kelly: … is 70% and you’re raising prices on this very tiny amount, right, of inventory that’s left.

Erik Gensler: So, what factors go into the predictive model?

Sean Kelly: So, we have 16 proprietary algorithms inside of the system and those look at things like how you’re trending on the number of tickets you’ve sold and how you’re trending on your revenue budget. But they also look at things that we often don’t think of as influencing single tickets, but over the past decade we’ve actually proven that these actually have an impact on what you ought to be charging. And so, it’s things like how many subscribers are in the house and how many exchanges they’ve executed and do you have a group, right? Even if it’s not fully paid, is there a group that’s in the house? Because when those hundred tickets suddenly sell the last week of the performance, when they’re fully paid, well, now you have a hundred seats less than you thought you did. So, it’s really custom-built for the performing arts environment to kind of fix a lot of the things that we have to deal with, but that we don’t realize can really impact us.

Erik Gensler: I’ve heard you say, “We work in the arts so we don’t buy tickets,” right? So, how does that impact us as practitioners in terms of our ability to price?

Sean Kelly: The reason that I say that is because I want to bring an awareness to folks of the reality. This actually goes hand-in-hand with what I said about Starbucks, when we used to say at Starbucks corporate, “We’re having a conversation with ourselves.” Most pricing happens based on what you did last year, which was based on what you did the year before. So, it becomes that kind of self-repeating cycle and most organizations don’t have the resources to really look in-depth and analyze what’s going on with their patrons and where their prices ought to be. And the reality is we don’t buy tickets.

Erik Gensler: Right, we get comps.

Sean Kelly: We get comps. We get industry comps. So, we’re literally the worst people to be choosing prices.

Erik Gensler: So, what is something I can do as an arts marketer to become better pricing?

Sean Kelly: I think that the most important thing is to become curious about price. Often, we think of pricing as this thing that we have to do and then the patron buys a ticket and boom, we’re done. Let’s go have a Chardonnay. But the reality is is that every time a patron is purchasing a ticket from you, they’re actually having a conversation with you and if you’ll listen to the conversation they’re having with you, you can price more effectively. And really what that’s about is just understanding, “How do they value the performance?” not, “How do I value it?” because I’m going to have my own particular views about whether this is a good performance or a bad performance or worth a lot of money or worth not very much money. And none of those opinions matter. The only one that matters are the opinions of your patrons and they are, in fact, telling you this. You have to be curious about that conversation. You have to be willing to look at the data.

Erik Gensler: Mm-hmm (affirmative) I’m not a pricing expert by any stretch of the imagination, but I know a few things—enough to be dangerous—and I’ve heard people talk about how it’s much easier to sell the very expensive tickets and it’s easier to sell the less-expensive tickets. It’s the middle where things get tricky. Is that true?

Sean Kelly: Sometimes it’s true. I think that it’s actually less about the most expensive tickets and the cheapest tickets and more about the systems that we use to scale our hall. Scaling a hall is really difficult and it’s really hard to get it right and even if you did get it “right,” it’s not necessarily going to be right for every performance. And when folks are looking at a potential performance to go and see, right, they go into your select-your-own seat map and they’re actually making value judgments, right? “This seat on the aisle is worth this and this seat at the back wall is that and then there’s these other seats over here,” and if those are priced correctly, then they’ll be able to find their sweet spot. We actually find that if you’re doing that right, we actually move more people into the middle-

Erik Gensler: Right.

Sean Kelly: … because the value seats aren’t so dramatically low and we’ve made the truly premium seats a truly premium price. So, if you really want to sit on the aisle, then you need to be willing to pay a little bit more for that privilege.

Erik Gensler: I want to see something on Broadway and so I go online and if I want to sit anywhere except, like, the back row of the mezz, the tickets are $300 or $400 and I get frustrated and throw up my hands and say, “I’m not doing this.” Is there a fear that by driving up prices, we’re keeping people away from the arts by making our offerings too expensive?

Sean Kelly: There’s absolutely a fear of that and I think that that is something that needs to be strongly considered. Broadway does not do a good job with its dynamic pricing. Producers are, for the most part, using the seat of their pants to make choices and they are always interested in charging more for seats rather than trying to make a trade off and say, “Well, maybe if I charge a little bit less, I’ll actually sell more tickets,” and the scale of the hall (laughs) doesn’t make any rhyme reason. Right? It’s just like, “Ah, you can sit in the back three rows and pay $75.”

Erik Gensler: Yeah, it’s unbelievable. It’s so frustrating.

Sean Kelly: It is really frustrating. There is some analysis and theory out there that says that the more you pay for a ticket, the more you will value it. I don’t think that that’s necessarily a strict continuum and I don’t think you can get away with it. You’re not going to bamboozle people into thinking that something that is more of a niche product is really worth $300.

Erik Gensler: So, let’s talk on the other side of that. Can you tell me about a time when you’ve recommended lowering prices or when the conditions show that the best move is to decrease prices?

Sean Kelly: Yeah, so, one of our clients, the Charlotte Symphony, they’re in their fourth year with us and this past year they had a show called “The Music of Queen” that’s a cover band that performs the music of Queen with the symphony. And it was just a one-night performance. It was all single tickets and it had sold, you know, pretty strongly, right? And about three-quarters of the way through the sales cycle, the head of marketing called me up and she said, “You know, tickets are selling pretty darn well for “Music of Queen. We would have thought you would have raised prices.”

Erik Gensler: Meaning your software?

Sean Kelly: The software, exactly. They often don’t refer to it. They just talk about me, which is-

Erik Gensler: (laughs) You’re sitting there at home looking at everyone.

Sean Kelly: It’s … Well, I do actually sit at home and look at everyone because I really care about what they’re doing.

Erik Gensler: (laughs) Yeah.

Sean Kelly: And I said, “Yeah, you know, actually, the tool has tried to raise prices a number of times and every time it did, the demand would slacken too much and so it would bring prices down. And so, what it’s determined is that the best way for you to make the most money is to have a kind of moderately priced ticket, but to sell every seat in the house. And sure enough, that’s exactly what they did. On the final day, they sold all of the seats and they made $125,000 off of one performance and that’s a huge success for them because $125,000 is a lot of money. I don’t care what organization you are.

Erik Gensler: That’s amazing. Can you use dynamic pricing for subscriptions?

Sean Kelly: I have heard folks talk about using dynamic pricing for subscriptions. I think, actually, what they’re doing is a tiered subscription model, where prices get higher the farther through the subscription you get. I have been considering that question for over a decade and have not thought of a way to do that unless you were to just say, “Well, the subscription price is a percentage off of the single ticket.” It’s complicated. I don’t know of a good way of doing that because you’re trying to achieve something different with subscriptions than you are with single tickets.

Erik Gensler: What do you mean?

Sean Kelly: Well, subscriptions are about setting up a habit. And you give them a discount—you should be giving them a discount—in order to do that, to incentivize them into doing that and if suddenly subscriptions are higher, I’m not sure that that’s doing that, right?

Erik Gensler: I see what you mean. Right. By moving prices up … But moving them down, perhaps you could sell more subscriptions, which is also dynamic pricing.

Sean Kelly: It is a form of dynamic pricing and we often recommend to folks that if they’re struggling and they need to grab a few more bucks to create a three-pack for $99 you know, there’s nothing wrong with that. It’s not actually dynamic pricing in its truest sense, right? It’s just a discount, but you’re just trying to keep the plane flying.

Erik Gensler: Right. How about museums?

Sean Kelly: So, we did have a lengthy discussion with a potential client who decided not to go forward about building a dynamic pricing model for them. It’s entirely possible and certainly with exhibits that you know are going to sell out, you can better manage that flow if you have variable pricing so that the peak times are more expensive than those shoulder times. It’s harder for museums to do that because their ticket prices are already lower, even for an exhibit. And so, when they’re looking at, “Well, what could happen?” that becomes more challenging for them. The vast majority of museum revenue comes from donations. So, for a lot of them, the juice isn’t worth the squeeze.

Erik Gensler: Right. Can we talk a little bit more about some of the wins you’ve seen with your product? I liked hearing that case study about the Symphony. Can you think of any other … ?

Sean Kelly: I’ll talk to you about a niche product. It’s one of my favorite stories and it was the first story that really helped us understand that the algorithms were doing a better job than we could. So there was another symphony show called “The Music of John Denver.” Yes, it’s a cover band that plays, with the symphony, the music of John Denver.

Erik Gensler: (laughs)

Sean Kelly: And if you’re out there listening to this and you don’t know who John Denver is because you are too young to know, you can look him up on the internet. We didn’t think that it was going to sell very well. Certainly, as we were looking at how sales were trending with our subscribers, they didn’t really think this was a fantastic show, or they didn’t think it would be. They didn’t know what the show was going to be. And then the first day we put it on single-ticket sales, we saw this absolute spike in sales. And at that time I used to let the Product Managers manage the pricing because they’re going to be held accountable for those results, so they should be owning what they’re charging. And so I said, “Hey, this show, it had this sudden spike in sales and do you want to raise prices?” And the product manager, she was a little sassy and she said, “You know, I really have better things to worry about than a cover band.” (laughs) And so, she very nicely asked me to just do whatever the tool wanted to do and she was going to go take care of some stuff that really-

Erik Gensler: She was the client? Or she’s your Product Manager?

Sean Kelly: No, she’s my product manager. And I said, “Okay, cause that’s a great experiment. Let’s find out what happens if none of us fiddle.”

Erik Gensler: Yeah.

Sean Kelly: Including me, and I think I’m actually pretty good at pricing.

Erik Gensler: Mm-hmm (affirmative)

Sean Kelly: And we ended up raising prices 22 times.

Erik Gensler: The algorithm raised prices 22 times?

Sean Kelly: Yeah, the algorithms raises prices 22 times because the demand was not overwhelming as far as the number of tickets sold, but the small audience who wanted to see it really, really wanted to see it.

Erik Gensler: Wow.

Sean Kelly: And they were willing to pay an elevated price to do that because that’s what it was worth for them.

Erik Gensler: Have you taken clues from the hotel or airline industry? Do you look at what they’re doing? Do you go to their conferences? Do you read their whitepapers? Because they were ahead of the arts in this.

Sean Kelly: They should were. These were the folks who actually started figuring it out, that this seat was worth this amount at that time and then later, it would be worth that amount. What’s interesting is while I was at the Fifth Avenue Theatre in Seattle, one of our board members worked for Alaska Airlines and she knew about the pricing tool and she said, “You know, you should come talk to our dynamic pricing folks, cause maybe they could give you some tips.” And I was like, “Why, thank you. I would love to do that,” and so, I hustled over to Alaska Airlines and met with their dynamic pricing folks who were super nice. And you know, I walked through my tool and pulled back the curtain, showed them how it was working, and they said, “Oh, that’s really interesting. And you built this. And I said, “Uh huh,” and they said, “By yourself?” and I said, “Yeah,” and they said, “Okay.” And they switched screens so that it was their computer and they said, “This is what our dynamic pricing system looks like.” It looked exactly the same.

Erik Gensler: Wow.

Sean Kelly: Because they’re doing the same thing that I was doing, which is, they’re looking at the pace of demand and managing pricing according to that.

Erik Gensler: So, at that time it was a spreadsheet?

Sean Kelly: It was many, many spreadsheets inside of a very large Excel document.

Erik Gensler: You’d be entering the data, it would be spitting it out, and then you’d be updating your prices manually?

Sean Kelly: Correct.

Erik Gensler: Wow.

Sean Kelly: And some of our clients, that’s still how it works because we don’t have integrations with their ticketing systems, but the value that they get from working with us is so overwhelming that they’re willing to put in a little bit of time to make that happen.

Erik Gensler: Wow, and so you have integrations now with Tessitura?

Sean Kelly: And we’re currently working on one with PatronManager, yes.

Erik Gensler: Wonderful. So, at that point, are there rules that a client has to put in for inputs or is it sort of like this, “You’re buying our methodology and we’re going to set it up and you can …” is it sort of bespoke or is it, you’re buying the philosophy and you let it run, let it rip?

Sean Kelly: They are absolutely buying the philosophy and we also give them significant controls, so they can turn off a certain price zone or a section or a discount price. They have, always, at all times, complete control of their pricing. They can go in and entirely reprice a performance and the system is just going to pick it up that night and keep doing its job. So, what we try and encourage them not to do is exactly that, going in and repricing things, because, ultimately … Let’s say they think the prices have gone too high, right? Well, they’re going to reprice them down and then the tool’s going to go back in and it’s just going to start raising them again, right? The tool is learning as it’s doing this. It’s seeing, where is your true top for your pricing? Because once it starts to see that demand slacking off, right, then it can pull back and it can find the right price.

Erik Gensler: So, it’s looking at pacing, essentially, like, how fast things are selling against the date of the performance.

Sean Kelly: It’s looking at the pacing compared to historical norms for that organization’s audience. So, when we build their pricing models, we’re using their data to build it because what we’re saying is, “By and large, your patrons, buy the way your patrons buy.”

Erik Gensler: Mm-hmm (affirmative)

Sean Kelly: And so, if we can compare that historically, we can have a better sense of, “At this point you ought to be ‘blank’ if what you’re trying to get to is there.”

Erik Gensler: Mm-hmm (affirmative)

Sean Kelly: And we can tell them whether they’re ahead of that pace or whether they’re behind that pace and we can try and adjust the price to influence that pacing.

Erik Gensler: Have you ever thought about, and I don’t know if the tool can do this, but looking at how many times someone is coming to look at a page or how many times they’re visiting again? And I’ve heard lore that, like, the travel sites online can change the pricing based on repeat visits from a website.

Sean Kelly: They absolutely can do that. There was a recent, I think, New York Times article where they counted the number of cookies that you get once you go through Google and it’s in the thousands, like-

Erik Gensler: Oh, yeah.

Sean Kelly: … they all just start landing right on your computer. You don’t know that they’re there, but they do. They know what you’ve done. There’s even some evidence that your phones are actively listening to your conversations.

Erik Gensler: Oh, they’re definitely listening!

Sean Kelly: (laughs) Because you will talk about Hawaii, randomly, and then suddenly-

Erik Gensler: Great, now I’m gonna get Hawaii ads.

Sean Kelly: A Hawaii ad will show up. We don’t like that. I don’t like profiling customers. I don’t think it’s an appropriate use of our technology. All of the data that we get is anonymized and aggregated. I don’t want to know who your patrons are. I want that data to be safe and I want your patrons to be protected.

Erik Gensler: But Google doesn’t know who they are. Well, they do, but the marketers don’t know. It’s totally anonymized. It’s just using data signals the same way you’re using data signals. I don’t think that’s personally identifiable.

Sean Kelly: And we can agree to disagree.

Erik Gensler: Fair. (laughs) What’s something you know now that you wish you knew when you were working at an arts organization?

Sean Kelly: I wish I had more empathy and the reason I say that is because now that I’m outside, I look at everyone and how hard they’re working and how hard their staffs are working and you have an overwhelming sense of empathy and not, “Oh my goodness, I can’t believe they did that!” but more like, “Of course that’s what they did because they’re feeling pressure and they’re trying to hit stretch goals,” and I, of course, when I was inside of marketing would get sucked up in all of that. Right? And so, there of course is this tendency to push harder and that’s not great. Wasn’t great for me, probably wasn’t great for my staff.

Erik Gensler: Yeah, I mean, look, it is hard to be an arts marketer. What you’re asked to do in a time where it’s just getting harder, where there’s more competition than ever, there’s … costs are rising faster than ever. Your number of seats is fixed and you have to make more money out of it and that is stressful. It’s hard.

Sean Kelly: It is really hard and there’s always pressure. There’s these kinds of competing pressures, right? So, on one end of the spectrum, you have the folks who are saying, “We shouldn’t charge more than $35 for a ticket because we’re mission-based,” and, of course, the challenge on that end of the spectrum is, we don’t actually know that only charging $35 is increasing audiences. It may just be that the same folks who are going to come anyway are coming, but they’re only paying $35 when they would have happily paid $55

Erik Gensler: Right.

Sean Kelly: And then on the other end of the spectrum were the folks who were charging really hard for revenue and they can end up having a kind of optics problem because they’re pushing so hard on the pricing. And then you’ve got your poor development colleagues, right, who are also trying to “bring in the cheddah” and all of us are trying to find the right mix of all of those things. It’s really, really hard. And there are boards and there are CEOs or General Directors. It’s a lot of pressure.

Erik Gensler: It is. It is. And all of these funding sources … I read something recently that said, “Corporate giving is down because of globalization,” so when you used to have a lot of companies that were local to your town, the more globalized these companies become, the less community connection they have and the less companies you can go to be corporate supporters.

Sean Kelly: That’s absolutely true. I think that the world of development is super challenging. Like, not my cup of tea. Please don’t put me in front of a donor. But that just gets back to this idea that, you know, if we could just find the “right” price.

Erik Gensler: Yeah. Well, I feel like ticket sales in the … I read in Michael Kaiser’s book that ticket sales in the 20th century averaged around 60% to 70% of revenue from single tickets and subscriptions and now, because of so many factors, you’re lucky if it’s 50%, where you are so much more reliant on donations.

Sean Kelly: Yes. And a lot of that, right? A lot of that 20th-century earned revenue was coming from subscribers. Subscribers in all arts are facing significant headwinds because people are more fluid and they don’t want to lock into eight performances and they might not necessarily be as concerned about having the same seat every time.

Erik Gensler: Also in Michael Kaiser’s book, he said that people are traveling a lot more for business than they did in the 20th century. So, your being able to predict far in the future that you’ll be home and also by having more women in the workforce, they’re not as … they’re traveling and they’re not as available on a regular basis to go to the theater. I thought that was interesting.

Sean Kelly: Yeah. We did an analysis once and we found that 75% of tickets were purchased by the female head of household.

Erik Gensler: Yeah.

Sean Kelly: And so, if those folks have less availability-

Erik Gensler: They’re buying less subscriptions.

Sean Kelly: … they’re making the choices that are right for their life.

Erik Gensler: Right. So, this is your “CI to Eye moment” and the question is, if you can broadcast to the executive directors, leadership teams, staff, and boards of a thousand arts organizations, what advice would you provide to help them improve their businesses?

Sean Kelly: The hardest thing about working in the arts is that you love what you do. You really care about it. And all of those people that you just named have very strong opinions about what success looks like and what they ought to be doing. What’s often lost amongst all of that knowledge is, what do your patrons want? And so, what I would advise them to do is to … absolutely, you should start with your intuition and say, “I think we should do X,” but then, reach out and, if you can, find some data to help validate that, because then you’re bringing the patron into the conversation and into your future strategy and since we are literally built for them, that is a really good thing and it actually helps you make better decisions for your organization and better decisions for your patrons.

Erik Gensler: Great. Well, thank you so much.

Sean Kelly: Thank you. It was a pleasure to be here.

About Our Guests
Sean Kelly
Sean Kelly
Founder, Vatic

After more than a decade of serving in marketing leadership roles at arts organizations across the country, Sean Kelly is now the Founder of Vatic, a company that provides automated dynamic pricing software for the performing arts.

Read more

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