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Demand-Oriented Pricing
Pricing methods can be differentiated into cost-based methods and market-based methods. Among the cost-based methods are cost-plus pricing and break-even pricing, whereas market-based methods include demand-oriented pricing and competitor-based pricing.
The central premise of demand-oriented pricing is to charge a high price when demand is strong and a low price when demand is weak. In the sport system this pricing method is common with fitness studios and health clubs. They charge relatively high prices in peak periods (like late afternoon and early evening) and lower prices in off-peak periods (like mid-morning). Value-based pricing, as a form of demand-oriented pricing, goes one step further and takes the value of the product as perceived by the custumer into account.
The in-stadium capacity for most sport events is fixed. That is, there is a fixed number of seats in the venue that cannot be adjusted in the short run. The marketer of the event has to anticipate demand for tickets and set the price accordingly. Demand depends on such things as the day of the week, star power of the athletes, and/or importance of the event. Demand will be highest at the weekend rather than on a weeknight. An Olympic gold medalist will draw more spectators than an unknown athlete, and the Super Bowl will draw more spectators than an ordinary mid-season game. On the other hand, prices should be lowered if these factors are not present. In recent years teams in Major League Baseball (MLB) or the German soccer league (Bundesliga) began to change ticket prices even during the season in order to generate a higher yield.
Price Elasticity of Demand
The responsiveness of demand to a change in price is an important coefficient for setting a demand-oriented price. The price elasticity of demand is a measure of the sensitivity of consumer demand for a product to a change in price. It is calculated by the following formula:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
Generally, elasticity coefficients bigger than −1 are called elastic, coefficients equaling −1 are unitary elastic, and elasticity coefficients smaller than −1 are inelastic. Suppose demand falls by 15 percent when a sporting goods manufacturer raises its price for shoes by 5 percent. Price elasticity of demand is therefore −3. This means that demand is elastic. The increase in price is overcompensated by the decrease in demand revenue declines. If the change in demand and the change in price are equivalent, then elasticity is −1 and revenue stays the same. If demand falls by 4 percent when the change in price is 8 percent, then elasticity is −0.5 and demand is inelastic, which leads to an increase in revenue.
Studies about price elasticity in spectator sports like the MLB or National Football League (NFL) nearly all document an inelastic demand. Many sport fans are fiercely loyal to their team or their sport. It is almost impossible for them to substitute one sport league, team, or competition for another, which makes them insensitive to changes in price. A second reason for the inelasticity of demand for ticket prices is that ticket prices only account for a fraction of the total costs for visiting a sporting event. Further costs are incurred for transportation, accommodation, food, and/or merchandising. Therefore admission is only a part of the whole budget, and a change in price has only a reduced effect.
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