Springfield Larry Buckingham Is About to Launch Case Study
- Length: 7 pages
- Sources: 10
- Subject: Sports
- Type: Case Study
- Paper: #43574972
Excerpt from Case Study :
Larry Buckingham is about to launch his season ticket drive for the Springfield Nor'Easters, a minor league baseball team. The city's only other minor sports team, the Falcons hockey club, is threatening to move and is about to launch a high-profile season ticket drive of its own. The ticket drive is critical because tickets are one of only three major sources of revenue for minor league baseball clubs. Another source is concession sales, which are highly correlated with ticket sales. Season tickets form the basis of the attendance -- the higher the rate of season ticket sales, the more profitable a baseball club will be in general. There are only small amounts of advertising and sponsorship revenues, totaling $46,000.
The Springfield market is challenging. The city has seen its economic base slump, and as a result real earnings are down and 25% of the city's population lives below the poverty line. Another 25% of the market is under the age of 18, leaving a little over 27,000 people as potential season ticket buyers. Of those, many will have families, which could find a minor league baseball team an attractive proposition. Indeed, such families were three times as likely to attend a game compared with families with preschoolers or retirees. This raises questions about whether or not Springfield is big enough to support minor league baseball. Minor league baseball is popular, with 176 teams around the U.S. The Nor'Easters are going to play in a 'A' league, which has a 76-game season, thus 38 home dates.
The pricing of the tickets should reflect a number of variables. The first is the different types of ticket options that the team wishes to make available. The second is the different sections of the stadium. The third would reflect special options, for example a family option. The fourth would reflect the tradeoff between ticket revenue and concession revenues. With that tradeoff in mind, a total revenue approach should be considered for this decision. For example, Buckingham reasoned that if ticket prices are too low, this may encourage no-shows, who will spend no money on concessions.
Analysis and Evaluation
The Springfield Nor'Easters do not have many strengths. They have an attractive product, as minor league baseball is generally popular in the U.S. The management of the Nor'Easters also seems to have a strong understanding of the local market. Families are clearly the key revenue driver for many teams, and they have picked up on that. They also appear to understand the relevance of concessions. Lastly, they keep 100% of concessions, which is of tremendous benefit as that is a key source of revenue. They have already sacrificed the $4 per car in lieu of stadium rent.
There are a number of weaknesses, however. The market is small -- Springfield only has around 55,000 residents, and many of those are unable to purchase tickets. The team is an unknown quantity in the market as well, being new. They have no established brand and minor league baseball is therefore not a tradition in Springfield. Lastly, the team has few sources of revenue. It must rely almost entirely on ticket sales and concessions to generate all of its income. Indeed, given the stadium capacity for the season, an average revenue per customer at 100% capacity would be $7.68 in order to earn a profit. At 75%, this is $10.25 and at 50% capacity, this is $15.38 -- and these figures are with concessions taken at net. The gross revenue required to meet these contribution levels would need to be much higher.
There are a number of opportunities in the market. The first is that there is no competition in the summer. The Falcons, should they remain in Springfield, have a season that has no conflict with baseball. The market is largely untapped, with few sporting competitors. In addition, there is the possibility of adding to the market in the summer months. According the U.S. Census Bureau, the Springfield area has 700,000 residents. Indeed, the U.S. Census Bureau puts the city's population at 155,000, not 55,000.
There are also a number of threats in the marketplace. For example, the Springfield market is declining. This means that fans may be less willing to purchase season tickets, and they may spend less at the stadium than they had indicated they would. Fewer fans may attend than those who had indicated that they intended to. As well, there is a significant amount of other competition from other forms of entertainment, such as movies, bars, nightclubs, television, the Internet and amusement parks. The Nor'Easters must present an attractive proposition to the citizens of Springfield if it hopes to make money.
In setting ticket prices, the contribution to fixed costs should be taken into consideration. The fixed costs for which the team is responsible are the uniforms, league dues, staff salaries, office expenses, team travel, market research and advertising. These costs total $1,051,879. Thus, the revenues must cover this figure in order for the team to be profitable. Buckingham's mandate from ownership is to make the Nor'Easters profitable in their first year.
The potential market within Springfield city limits is a little over 77,500 if the U.S. Census population figure is used. According to the survey results, 38% (29,450) consider themselves baseball fans. Of the total, 17% (4590) have attended a minor league game in the past year. A total of 23% (17,825) have purchased a season ticket for a sporting event. These figures indicate that there is strong enough local market to fill the 3600 seat stadium. Most fans expect a discount that escalates with the amount of tickets purchased. The 1600 grandstand seats could reasonably command 10% more than the bleacher seats. A total of 81% of fans indicated that they would spend $6 or more on snacks and souvenirs for each game attended. From these figures, some conservative estimates can be drawn up. Conservatively, the team can expect $6 in concession sales per fan per game. The actual figure may be more, but many surveyed may be overstating their willingness to pay, especially if they intend to attend several games.
Four scenarios have been tested. One constraint is that the ticket prices must be on a sliding scale. Consumers have no incentive, for example to purchase a 5-game pack if they do not receive a discount over the single game ticket. Thus, each package should offer a discount over each other package. There are essentially four main options facing the team. The first is to price starting at higher price points, understanding that capacity utilization will be lower. The second is to price at lower price points, seeking to bring customers through the door to spend at the concessions. Very high end ticket and low end ticket prices have also been tested. For the basic model, a conservative $6 concession is used, which translates to a $2.34 contribution. The results are found in Exhibits A, B, C and D
While both price scales deliver a profit, the low price scale is the more profitable of the two. The basic model does not address the constraint of capacity, which would reduce the revenue totals for the first option, which in the current calculation comes in with estimated demand of 108.58% of total capacity. The model, however, also does not account for the 10% surcharge on grandstand seats. This is in part because it is not known what the demand for grandstand seats will be relative to bleacher seats if the stadium is below capacity.
What the results show is that the low price scale delivers a profit of $270,832 and the high price scale delivers a profit of $147,448. The amount of additional customers that results from lower prices not only indicates a sellout every night, but would result in a total additional customer base of almost 27,000 over the course of the season. There is a $2 difference in the average ticket price between the two options, however, but the extra customers deliver a higher total ticket revenue under Option A ($975,000 versus $942,000). It is in the concessions where the extra customers deliver the profits for the team. Option A delivers $347,000 in concession revenues, compared to $257,000 for Option B, a $90,000 difference. Combined with the additional ticket revenue, Option A is by far the more profitable of the two options. It is worthwhile exploring other options as well. The optimal price points, for example, may lie in between the $2 intervals that were used in the survey. The team could begin by using those $2 intervals, but it could over time attempt some other intervals. For example, single ticket at $9.50 may have a higher price elasticity of demand than single ticket prices over $10, simply because of the impact of the $10 psychological barrier. The season ticket package at $4 totals $152. If this price is lowered to $149, it would have little impact on the average ticket price but by taking it below a…