Sunday, January 01, 2006

SAP: How does Broadway price a ticket?

For those who've been wondering why a Broadway ticket is so expensive, here's why. In this post, let us analyze how Broadway Theatres prices a ticket for its world-famous live musical shows like The Color Purple and Dirty Rotten Scoundrels.

  • In this industry, the pricing strategy cannot be determined by looking at the competitors becuase there aren't many.
  • Although we have to focus on supply and demand to an extent to price a ticket here, the price-based costing technique will not work here too because there are no economies of scale in these plays. There are huge costs associated everytime a musical is performed, which cannot be controlled by demand.
  • So, that leaves us with one approach - to analyze the total costs involved with a musical and price the ticket accordingly.
Let us first break up the costs as follows -
(a) Costs in getting to the opening night
  • Sets, costumes and lights - $4 M
  • Salaries and expenses in the theatre - $2 M
  • Salaries for creative team, staff - $1.5 M
  • Rehearsal salaries - $1M
  • Advertising and promotion - $1M
  • Administrative - $700,000
  • Advances for writers, director and designer - $350,000
  • Casting / rehearsal expenses - $150,000
  • Reserve - $1M
TOTAL = $12M
(b) Costs per week in keeping the show on
  • Theatre expenses - $200,000
  • Salaries - $150,000
  • Advertising - $50,000
  • Maintenance of physical production units - $50,000
  • Administrative - $25,000
  • Fees and royalties - $5,000
TOTAL = $0.5 M / week

Let us assume an average play shows for around 5 months, successfully running 7 shows / week including weekend special shows.
A Broadway Theatre's capacity = 1750 (app.)

Total costs for this show = 12M + 0.5*20 = $20M

Estimate total tickets sold = 1750 tickets/show * 7 shows/week * 4 weeks/month * 5 months
= 245,000 tickets

So, Break-Even Price = $20M / 245,000 = $82

Let us assume Broadway wants to see a profit-margin of 20% per show, which is very reasonable. That brings the price of a ticket to $100

We know that there is pretty good demand for these shows and they run at full capacity most of the days in New York. Three-fourths of the demand is fulfilled by visitors to the city. So, as long as visitors rush to New York, Broadway will continue to survive even by charging these high prices.

What can it do to bring down the price? (1) Increase the capacity of the theatres? -NO, becuase those are historical landmarks. (2) Increase the number of shows per week? -NO . First, producers cannot add shows to the schedule as they like becuase of union rules and second since there are costs associated with every show, it does not guarantee more profits.

So, unf0rtunately, Broadway has to charge us around a $100 for its musicals.

NOTE: The numbers used in this post are estimates and assumptions



Blogger Rams said...

This seems an interesting space to watch...Estimates seem good (though I never knew abt this Broadway or its musicals ;-)

10:56 AM  
Blogger Padmanaban Kumar (paddu) said...


BTW, I dont know if you know me, I'm a 2002 CEG computer science graduate. Which batch are you in?

I just saw your profile and blog. It seems you've had a nice Mahabaleshwar trip...I see a lot of Juno guys there also, Parthiban and Anbu...I was working there till August 2005 after which I joined UT.

Say hi to Vimal...

10:28 PM  
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