#3: Gross Potential Is a Beauty Contest Where You’re Both the Contestant and the Judge
A few weeks ago, we published 15 thoughts about pricing for the new year — 2015. A lot of people read the article, and so I thought I’d expand on a few of the topics and give them their own posts.
Gross potential is a term that a lot of people in the live entertainment business use for reasons that to me are, let’s just say, mysterious.
For those unfamiliar, gross potential is the number calculated by taking the starting prices of a given house and assuming every ticket sells at that price. For example, and to keep it simple, suppose you have a 100-seat house for one show and the tickets are all priced initially at $50. The gross potential for that show is $5,000. If you change the price, let’s say by hitting the wrong key, to $60 and it goes to market that way, your gross potential is now $6,000.
The marketer who only sells $5,000 worth of tickets to a show that has a gross potential of $6,000 is, by definition, not as effective on that show as one who sells the whole $6,000.
But wait … why did the show’s gross potential change? Because I, the fat-fingered typist, accidentally typed a six instead of a five. Nothing fundamentally changed about what the show is worth to the marketplace of potential buyers.
Obviously, the typo is a somewhat silly example, so let’s be more realistic. Prices get set based on some beliefs about the marketplace: There’s X amount of potential for a given show or section out there at a given price. If we knew that this belief was correct, then gross potential would make a ton of sense, but we don’t. That’s the entire point of price management. Fairly often we’re destined to be wrong about the price people who will actually buy tickets think they should pay.*
My sense is that many people use this term because it’s built into a lot of contracts, especially in the concert world. This is truly unfortunate. This is a number that’s completely made up and has no actual real-world relevance. Unless, of course, you write it into a contract, which, well, doesn’t make any sense.
Why doesn’t it make sense? Because you (the collective “you” who determine pricing for a show) made the number up. It could be anything, and it doesn’t mean anything.
Instead, you should be doing two things: first, calculating the break even revenue per seat (not just average ticket price) and then, setting a goal revenue per seat. Why take an opinion on the “potential” of the show? Model the business the way it needs to be modeled: When do you stop losing money and how much would we like to make on the upside? Those are the important questions and metrics.
So drop gross potential when it’s up to you and negotiate not to use it when others want to. It’s a beauty contest where you are both the judge and the contestant: You perform as a marketer against a set of standards you yourself set. You can get much better business results with a lot less nonsense by changing to the measurements I suggested.
*If you’re always right, that’s great, but it’s maybe because you’re being very, very cautious and careful. That’s not a bad thing, but it can be in excess. I know people who choose their programming very conservatively because they’re afraid to be wrong on price. As an entrepreneur, I get it, but over time, this caution makes you less and less forward-looking and tends to box people into a very staid, very stale way of working. It doesn’t happen all at once, but it does happen. There are plenty of living examples out there that I’m sure some of you can name. It might be better to be willing to be a little wrong and adjust on a higher-risk show than to always nail in on shows that are familiar.