What drives profitability in the theatre?

First, let me be clear: the reasons to make profit are many fold: with this year’s extras, we can make better art next year, provide more for artists (and administrators), lower access barriers [...]]]>

What drives profitability in the theatre?

First, let me be clear: the reasons to make profit are many fold: with this year’s extras, we can make better art next year, provide more for artists (and administrators), lower access barriers for audiences, ask less of our donors, and have greater economic and cultural impact in our communities. So we’re not making profits just for their own sake, but instead for sake of the art(ist).

One of the first issues to solve is data collection. Without clear and consistent variables across time and place, it’s hard to form any hypotheses about predictive drivers.

But let’s break down the competitive pressures in the theatre and see what we find.There’s a lot of juggling going on, and some of those balls are on fire (see how hard I’m stretching to make the picture fit?), so forgive my simplification. It should be the case that:

Buyer have very little power because there’s many more of them than there are us. But it turns out they don’t need much power because we’ve overbuilt seating capacity and there are an increasingly infinite* array of leisure time activities. We’ve tried to increase switching costs via annual subscriptions and membership programs, but those are clearly on the decline as well.

• From the perspective of an outsider, I’d like to find some predictive variables that drive ticket prices.
• From the perspective of an audience member, just how elastic are ticket prices?

Suppliers have very little power (again) because there’s many more of them than there are us. Even though on average 60% of a theatre’s budget is spent on personnel, the ratio of qualified people (artists and administrators) to available positions is very very high, and though execution is difficult to measure, rents tend to fall to the firm. Here’s what I’d like to know:

• What impacts salaries in the theatre? How do we identify the driving forces? Does the presence of other theatres in town drive the market price of talent up? Does the education level of applicants? Do annual ticket sales? If so, by how much? How does tenure have an impact?
• What objective impact does a change in Artistic Director (and Managing Director?) have on programming, ticket sales, and/or business strategy?

Barriers to entry are laughable. Anyone can start a theatre company; there’s no license involved (as in hospitals), it requires relatively little capital (compared to say manufacturing), and distribution channels are wide open (online ticket retailers are aplenty). Rarely do founders think of serving a target market with a niche product (though Single Carrot is off to a good start), thus many of us have drifted towards the center in our quest to capture market share. Here’s what I’d like to know:

• In theory, a mission serves 3 masters: donors, clients, and staff, for the purposes of evaluation, boundary setting and motivation. Everyone complains that mission statements “aren’t good” and/or “shouldn’t be changed (often).” But with these (at least somewhat) objective measures, I’d like to see an actual comparative study of missions across location and time indexing their impact for motivation, boundary setting, and potential for evaluation.
• Once a theatre enters a market, there is a fairly well documented organizational life cycle. We know that it exists, and we know what features characterizes each of the stages on a macro level, but we don’t know how organizations leap from one stage to the next, how long they can stay there, or what minimum efficent levels of scale are at each stage.
• There’s a clear selection bias of only looking at successful theatres (or even those still in existence) and interpreting cause based on effect (because it could be the case that theatres that have closed had the same cause with a different effect). But I’d like to know a little bit more about the path to extinction. Looking backwards, what were some of the key decision points where things could have gone either way?

Substitutes abound. Sort of. It all depends in how we define ourselves. Which we’ve always had trouble doing. Do folks buy tickets because they’ve learned to value the cultural opportunity via arts education at a young age? Or do they just want to take a few hours off in search of a good laugh/tear jerker? Does the reputation of donors increase in their community in line with the size/consistency/transparency of their gifts? Or are they just looking for a tax break? Clearly this is more of a spectrum, less of a dichotomy. But strictly speaking, a product or service is a(n economic) substitute only if a change in your price impacts a substitute firm’s demand (or vice versa). Simply: when you raise ticket prices $10, do more people start attending the local movie theatre? When donations increase at the symphony, are you left with fewer donors? If so, you’ve just found your substitutes.

Competitive rivalry is fierce. As one of my classmates proclaimed this morning, “a curtain is not a sustainable competitive advantage.” It is difficult if not impossible to achieve productivity gains in the theatre: in other words, we can’t replace actors with robots (yet?). With the constant turn over in Artistic Directors, our programming trends are in constant flux, and our mission statements are wide enough to drive a truck through. However, theatres also share resources via co-productions, a common artistic & admin pool, companies in residence, and the dispersion of ideas propogated through foundation grants. Here’s what I’d like to know:

• In theory, rivalry should drive innovation (for an industry seeking high returns on resources). Many believe that innovation can be systematized–that a focus on the process yields better results than restricting your eyes to the prize. One force shaping how much innovation an industry undergoes is the net entry rate of that industry. In short, if you have many firms entering and exiting the field, ideas flow more easily between the remaining firms. I’d like to see within particular regions the inflow and outflow rates of theatres, and how that impacts both programming and managerial decisions.
• More generally, what are the revolutionary ideas that have changed the theatre industry? Technical advances are a little easier to identify: the advent of electricity fundamentally changed our ability to manipulate light and sound; building an indoor stage expanded the length of time during the day and during the year that we could perform. Then there are the business model advances like repertory companies, subscription tickets, education departments, and co-productions. But I’ve yet to find a relatively comprehensive study of the economic (rather than simply artistic) shifts in modern theatre history. It’s a little overwhelming to think of, so in discrete chunks, on an industry-wide level, I’d like to know things like:
  • The change in ratio of artists to administrators over time
  • The change in ratio of earned to contributed income over time
  • The change in total seating capacity over time (relative to the change in the nation’s population?)
  • The change in the number of theatres per capita over time
  • The change in average length of run (and actor weeks!) over time
  • The ratio of rural:suburban:urban theatres over time
  • The proportion of theatres at each TCG budget level over time
  • The professionalization (proxied by graduate degree holders?) of artists, administrators, and boards
• We don’t often think of market share within the theatre, when it would seem to be fairly easy to do so. Within your city, do you know what share of arts-based revenue your theatre captures? Do you know when the entire pie expands (or shrinks)?

A little idea I’ve been kicking around for awhile is how to create a merger and acquisition market for the theatre, simply for the sake of data collection. Or maybe it’s a franchise market. In short, I want to know which theatres out there are figuring out ways of doing it better than the rest. Much like in my social media research, I want industry benchmarks that are simpler than the annual fiscal surveys. I want metrics driven by theory rather than history. I want case studies that highlight success stories. I want clearer bounds to capacity for growth in a particular area. I want to spot regions or customer segments that are under-served. I want theatres with R&D budgets attached to specific objectives. I want a web site that contains these resources and a community of art makers that embrace and critique it.

I’m not interested in data for the sake of collecting reams of paper terabytes. But I think that by looking at industry structure we can begin to seek out pockets of innovation that could make the field stronger (and maybe a few lucky theatres more profitable). No doubt some of this already exists on the interwebs, and I just haven’t happened upon it. And someday, someone will finally start paying me to do some of this research. Until then, I settle for work study grants and graduate research fellowships.

*not strictly mathematically possible

Teddy Goff, of Blue State Digital, came to speak to my Social Media Marketing class last week. I’ve got to admit: even after reading his bio, I was a little jealous of Beth Kanter guest [...]]]>

Teddy Goff, of Blue State Digital, came to speak to my Social Media Marketing class last week. I’ve got to admit: even after reading his bio, I was a little jealous of Beth Kanter guest speaking at the Stanford GSB Power of Social Technology class. But ten minutes into his lecture, I was hooked.

First, the video.

Then, the words:

The 3 Principles Guiding Obama’s Digital Strategy:

1. Transparency. This meant giving complex issues their full day on stage instead of shaving them down to 10 word answers.
2. Authenticity. This meant going “off message” to show the candidate as a person instead of a brand.
3. Engagement. This meant asking users what they wanted, and showing that you’re listening.

The campaign’s mission:

1. Communicating. Users want to see other users like themselves online. Through testing (more on this below), they found users preferred “real” videos over “highly-produced” ads. This much communication required hiring lots of folks to produce content.
2. Organizing. The more they talked about what people were doing, the more they did it. Along the way, they realized they had to base the digital strategy in existing relationships. This much organizing required a lot of volunteers.
3. Fundraising. Making it about the # of people donating instead of the $ increased traffic and total donations. They found donors, no matter how little they had donated, were far more engaged with the campaign after they donated. They had great success with a contest that tied small-amount donors to big-donor rewards. Gimmicks work. Sometimes merchandise made more profit than fundraising; that’s ok.

And then came the answers to our many questions.

• Email lists were the most important asset they had. Far more so than Facebook fans.
• Test everything. Say you’re sending an email. Take 1% of the list, and split them into 2 groups. Send one group one version of an email, and send the other group a different version. Wait an hour. Use whichever email has the highest click through rates to the entire group. You can test to, from, subject lines, and body text. You can test the color of the donate button you’ve embedded in your email. You can test your website too: from the titles of page tabs, to whether your “donate” button should instead read Contribute, Please Donate, or Donate Now. Apparently, it mattered.
• Counter messaging only helped when everybody was already aware of the smear.
• Facebook wasn’t (as) important then, but it is now. Twitter legitimizes Facebook by making social media an industry rather than just a single website. When Facebook made status updates the center of the FB experience (instead of the wall, or personal info), it revolutionized social media. Facebook photos and videos drove more engagement than text-based wall posts.

And just a few general ideas that he threw out:

• They didn’t have to sell a product people didn’t like, just one they didn’t know. This made their job considerably easier.
• Almost everything everyone does is targeted towards current users. No one’s figured out how to engage undecideds or non-supporters. But in non-political spheres, consumers are generally brand agnostic.
• Consider the kind of relationship that your customer wants to have with you.

It’s that last one that hit me like a ton of bricks. What kind of relationship do ticket buyers (or more generally, members of your community) want to have with their theatre? You’re never going to be a part of their daily lives. You might be a part of their monthly lives. When your paths do cross, what could you probably be doing better?

Here’s a few things that came to mind:

Be more transparent. I (as a consumer) want to know what’s going on behind the scenes, literally, and figuratively. More quarterly reports, and less 3 year old innacurate 990s. When a play on your stage isn’t up to snuff, tell me what’s working and what’s still being worked on. Stop treating Artistic and Managing Directors as the (wo)men behind the curtain and let me see them as real people. That extends all the way to actors too–I like seeing them out of costume just as much as I do onstage.

Understanding the importance of me seeing people “like me.” For a long time we’ve talked about the importance of seeing like-minded folks in the audience, but when I’m checking out a theatre’s online presence, I’m also looking for folks like me. That means on your website, on your Facebook fan page, even checking to see who else is tweeting about you. What if one of your marketing interns stood in the lobby with their flip cam to capture what your audience looked like?  You can edit selectively. Or get first time audience members to post a comment to your Facebook page, make a contribution to your blog, or tweet about their experience. This applies for 50 year olds the same as 20 year olds. Know the demographics of your (social media) audience.

We need more content (creators). I know everybody’s in a hiring freeze, but over the past few years I’ve been seeing more and more of these folks as permanent staff. Still appalling to me that most of my classmates (at both schools) don’t know squat about video editing, photo-shopping, or blog writing. I’ve got an inkling that designers who’ve been working in the theatre for awhile might not be the best people for this job, but that’s more anecdotal than data-driven. In light of the “real” versus “produced” note above, I think designers would be driven crazy by the low-(production)-quality bar that this kind of job requires. If I had a staffing survey to do over again, I’d ask more questions about that.

In fundraising: people > dollars. I’ve rarely seen capital campaigns that focused on the number of folks participating over the dollars raised. Although, I’m wondering if anyone’s yet undertaken a capital campaign that has really embraced social media. Maybe it’s too early for it, but to me it’s an exciting prospect. Especially with ideas like this. I want to see theatres experimenting more with gimmicks. With contests. With merchandising. When’s the last time you actually wanted to wear that t-shirt you saw in the gift shop?

Test everything. Again with the problematic hiring freezes. But this is what I get the most passionate about. In a recent discussion about which should be the image on the front of our marketing brochure for next season, my suggestion was to poll our subscribers. Or our single ticket buyers who we want to start subscribing. Every time someone lands on our webpage, or clicks onto our Facebook fan page, or opens an email from us, it’s an opportunity to stop TELLING them something, and instead start ASKING them something. Every week we’re looking at our Google Analytics, but when’s the last time we actually made a change based on the stats? How often do we forget to use a control group so that we know how well the “test” worked?

But do it quick and dirty. There’s a lot to do, and never enough bodies in the office. So (especially when you’re not printing it out), form a hypothesis, make a decision, release it to the wild, and see what works. Throw everything at the wall and watch what sticks. Lather, rinse, repeat. Don’t be afraid to make mistakes (but don’t forget that transparency thing when you do). One of the sort of magical things about social media is that it is time intensive, but incredibly cheap.

My latest experiment is this new blog. What’s the last experiment you tried? How’d it work out?