Question

It’s a new season and you manage to renegotiate several important contracts. After several rounds of tough bargaining, your stadium rental for the season is $40 million, your payroll $5,000,000, and cost per each of the 10 home games is $125,000. You also pay a flat fee of $1,000,000 for utilities and another $65,000 per game. You hope to sell 315,000 tickets this year, with a variable cost per ticket of $90. For each block of 6,000 spectators, security costs will add $4 to each ticket sold. What are total costs?

Your boss wants to achieve 25% profit margin. How much would each ticket have to cost to make that happen?

Your boss thinks you have no idea what you are talking about, since he’s “always done things a certain way” and knows “perfectly well how much our fans are willing to pay” based on experience and competitors. What are the dangers of such an approach to pricing?

Last year, you charged $300 for a ticket. This year, your boss decides to charge $400 because the team signed a free agent. Attendance at the first game drops from 30,000 to 25,000.

What is the price elasticity of ticket demand in this case?

How would you characterize it?

Are you going to make more money this year despite the drop in attendance?

Answer 1

Planning to sell 315000 tickets. For every 6000 tickets, security costs add up by $4 per ticket.

So total block of tickets is 315000/6000 = 52.5

Total cost = $40mn + $5mn + $1.25mn+ $1mn + $0.65mn = $47.90mn

Adding security costs, Total cost = $47.90mn + ($4*315000) = $47.90mn + $1.26mn = $49.16mn

Boss wants to make 25% profit margin, So $49.16mn*1.25 = $61.45mn

Price per ticket = $61450000/315000 = $195.08

When the above price is charged, lot of dangers associated with it.

• Audience rate wont be constant for all matches
• Losing the willingness to pay amount by audience
• Discounting from previous price will not help us overcome the increasing costs

Price change from $300 to $400. i.e., for $100 price increase demand falls by 5000

Price elasticity = (5000/55000) / (100/700) = 7/11 = 0.63

Audience are more price sensitive.

Yes. As the price gets increased 33%, drop does not slide us below the profit margin mark.