The Art of Alienating Your Fans: Two-Part Tariffs in Professional Sports

It has long been an understanding by the owners of professional sports teams that their fans are completely irrational about their favorite teams. What an advantage that must be when setting prices for season tickets. Even better, how about extracting extra revenues from those fans whose demand is trending towards being inelastic by requiring them to pay an entry fee in order to purchase season tickets? Well that is what the owners of the New York Jets are doing to their fans beginning in 2010 when they open up their new stadium. In an article titled "Playoff Run May Drive Seat License Demand" it is stated that, "More fans will be willing to pay these steep increases in admission costs for Jets games beginning next season thanks to the team's march through the playoffs..." Those steep increases are mainly due to the implementation of "Personal Seat Licenses": the dreaded entry fee paid by fans for each seat they demand for the ability to purchase season tickets to home games. The usage of personal seating licenses has taken place dating back to 1986, now being used in all professional sports ranging from the National Football League to the National Rugby League.

The concept of using personal seat licenses in professional sports is a perfect pricing strategy for their season ticket holders due to the unwavering demand by the fans for tickets to these live sporting events. Not only does the purchasing process separate the high demand and low demand consumers (personal seat licenses for the Jets range from $4,000/seat in the upper levels of the stadium to $30,000/seat for the absolute best seats), but it also extracts the most possible consumer surplus away from the fans. Although fans are predictably irrational, they also live within their monetary means. The front office for the Jets realized this and had an opportunity to lower the per-game price of tickets in some areas by 50%, further lowering the variable price of the two-part tariff to marginal cost. However, the personal seat license prices will remain the same. Some fans refuse to purchase personal seating licenses and have been extremely outspoken about the gouging of prices, but due to the recent success of the team there is little worry that every personal seat license will be purchased before the start of the 2010 NFL season.

- Randy Abbott, Jeanette Elliot, Dan Furey, and Jordan Smith

Bundling: Helping you get what you want and much more

Bundling products is a tried and true method of getting consumers to purchase certain goods, and it is no different for grocery stores. Recently, retailers have started bundling gas with their weekly grocery purchases. This has not always been an acceptable method to gain business. According to an Antitrust Law Blog article by Sheppard Mullin, grocery stores came under fire for the “practice of offering below cost discounts on gasoline conditioned on the purchase of a qualifying amount of groceries purchased in the store.” Concerns about this promotion centered upon loss-leader pricing, but this was ultimately thrown out as, “the court noted that the customer attracted to City Market's gasoline pumps was unlikely to be lured to buy other items in the store on the assumption that they were similarly low-priced. On the contrary, the structure of the program was such that the ability to buy discounted gas was expressly dependent on the prior purchase of a qualifying amount of groceries.” Since proven an acceptable practice, we have seen a surge in the gas and grocery bundling practices across the nation. It has become a method by which grocery chains are gaining brand loyalty. In the rough economic environment, pennies matter and if one retailer can offer gasoline for two or three cents less- consumers will flock and continue to frequent the retailer that can lessen the burden of filling up the tank.

Tops Markets is a perfect case in point: by bundling their grocery business with their gas business by means of their gas bonus points, they are securing consumer demand that otherwise may have been lost to the competition. They run promotions with their gas bonus points, which allow consumers to earn extra bonus points based on their expenditures during the specified time frame. The time frames encourage consumer foot traffic in the store, which help to sell goods around key events and holidays. Examine the Tops promotion above; it is no coincidence that they are running their gas bonus points special during the week immediately following Fat Tuesday. Typically, consumers hit the store midweek to prepare for their Mardi Gras celebration and they stock up on goods to get them through both their party and the remainder of the week. Tops gives their consumers a reason to make another trip by offering incentives that may convince those shoppers who are decently stocked with goods, to venture out to the store anyway so as to capitalize on the gas promotion.

- Courtney Hayward, Laura Heslop, and Katie Tretter

Wal-Mart vs. Wegmans: The Name of the Game is Differentiation

Wal-Mart, to many, is an industry steam roller. It enters a geographic market and quickly wipes out neighboring competitors, then continues on its way crushing retailers who simply cannot compete with the everyday low prices it can offer its customers. Wegmans has been able to hold its own, but it has not been an easy fight. According to an article entitled, Wegmans Sweet Spot, “Danny Wegman's liberation manifests mostly as being just about everything that Wal-Mart is not.” Each and every day Wegmans fights to own a position in consumers’ minds that clearly separates it from its competitor, Wal-Mart.

Realizing that Wal-Mart has the economies of scale to offer prices that dip much lower than what Wegmans can feasibly offer, Wegmans does its best to make its store more of an experience to compensate for the at-times higher prices. Wegmans offers an unparalleled produce section that embodies freshness and epitomizes the highest standards of quality. The gourmet food stations, meals-made-easy instruction based cooking lessons, and superior pharmacy are just a few of the components that makes Wegmans a stand out compared to Wal-Mart. Danny Wegman has done his best to create real differentiation between the two retailers. Aside from the retail environment, Wegmans is a community staple in that it donates and supports local charities and local people. Customers see local produce featured in its stores and sponsorship at area events, and they see some of their own dollars come back in the form of community programming that Wegmans supports, such as their scholarship programs. Wegmans is successfully coming to own a unique place in the hearts and minds of consumers, which has certainly been a key factor in its expansion down the east coast.

- Courtney Hayward, Laura Heslop, Katie Tretter

Can Apple Lead Consumers Down the Yellow Brick Road?

"An oversized iPhone that doesn't call." "Hilarious name." The iPad was revealed last week in a typical Steve Jobs presentation. An interesting article in a technology blog lists "8 things that suck about the iPad." Issues include the keyboard, seconded by Walter Mossberg of the Wall Street Journal, citing the trouble his keyboard-whiz colleague had using it. Negative reviews on the iPad are numerous, overwhelmingly focusing on the need for adapters. The device also lacks HDMI output, USB port and SD card slot, raising an interesting question: Why? To leave these functions off a “computer” is hardly an oversight. Take the lack of the flash player, for instance. Steve Jobs has publicly criticized Adobe for its Flash software, and has made clear his desire for a universal shift to HTML5. Unveiling a device lacking features consumers have come to require will be a test of Apple's market power.

The iPad is linked to iBooks, which will increase current prices of eBooks by $4. Can Apple entice consumers to pay this premium, even during a recession? Macbooks, iPhones and iPods are all successful highly priced products. Over the years, Apple has acquired an innovative position in the market, developing a cult following. During a sluggish economy, strong brands remain attractive thanks to inelastic demand. Apple customers are loyal to the Apple brand; Apple products are indispensable items in young and gadget minded environments. The lack of close substitutes with similar extrinsic characteristics and user experiences, coupled with the preference within budgets and the sex appeal Apple offers will offset technical shortages. Actually, these shortages might benefit Apple; it can rapidly develop second and third generation technologies building upon its customer base, and honoring its reputation as innovator and pioneer. Apple has become aware of its market power and is now exerting it.

- Jim Flanagan, Friso Klok, Kelly Mannix