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Thursday, February 7, 2013

Bearing Down On Positioning Price Hikes



           For the 11th time in 12 years, the Chicago Bears will raise ticket prices in at least some portion of the stadium for the 2013 NFL season. As the Chicago Tribune pointed out, “The average increase for season tickets is 4.2 percent after the club missed the playoffs for the fifth time in six years.” This observation highlights one of the most commonly held beliefs about ticket price increases: that teams’ should only raise prices when experiencing on-field success.
            This is a misnomer. Ticket price increases should not necessarily be tied to performance. The Tribune’s statement implies that the Bears’ making the playoffs is a prerequisite for raising prices – that the value of the in-person experience increases only when the team’s performance improves.
However, making the playoffs is a relatively arbitrary indicator of success. Finishing the regular season with a winning record, such as the Bears’ 10-6 campaign this past year, would usually ensure the team a spot in the playoffs. If the Bears had simply made the playoffs, would raising ticket prices be more palatable? While the team lost critical games to both Seattle and Minnesota this year, how other teams perform is largely outside the Bears’ control.
Second, making the playoffs certainly is not the only way Bears fans receive value from attending games. Under that logic, it is unlikely the team would have been able to sell out Soldier Field in the five seasons without playoff appearances. Fans may (rightfully) complain about the Bears’ on-field performance, but their spending habits suggest they are willing to pay for ticket price increases to continue attending games. This indicates that fans are receiving value by attending games even if the Bears fail to make the playoffs. While fans almost never will be happy with price increases, they do not usually follow through with their wallets to voice displeasure about the team’s performance.  
            The Tribune does a good job explaining the unique competitive dynamic the Bears face playing at Soldier Field. Despite being the only team in the country’s third largest market (New York has both the Giants and Jets, while Los Angeles has not had a team since 1994), the Bears will not only play in the NFL’s second smallest stadium starting in 2013, but also do not own the stadium. As a result, the organization has to make $5.7 million annual lease payments and pay 12% in amusement taxes for luxury box seats. This puts the team at a significant disadvantage compared to other NFL teams in generating gameday and in-stadium revenue. Coupled with the high demand for tickets and revenue restrictions that come with leasing a stadium, the team can and should charge the third-highest average ticket prices in the league.
            The Bears, however, have failed to properly explain these factors to fans or the media when announcing price hikes. Instead Bears President Ted Phillips asserts that the Soldier Field situation “puts pressure on us, and we have to remain economically competitive to help us build a championship team. It's as simple as that.”
           Unfortunately, it is not as simple as that. In fact, ticket price increases are not necessary to either remain economically competitive or build a championship team – issues addressed by the NFL’s lucrative revenue sharing policies and television rights deals.
The NFL recently signed new agreements with broadcast, cable, satellite, and radio partners that will generate $7 billion in media revenue starting in 2014. Forbes estimates that every NFL team will make $200 million simply in media money every year based on these agreements. Yet the NFL player salary cap is anticipated to be about $120 million in 2013 and is not anticipated to increase substantially in following years even with this new influx of media revenue. While current player salaries are not the only cost that comes with producing a “championship team,” they still account for the bulk of a team’s costs. It is also unlikely that the salaries of coaches, general managers, scouts, or trainers (i.e. the main people that focus on-field performance) or paying for the contracts / benefits of released players, coaches, and front office staff would account for the approximately $80 million remaining from these media deals.
            In addition, the “economically competitive” argument does not appear to apply as well. The Bears will cover the vast majority of their costs from these new media rights deals. Because the Chicago Bears operate as a private company and do not have to disclose financial details, B6A has estimated the team’s revenue and cost structure using publicly available sources of information. B6A estimates that the Bears will have about $280 million in operating costs and that all revenue streams outside of national media money (tickets, sponsorship, events, concessions, merchandise, parking, preseason media deals, etc.) will generate about $213.3 million in revenue in 2013. Based on B6A calculations, the Bears can expect to generate $133.3 million in profit starting in 2014. Therefore, the Bears can most likely pay for a “championship team” and still make a significant amount of money without having to increase ticket prices.
            B6A does think the Bears are completely justified in raising prices. There is clearly significant market demand for game tickets, especially given the relatively small supply of seats at Soldier Field. In addition, ticket holders do not judge the value of their tickets based on the team’s on-field performance. Their willingness to pay continues to rise with higher ticket prices even as their team fails to make the playoffs several times in recent years. However, justifying these price increases based on personnel costs or economic viability is not the right approach. Many companies have asked its consumers to pay a price premium for superior products - such as Apple has done with the iPhone and iPad. The Bears can follow this example. The team can an afford to ask its fans to pay more money because it offers a superior product.     

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