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Pricing lessons from the London Olympics

This year, the English can teach the world a thing or two about finance and investment, simply by laying out their Olympics Spending Plan.
The committee organizing the London 2012 Olympic Games faced an extraordinary business challenge: How to price 8 million tickets in a way that allows equitable access to 26 sporting events, meets revenue and attendance targets, and adheres to the explicit social objective of making the Olympiad "Everybody's Games."

To accomplish this, the committee took what we call a shared-value approach to pricing. Traditional pricing strategy is by definition antagonistic, but it needs to become a more socially conscious, collaborative exercise. Businesses should look beyond the dry mechanics of "running the numbers" — still relevant but no longer sufficient — and recognize that humanizing the way they generate revenue can open up opportunities to create additional value. That means viewing customers as partners in value creation — a collaboration that increases customers' engagement and taps their insights about the value they seek and how firms could deliver it. The result is benefits for firms and customers alike.

By studying the 2012 Games and the committee's multiyear pricing process, we determined five pricing principles that every business, whether it has a shared-value mission or not, could profitably adopt. Here are the five principles and how the organizing committee applied them:

Focus on relationships, not on transactions

The committee understood early on that it was in various relationships — with the British government, with the British public, with the International Olympic Committee, and so on — and that ticketing was the most visible aspect of those relationships. As one committee member put it, tickets account for 20% of the Games' revenue but when done wrong result in 80% of an organizer's headaches.

The solution was to value customers more than their money. First, the committee increased the number of pricing tiers for many sports, which kept some ticket prices low while still hitting revenue targets. Second, it offered a pay-your-age pricing plan for young customers and discounted tickets to those over 60. Third, for the opening ceremony it chose high and low price points — £20.12 and £2,012, respectively — whose symbolic rationale everyone understood. Finally, it instituted a strict policy of no free tickets, avoiding the public outrage free tickets had provoked at previous Olympics. To many, these actions said, "We are looking out for you."

Be proactive

Consider the committee's decision not to bundle tickets to a more popular sport (swimming, say) with those to a less popular sport (tae kwon do, for instance), a tactic sometimes used in previous Olympics to increase ticket sales and boost attendance at the less popular events. While bundling can increase revenues, it can also add costs for consumers and doesn't necessarily fill seats. Indeed, past experience with bundling suggested that many who purchased the bundle let the tickets to the secondary event go to waste.

To avoid this problem, the committee let the ticketing of every sport stand on its own, creating 26 different pricing plans detailing how tickets should be promoted and sold to the appropriate target markets. Interestingly, however, the committee did bundle public transportation into the ticket price, recognizing the opportunity to reduce traffic congestion in and around the venues. By pricing proactively in this way, the committee discouraged one type of behavior (not attending events) and encouraged another (using public transportation), benefiting both spectators and the Games.

Put a premium on flexibility

The committee had to price all events more than a year and a half in advance of the Games, before it had a clear understanding of demand. To manage the uncertainty, the committee increased the number of price tiers across events, as mentioned, but did not assign a fixed number of seats to each tier. It did, however, promise that someone paying more would have a better view of the event than someone paying less. In the spring of 2011, fans placed requests for tickets through an online ballot, thereby revealing how much they were willing to pay for various events. This allowed the committee to gauge demand at each price point and reallocate some seats accordingly. By not predetermining the number of seats in each tier, the committee had the flexibility to better satisfy actual rather than anticipated demand, which resulted in more seats sold and happier customers.

Promote transparency

This being England, the committee knew its actions would be subject to intense public scrutiny, especially in the British tabloids. One of the explicit goals in pricing the Games was to limit negative media attention. From very early on, therefore, the committee issued a continuous flow of information to consumers and the media about the rationale and process of ticketing, the major dates in the ticketing time line, the price tiers for each sport, the number of tickets available, and the distribution of tickets to corporate sponsors and the general public. To date, the efforts have been largely successful, with the media's attempts to stir controversy largely falling on deaf ears.

Manage the market's standards for fairness

Ask Londoners about the Olympic Games, and many say that they deserve to attend the most desirable events at reasonable prices. After all, they financed and endured the construction. But not everyone who wants to attend a particular event will be able to obtain a ticket, and some tickets may seem unreasonably priced.

The committee took two important steps to manage these and other expectations: First, from the moment the ticketing process began, the committee heavily communicated the pay-your-age and senior discounts and the percentage of tickets that would be sold at £20, at or below £30, and so on. Yes, there would be some very expensive tickets, and the British press would surely comment on that fact, but the committee wanted the general public to realize that without the expensive tickets there would be fewer inexpensive ones. Second, the committee rejected any suggestion to auction the tickets in highest demand or to allow secondary exchanges above face value. Instead, ticket allocation was carried out through a simple lottery, reinforcing the fact that there was no preferential treatment.

The committee's challenge is not unique; it's the same one most firms face but writ large and executed in a highly compressed time frame under intense public scrutiny. While few firms have been as explicit as the Organising Committee in stating a shared-value mission, most can nonetheless learn from the multiyear process used to devise the Games' pricing.

The Olympics' pricing scheme will probably experience some glitches. Shared-value pricing is a nascent and evolving strategy, and some experiments will surely fail. But given the fundamental shifts in consumers' power and expectations, customers will have dwindling patience for antagonistic pricing. And considering the benefits to be gained by increasing the pool of value in the marketplace and sharing it with customers, any firm that is not evaluating its pricing through a shared-value lens should ask whether it can afford not to.
About the author: Harvard Business Review