Sunday, September 18, 2011

Subscriptions Dead? Maybe Not.

When I joined Arena Stage in 2007, I came to my new job with a couple of preconceived notions about subscriptions. Perhaps it was in part a reflection that I am on the Generation X/Millennial cusp, but I was certain that the subscription model was outdated and ineffective. Many mature organizations that had developed their business models on subscriptions were seeing significant declines in subscriber numbers, and were literally caught between a rock and a hard place -- should they dump their subscription model and leap into the unknown, or keep putting band aids on a failing and timeworn strategy? Reports from major performing arts organizations at the time seemed to indicate a trend of declining returns, forcing a feeling that immediate change to a staple in our business model could be warranted.

In early 2008, Arena Stage along with a few other LORT theaters, began to test subscription alternatives in focus groups. In doing so, I was absolutely certain that the results would show at least one, if not several, attractive alternatives to subscriptions. I was wrong. Our work indicated that each option we put forth was less attractive to target single ticket buyers, multi-buyers and current subscribers than what we currently had. I was so surprised that we conducted a second series of focus groups with similar results. Amazed and confused, after a few months, I concluded our market research indicated that the subscription model wasn't outdated, but that our execution was flawed.

With the help of Target Resource Group, we conducted a thorough audit of all subscription related practices, and started making significant changes in mid-2008. Since our 2008-09 season, Arena Stage has experienced substantial growth in subscriptions, increasing our subscriber base by 57% and revenue by 73% in three fiscal years, beginning 1.5 years before the opening of the Mead Center for American Theater at the height of the global economic crisis and during a time when we were performing in transitional spaces throughout the metropolitan area. Even more surprising, during the same time period, our subscription related marketing expenses decreased, which along with increased revenue, effectively doubled our return on investment (ROI).

Below is a brief summary of major tactical changes:

Simplified Pricing. Our previous subscription pricing strategies were incredibly complicated. I remember spending hours poring over pricing strategy, and at the end thinking that one would have to be a CPA to understand how our pricing model worked. We decided that in order to create an effective value proposition, subscription pricing would have to be clear and easy to understand. We worked for weeks to develop a simple pricing structure that could be messaged easily, such as "buy 6 plays, get 2 plays free." The new pricing structure allowed us to easily communicate a value proposition and to eliminate complicated order sheets, replacing them with order forms that could be filled out easily. Clear, concise and transparent pricing was pivotal to effectively communicating the value of a subscription.

Introduction of Dynamic Pricing for Single Tickets. In 2009, Arena Stage introduced dynamic pricing for single tickets, and we immediately started to see an unanticipated outcome. Due to our new subscription pricing structure and the introduction of dynamic pricing for single tickets, we were able to guarantee subscribers "the best seats in the house at the best prices." Dynamic pricing eliminated last minute discounting on premium tickets, and rewarded single ticket buyers with a lower price for better seats if they were willing to purchase earlier. In turn, our patrons soon started to understand that the earlier they purchased, the better "the deal" they received, with the ultimate deal being given to subscribers. As we religiously track all customer service issues, we can say with full confidence two years later that dynamic pricing has not caused distress with our ticket buyers or donors, and in fact, from the moment we introduced dynamic pricing to current day, we have increased the number of single ticket buyer households by 84%.

Focus on Retention and Customer Service. We were allocating too much resource on subscription acquisition, and not enough on subscription retention. We developed a "say yes to the customer" approach with our subscribers, thereby earning us "industry leader" marks on our most recent customer satisfaction survey conducted by Shugoll Research. Year to year benchmarks for customer service have increased steadily as we focused on providing our subscribers the best experience possible. Given today's sad state of customer service at most establishments, we were determined that our customer service would be a competitive advantage. In addition, we allotted resources for special subscriber recognition efforts throughout the year, including a sneak preview of the upcoming season, complimentary artisan chocolates at specific performances and subscriber-only events. During the 2010-11 season, we introduced a concierge program for all new subscribers. Each new subscriber was assigned a personal concierge on staff, who was expected to make themselves available to answer questions, field requests or be helpful in any way. Concierges were reactive to inbound inquiries, but were also expected to be proactive throughout the year, offering new subscribers recommendations on local restaurants, parking, interesting tidbits about upcoming productions, and the like. By concentrating on customer service and retention, we were able to increase our overall subscription renewal rate by 13% over three fiscal years.

Eliminated Advertising, but Increased Direct Mail and Telemarketing. Prior to 2008, 25% of our subscription budget was allocated to advertising. After exhaustive efforts, we could not trace a single subscription purchase back to our advertising campaigns. Therefore, we cut all subscription advertising, and refocused those resources on direct mail and telemarketing. In doing so, we completely revamped our direct mail and telemarketing campaigns. In terms of direct mail, we would previously print hundreds of thousands of season brochures, and then mail them out in a few rounds of massive mailings. Our brochures were 28 to 32 pages in length, and functioned more as a branding tool than a sales piece. Today, we send out 30+ direct mail pieces during each subscription campaign that specifically tailor the offer to the target. We have eliminated our subscription brochure, cut our design costs by 60%, and have directed all of our resources to testing message and offer. For more information on our new approach to direct mail, please read "The Future of the Season Brochure." While retooling direct mail, we also invested heavily in telemarketing. If executed properly, many patrons actually view telemarketing as a service, as it allows them the opportunity to discuss the plays with a seasoned caller and to ask any questions they may have. As the economy worsened, we found that many potential subscribers needed personal interaction with a friendly and knowledgeable sales agent in order to make a commitment.

Delayed the Introduction of Smaller Packages and Concentrated on Upgrade Strategies. In 2009, we started to experiment with delaying the on-sale date of partial season packages in order to focus our efforts on upgrading subscribers to the full season. There was a fear at the time that our partial subscribers would become frustrated, and leave the company all together, but I was confident that our programming was strong enough that a delay would encourage subscribers to upgrade. The value proposition was clear -- the only way to guarantee the absolute best seats in the house for our most popular productions was to purchase a full season subscription. By focusing on full season subscriptions and postponing the introduction of partial subscriptions, we were able to increase the percentage of full season subscribers by 14% from FY09 to FY12. Expanding upon previous successes, in 2011 we launched a completely separate upgrade campaign alongside our renewal and acquisition campaigns. In addition to crafting and executing strategies that focus on renewals and acquisitions, we now also focus on upgrading subscribers throughout the year. These strategies have proven to be quite effective, and as of publication, we have upgraded more than 1,800 subscribers from smaller packages to larger packages in the current fiscal year.

Relentless Dedication to Monitoring ROI. In FY12, we will spend almost 20% less on subscription expenses than we did in FY08 despite the fact that the number of new subscribers has increased by 166% during the same time. I've always been taught that acquisition campaigns are expensive; that you have to "spend money to make money." In most cases, I agree, however if you aggressively monitor ROI on each campaign, in many cases, you will find efficiencies that will allow you to actually decrease your expenses in the middle of an aggressive acquisition cycle. Many marketers think that given limited staff resources, tracking ROI is too time consuming, however a relentless dedication to monitoring ROI will reveal where you should invest in the future, and more importantly, where you should cut.

In addition to the above, it should also be said that the most important ingredient to any subscription campaign is programming. A subscription campaign is both a referendum on the previous season and an indicator on the amount of excitement in the marketplace for the upcoming season. In my time at Arena Stage, I have been extraordinarily lucky that our artistic team has consistently produced and presented exceptionally high quality work, without which, the aforementioned tactics would have only resulted in minor successes at best.

Sunday, September 4, 2011

Building a Budget that Empowers via Flexibility

Each September, a great deal of my focus migrates to budgeting for the next fiscal year. Even while the current fiscal year is just getting its start, many senior managers at Arena Stage are focused on the following year, knowing that in just under four months, a new subscription campaign is set to launch. As summer comes to an end, and the new theater season begins, I find myself already thinking about how in many cases, budgets are created to restrict, rather than to provide, flexibility.

If there is one thing I have learned since 2008, it's that success is greatly dependent upon one's ability to adapt quickly to changing circumstances. I've always been fascinated by people who consistently make the choice to stick with a strategy that isn't working instead of leaping into the unknown. In doing so, many believe they are mitigating risk, however refusing to adapt when a strategy is clearing collapsing only ensures failure, and what could be riskier than that? Those that are change adverse often times use a rigid budget to fortify their position, but a good budget lives and breathes with an organization, thereby providing plenty of flexibility when needed.

When budgeting, common practice at many non-profit performing arts organizations allocates revenue and expense into two categories: contributed (development) and earned (marketing). In doing so, each department is assigned resources and given revenue goals with a simple charge--use the resources provided to generate the targeted revenues. In my career, I have observed that this system of allocating resources and establishing revenue goals for separate and distinct departments can lead to inefficiencies that reduce, rather than maximize, return on investment.

Let me give an example:

Organization X anticipates that a certain production will achieve a significant single ticket revenue target, and as such, budgets higher than average expenses for advertising. The production opens to less than stellar notices, and word of mouth isn't helping either. After several weeks of slow sales despite the considerable investment in advertising, management concludes that the additional expenses set aside for marketing aren't providing the necessary return on investment, and asks that you reconsider your strategy. Meanwhile, you've begun to hear from the development department that the first annual fund campaign of the season is substantially over-performing, although they don't have the additional funds needed to grow the campaign beyond what was initially budgeted for.

In these types of situations, many marketing directors would reallocate funds from the under-performing production to productions later in the season, even though those productions, if budgeted properly, should already have plenty of resources allocated to support them. Fearing that they won't receive adequate resources in future budgets if they "give back" money in their expense budget, marketing directors can feel like they are incentivized to ineffectively spend resources on a struggling production or to reallocate them to productions that are already resourced appropriately. Meanwhile, the development department has struck gold, and could desperately use an infusion of additional resources, but none will come.

To avoid situations like the above, I believe budgets should be created with minimal essential resources allocated to each revenue stream, ensuring that each is supported adequately. Resources traditionally budgeted above the minimal level for campaigns that are anticipated to do well, should instead be used to fund a reserve that is used to allocate additional resources to over-performing revenue streams based upon actual highest achieved return on investment. Why religiously stick to a budget that 10 months prior allocated additional resources to anticipated successful revenue streams when current reality indicates that the additional expenses aren't warranted? Wouldn't it be nice to be able to move resources across departments to invest in activities that are actually over-performing rather than those that we thought would over-perform?

In addition, chief development officers and chief marketing officers should share responsibility for the total revenue goal of the organization, thereby eliminating any territory related issues that may arise. Together, they should be charged with shifting resources on a regular basis to fund activities that reduce cost of sale, maximize return on investment and best position the organization to achieve the annual institutional revenue goal.

At the end of the day, performing arts organizations are having to use their limited resources much more wisely than in previous years, and that reality should force all senior managers to reexamine how resources are allocated and spent.