As any economist will tell you, there are three things that drive profit: cost, volume and price. But which matters most and to what extent?
According to Jochen Witt, the former CEO and president of Messe Cologne, past president of international trade fair association UFI and founder of a management consultancy firm specialising in exhibitions (JWC), price is the most important profit driver, a fact we tend to forget in this industry.
Here, in an account taken at the June UFI European Open Seminar in Budapest, Witt discusses alternative pricing structures, and how to boost your show’s revenue and profit through intelligent pricing.
Giving your exhibitors choice is the key to success. Based on that choice you will be able to increase value for the exhibitor and as a consequence increase both your revenue and your profit.
There are three methods by which prices are normally determined: competition, costs, and customer perceived value. The most important is customer perceived value, a method which is frequently not applied in our industry.
So, let’s take a look at how other industries do pricing and what our industry can learn from them: airlines, shopping malls, telecoms and publishing. All these have one thing in common. They base their prices on the value they are delivering to customers. That’s why these industries have a deep understanding of current and future customer needs, which means they consider both existing and future customers.
They have a lot in parallel with our industry. The airline industry operates in perishable goods. A seat not sold is lost forever. In ours, a stand not sold is lost forever.
The parallel between telecoms and our industry is that both have a wide range of products and services.
Shopping malls have various qualities in terms of location as we have in the exhibition industry. We try always to deny there is different quality in locations, but everybody in the industry including exhibitors knows there is different quality depending on the location of a booth.
Lastly, publishers basically base their pricing on the extent they are reaching their target group or on the number of readers.
Let’s take a look into these industries in more detail.
Airlines
Airlines employ yield management. If you book a seat three months in advance the price range is likely lower than if you book the seat one month in advance. But even if you book a seat for next month, the lowest price may still be below the highest price for three months ahead.
What does the airline industry base this pricing scheme on? It is supply and demand. Irrespective of booking time: A flight at 12 o’clock noon is likely less costly than a flight at seven or eight o’clock in the morning or evening when everybody wants to fly.
In the Seventies, when American Airlines introduced yield management, they came down from 41 to 45 per cent of unsold seats to 35 to 36 percent, creating an increase in annual revenue of US$500m.
We already do a little bit of yield management in the exhibition industry, for example early bird bookings. The question is: why do we grant early birds at all, when, and to what extent? Normally we don’t get a proper answer to these questions, as these kinds of rebates are granted without proper analysis of customer perceptions. Even more: When we give the exhibitor an early bird, we in fact give two rebates. Firstly they get the discount in terms of money. But secondly we allow them to choose a location. Of course they want the best location, so the best locations are gone at the lowest price.
What does this mean for our industry? Depending on the preferred time of booking, prices can be adjusted. However, any change in the pricing methods requires in depth knowledge of your customer’s willingness to pay. Before applying any new pricing scheme you need to know what your customers are willing to pay at what point of time. In other words: Never employ any of these methods without an in-depth survey and analysis of customers perceived value and price elasticities.
Telecoms
The telecom industry has something different in common with our industry; it offers a wide range of different products. What they frequently do is bundle these products in a way that combines high margin and low margin products.
Let me give you an example: You will rarely find a telecom company offering the iPhone without a contract, since the iPhone as such doesn’t render them the appropriate profit. As a consequence, they will always try to sell the phone in a bundle with certain services which are highly profitable: They cross-sell the iPhone with high margin telecom services and thus improve profitability.
So what can we learn from that? Yes, we do bundles as well, but we don’t do it with deep analysis of customer needs and customers’ willingness to pay. Also, in the vast majority of projects, we concluded that bundling in the exhibition industry is done without accurate analysis of bundle composition.
In one of our projects we did a customer profitability analysis. The result wasn’t surprising: Customers taking less than 12sqm proved to be unprofitable. So those customers were made to purchase certain bundles, which achieved profitability for each single customer. But again, before you apply such methods you will have to find out what the customer is willing to pay for each single product.
Shopping malls
Each shopping mall has different quality locations. A dark location will be cheaper, a central shop near a cafe more expensive and then a location next to the main entrance more expensive still. It’s very clear; different quality, different visitor frequency etc. drive the price.
For our industry such a system would result in exhibition stands being priced differently based on their individual quality in the hall. This is something mainly for venue owners of course, but in the long term it might also be applied for organisers.
Publishing
What drives the price for an advertisement in a magazine? It is clearly the extent to which an advertisement reaches its target group. A normal ad costs x, and if you place it near the front cover you may have to pay five times that amount. The price is determined by the location of the ad in the magazine, the number of potential readers or the proportion of the target group which can be reached by such ad.
In the projects JWC has conducted, we were able to determine through surveys that the most important factor to the exhibitor is very clearly location. If we offer our exhibitor the right location, if we offer them the choice to say ‘I want to be in the top location, a medium location or a low frequency location’, then we not only increase customer satisfaction because all of a sudden the customer has choice, but we also increase our profitability.
My partner at JWC, Dr. Anna Holzner, is a leading expert in the area of pricing strategies in the trade fair industry. She has run several pricing projects. From her practical and scientific work but also from the surveys we have conducted we can draw one very clear conclusion: The most valued location to the exhibitors is a place on the main aisle, or places of high visitor frequency. Locations close to the market leader or close to competitors are also attractive to the majority of those surveyed, but there were also exhibitors which didn’t want to be next to the market leader or competitor.
So what does this mean, in practical terms, when it comes to floor plan?
Our floor plans today are driven simply by quantity considerations. We want to put as many stalls into a hall as possible. We should rethink that and focus on value considerations. The more our floor plans reflect the values we bring to our exhibitors, the better we can implement price differentiation schemes and increase profitability for the show organiser.
How often do we have to discuss with customers who say ‘I’m in a terrible location, but I have to pay the same as that guy at the front’. You avoid dissatisfaction of your exhibitors by giving them choices. By creating different price segments (eg premium, comfort and standard) for different qualities of location show organisers were not only able to increase exhibitor satisfaction but also revenues and profit of their shows.
On top of this we have applied a more sophisticated approach: Each show has a number of magnets, or ‘stars’, and all these industry-leading companies normally want to stay on the main aisle or at the front entrance. By placing these stars in strategic positions throughout the hall, we created a strong increase in premium space as there are always many companies who want to be around those stars. This in turn resulted in a steep profit increase for the show.
Of course, before doing that we surveyed the customer’s willingness to pay and analysed price elasticities.
In summary, if right methods and tools for location-based pricing are applied, the profitability of a show can be increased by about 10 to 15 per cent at the beginning; then over time and with more experience, that profit increase will rise even higher.
If you add the bundling part and the yield management part, you can increase your profit margin further still.
The best thing is that you can employ all these methods separately. Our advice is to start with a simple price differentiation model, which reflects the value perception of the exhibitors and, over time, refine and extend that model.
By intelligently introducing a simple but well founded location-based pricing scheme, along with intelligent bundling methods, you can grant your exhibitors value and choice.
After all, customers who have choice are happy customers.
