Every year London’s commercial theatres are accused of profiteering, as ticket prices rocket and the industry boasts of record-breaking revenues. But analysing the high costs involved, ticketing expert Richard Howle shows where your money goes – and why musicals remain a risky investment, often taking years to recoup
Ticket prices are always a talking point, whether for audiences, those in the industry or the media. Newspapers, including The Stage, continue to chart the seemingly inexorable rise of the top ticket prices in the West End, but the reality of what drives them is not as clear-cut as the headlines make out.
The thought processes and the economics behind commercial theatre ticketing prices are regularly misunderstood, and, drawing on my 15 years’ experience of setting ticket prices in the West End and on Broadway , it is time to reveal the reality beneath the numbers.
First, it needs to be stressed that commercial theatre is just that: commercial. It is designed to make money. That is its primary purpose and the industry shouldn’t be ashamed of that. The money generated from West End shows employs thousands of people, from creatives to technical staff, front of house to administration.
People from all over the world visit London in their millions to experience West End theatre, generating hundreds of millions of pounds for the city, and country’s, wider economy. It is a UK success story, an industry that has had more than 20 years of continual growth. That is something to be very proud of.
This is all achieved with no subsidy. Quite the reverse: in 2017, London theatre paid more than £117.5 million in VAT. That is enough to cover all the grant-in-aid funding from Arts Council England for every London-based theatre, dance venue, opera house and arts centre combined in 2018. This is a business, with investors who need returns in order for them to keep investing.
The second thing to be clear about is that West End theatre is expensive to create. It is the pinnacle of the industry and, as such, the best people are employed, with the best equipment to produce the best productions. When you want the best, you have to pay for it.
In addition, the historic nature of the buildings where commercial theatre is performed means that those buildings are costly to maintain and operate. The ‘dark’ costs of a theatre – just to maintain it when there is no production playing – are frightening, reaching up to £150,000 a month for some venues.
So, ticket prices need to be considered in that context. Setting ticket prices is as much an art as a science. It is a balance between ensuring the financial proposition is an attractive one for potential investors and that is also an attractive one for theatregoers.
What does it take for a show to recoup?
Those involved in pricing are acutely aware of what sells, when and how. We also have to position the production in the market; what are other productions’ prices – is this a low-end, mid or high-end show? Which other shows do we want to be associated with when it comes to pricing?
Imagine a new musical going into a (fictional) 1,500-seat West End theatre. The producers have calculated that it will cost £250,000 per week to run this show. How and why a production costs £250,000 per week to run would take another article to unpack – but it’s not an unusually high or low figure. So, the producer needs to earn, just to break even, £250,000 per week from a 1,500-seat theatre across eight performances – that is 12,000 tickets per week.
The amount that the producer receives out of the box office receipts is a net amount – the total value of tickets sold, less VAT and credit card and ticketing commissions. If a ticket costs £100, the producer receives only a portion – about 75% – of that once these deductions have been made.
Therefore, we need to gross up that £250,000 to get to the required break-even figure. With the gross-to-net ratio in the West End being around 25%, that makes the gross break-even figure in this example £335,000 per week. Dividing the gross break even (£335,000) by the total maximum capacity (12,000 seats) produces an average ticket price of £27.92.
Therefore, just to break even, every ticket has to sell for £27.92, which means the production is effectively losing money on every single ticket sold under that price. That includes those “100 tickets at £15” deals the marketing team wants to crow about on the advertising as well as all the tickets sold to schools at the education rate who will not pay more than £25 per ticket.
That is the price if every single ticket is sold for every performance, each week: 100% capacity. The Society of London Theatre’s 2017 Box Office Data report shows that last year’s attendance at London theatres was at 77.5%. If the fictional production plays to the SOLT average of 77.5% capacity (9,300 seats per week) then the average ticket price to break even jumps to £36.02. Now all seats at our bottom two price bands are losing money, as is the early bird group rate of £35 per ticket.
What happens if we don’t get to 77.5% – what if it is more like 60% of capacity? Well, then that average ticket price to break even rises to £46.53. To provide some context, last year SOLT reported that the average ticket price actually paid by theatregoers was £46.71, and £49.93 for musicals.
All this is just to break even. It only covers the weekly running costs and does not take into account the cost of recouping the initial investment to produce the show. In other words, we haven’t started to ensure that the investors get their money back.
For this fictitious show, imagine that the production cost £3.5 million to stage – and many West End shows are more expensive that. On top of the running costs of £250,000 per week, the production team wants to ensure that the investors’ money is returned as quickly as possible.
If they put together a recoupment schedule that recoups £50,000 per week, then that £3.5 million investment would be paid off after 70 weeks, or just under 18 months.
When that £50,000 is added on to the running costs, the production needs to net £300,000 per week – a gross of £400,000. Now to cover the costs, the average ticket price of a full house is £33.33, £43.01 at 77.5% (the SOLT average) and £55.56 playing at 60% of capacity. This clarifies why a West End ticket is set at the level it is.
Of course, all this is just a paper exercise. In reality, for investors there is no guarantee of weekly recoupment, but this kind of exercise can help demonstrate to a potential investor how their investment might be paid back.
The pricing of a house is also a marketing exercise as much as an economic one. The prices, the difference in the prices and where the price breaks fall are all carefully considered, based on previous sales, market positioning and physical considerations such as the quality of the view from a particular seat.
Back to the fictitious show, and considering its financial and marketing targets, the pricing might look something like the table above. The headline ‘premium’ ticket price of £100 only truly represents a small proportion of the house. Some producers will try to beef up the gross potential to impress investors by increasing the number of premiums, but somewhere between 5% and 10% (depending on the performance and time of the year) is a more likely sales outcome.
The subject of premiums creates a lot of debate – but there is a small minority of people who are prepared to pay higher prices for the best seats or high-demand tickets and it would be negligent, on behalf of royalty holders and investors, for a theatre producer to deny that income.
In many walks of life there are items priced above the range that most people are prepared to pay: a £400 bottle of champagne on a restaurant’s wine list, a £1,500 handbag or a £175,000 sports car. Most people look at these and shrug their shoulders, saying “if only” or “more money than sense”. But in theatre we get our knickers in a twist and condemn premium seating as the root of all that is wrong in the industry.
Premium seating is not designed for the masses. For our example production (imagining an average transaction size of 2.5 tickets), of the 600 or so people who will buy tickets for a performance, the hope is that about 30 will pay premium prices. They are out there and they will put down the money. In a recent survey conducted by The Stage, 11% of respondents said that they were prepared to pay more than £100 for a ticket . We need less than that to sell our premiums.
The largest portion of seats are the price band A, £75 seats. Undoubtedly, among customers, price band A is the most popular. Conversely, the price band B tickets are always the hardest to sell. It is a truism that rather than reduce the price of band B seats, putting them up to band A makes them more likely to sell.
There is a market, though, for cheaper seats, so in this fictional theatre setting the upper circle tickets at £35 will prove to be a popular price. And then, for those marketing messages, there will be a series of (usually hard-to-shift) restricted or side view tickets at £15.
This model provides a weekly gross potential of £739,000 and an average ticket price of £61.58 if every ticket were to sell at full price. Even playing at 60% of financial capacity provides a weekly gross return of £443,400. Comfortable enough to cover costs and to recoup within 18 months.
That is only the start of pricing for a show, however. The reality is that pricing is a fluid thing. Group and school bookings, which are important for building a foundation of sales, will erode the gross potential of each performance, and various marketing and incentive-based promotions will further lower potential income. The box office will react to sales by repricing seats up or down, usually by changing the price band of a seat to maximise both attendance and income.
Another challenge when managing ticket sales for a production is the balancing act of ensuring that a production remains commercially viable while maintaining attendance levels.
For performers and audiences alike, the quality and enjoyment of a production can be significantly affected by the number of people attending. Playing to half-empty houses can be soul-destroying for all involved and makes it hard to generate demand – a squeeze on tickets that makes it difficult to charge the higher prices needed to maintain a production.
Nothing sells a show like having tickets that are hard to come by. Getting pricing right is key to this; if the tickets are set too high then people won’t buy them, and attendance falls. Price them too low and the house will be packed but cannot pay its bills. The West End’s box office managers and marketing teams are some of the best in the business at striking that balance. It is a real art and it was no surprise that in her acceptance speech when winning the Olivier Award for best new musical that Book of Mormon producer Sonia Friedman thanked her box office manager.
What does the ticket price pay for?
Back to the fictional show. Playing at 60% of financial capacity doesn’t mean playing to 60% of ticket capacity. If our production is achieving the SOLT average ticket price for a musical of £49.93 at 60% of financial capacity, then that would mean attendance levels were at around 75% – a fairly typical level.
But where does that £49.93 actually go? How is our theatregoer’s money being spent? Making some general assumptions about costs, the breakdown of a £49.93 ticket price includes £10.14 to pay for the cost of the production, wages, equipment hires and so on. VAT eats up £8.07, which is 20% of face value after taking off the restoration levy. The cost of hiring and operating the theatre, including staffing costs and utility bills – the electricity costs of modern shows can be astronomical – accounts for £7.34.
Selling the ticket through marketing and advertising is an expensive business. Should this show have a marketing budget of £40,000 per week, that, combined with commissions paid to ticketing companies, amounts to nearly 19% of the ticket price. Add in royalties and restoration levy and we are left with a profit of £6.46 or 13% of the ticket price.
The number of musicals that have double-recouped in the past 10 years can probably be counted in single figures
From this profit, the original production costs (£3.5 million for our production) have to be recouped. Those costs divided by £6.46 means that our production will have to sell almost 542,000 tickets at this ticket price to break even. At 75% of capacity, that will take just under a year and a half.
A musical that plays for 18 months at 75% of capacity with an average ticket price of £49.93 is one that is considered to do very well. Theatre investment is not for the faint-hearted. The number of musicals that have double-recouped – for which investors have got their money back and made the same amount again on top – in the past 10 years can probably be counted in single figures.
How increased wages affect ticket prices
Finally, this is an industry that provides employment and income for a lot of people. Those people should be paid a decent wage. But those wages are paid for purely from the income from ticket sales, so whenever there is a well-deserved Equity or BECTU rise, producers do need to think about how it is paid for.
Imagine a blended pay rise that is the equivalent to £2.50 per hour (including employer’s pension and national insurance contributions) for a four-hour call for eight performances a week, and that this applies to 40 staff working front and back of house at our production. This adds an extra £3,200 per week to the running costs. Playing at 75% of capacity, that is the equivalent of 36p per ticket.
That can either be paid for by raising ticket prices or by reducing the profit on each ticket. If we reduce the profit, that pushes out the recoupment schedule by another two months, making it even harder for investors to get their money back. While we should strive for the best pay and conditions for the talented people who make this wonderful business run, we do need to recognise that it has to be paid for somewhere, either by increasing ticket prices or reducing returns for potential investors (without whom there is no business in the first place).
So, what comes next? Well, as ticketing systems become more sophisticated, pricing will become even more scientific and automated. Prices will constantly change based not only on demand at a specific performance, but also sales demand at any given moment in time. All this will be designed to ensure that commercial West End theatre both continues to increase attendances and remains profitable and investible so that it can maintain its world-leading status.