Thursday, May 19, 2011

The Economics of Jon Bon Jovi's Success

Just finished reading a Yahoo Music article on the rock band Bon Jovi's profits compared to the more mainstream artists like Katy Perry and Kanye West. The numbers speak for themselves: $125 million over the past year, an amount only surpassed by the band U2. This $125 million income is more than the combined of Justin Bieber, Katy Perry and Kanye West. It's pretty amazing when you consider that Bon Jovi does not appear as often in the mainstream media as those 3 artists. The other numbers are very impressive too: $203 million gross income in ticket sales and $20 in merchandise sales, which stems from playing in 74 gigs across 15 nations. But what caught my attention wasn't just the profitability -- but the frugality taken to reach those numbers.

As the articles describes, the Bon Jovi band carries less baggage (literally and figuratively) than the other artists. The band consists of 6 musicians and their total equipment can be carried on 12 trucks -- compared to the reportedly 28 required for Lady Gaga's entourage. In addition, the band attempts to maximize the revenue stream from a single location before moving on. This means they save on the costs of setting up, breaking cost, and moving; not to mention the good this does to their energy levels. It also mentions the little things like carrying a massive screen, which allows Bon Jovi to sell more tickets (5,500 more) than normal since more fans can see the show.

Perhaps the most interesting information was about how Bon Jovi maximizes the monetary amount fans are willing to pay. In economics speak, this process is known as capturing consumer surplus. The premise is that no two fans are the same, which translates to different income levels and thus the money available to spend on Bon Jovi's show. For example, one fan makes $10,000 and another makes $100,000 a year -- the second fan can buy much more than the first. Bon Jovi band exploits this (as I am sure other bands do too) by selling specially-packaged bundles like two front-row seats including a good of special goodies like autographed lithographs. This sort of VIP treatment costs on average $2,550 -- compared to $450 for a lower-end alternative.

Generally speaking, firms want to be able to price discriminate because they want to maximize the amount of profits possible. In the absence of any laws, firms would opt to engage in first-degree price discrimination, which is when firms can target individual consumers and charge them a distinct price that captures all the consumer surplus. The assumption, of course, is that consumers are not able to trade with one another (e.g. sell tickets on Ebay). But this practice is largely illegal due to the perceived unfairness posed against consumers. Instead, firms often resort to third-degree price discrimination, which is the separation of consumers into classes and charge a separate price for each class. (Second-degree is when firms lower prices the more products a consumers buys). The result is not as efficient as the first-degree discrimination, but still better than charging a flat price.

For Bon Jovi, the article mentions that the band averages 20 different price points on any tour. This allows the band to have better returns on the simple fact that they price discriminate. This is very cool (profitable) application of economic ideas -- and perhaps a major reason why Bon Jovi earned so much.

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