Targets, The Cost of Bread, and Nonprofit Arts Pricing

Focus on the targetMy previous post drew lessons for museum pricing from what we observe in the prices set by cable television providers. But how can for-profit pricing be relevant to nonprofit museums, to orchestras and opera? Don’t the nonprofit arts, unlike cable companies, have a mission to be accessible to all patrons, regardless of income?

Let me draw from what might seem at first a very unrelated policy issue. All rich countries except the US raise government revenue through value-added taxes (VAT). These are sales taxes applied to all goods and services, where intermediaries receive a full tax credit for any VAT paid on their purchases, so only final consumers end up effectively paying any tax. And the rates are high – in Denmark, for example, the rate is 25%. You won’t see the tax as you go shopping in Copenhagen, since retailers have included it in the sticker prices you see. American visitors might be especially surprised to know that the VAT applies to everything. The 25% tax is applied not just to luxuries, but also to purchases of milk, eggs, and bread. How can that possibly be justified, in a country normally perceived as one that places a high value on economic equality? (And Denmark is not the only European country to apply VAT to all purchases). Don’t they care that the poor spend a higher proportion of their income on groceries than the rich do?

Suppose Mads earns 10,000 Euros per year and spends 1,000 on groceries, while Freja earns 60,000 Euros per year and spends 3,000 on groceries. While it is true that the proportion of income spent on groceries falls as income rises, it is also true that the rich spend more Euros on groceries per person than the poor. That’s true everywhere. Now if the government decided to exclude food from the base of the VAT, and the tax rate is 25%, the exclusion would save Mads 250 Euros per year, and would save Freja 750 Euros per year. That would be an ill-targeted means of helping Mads. What if we kept the tax on food, and used some of the money we raised from Freja and others in her income bracket to make transfers to people like Mads, either in cash payments or in useful public spending, such that he was more than compensated for having to pay tax on food?

In tax policy, as in other branches of social welfare, we aim for policies that are well targeted at the people they are meant to help. It is expensive and inefficient to have policies that aim to help those with low incomes, but in fact give a much bigger benefit to the well off.

Nonprofit arts organizations need to consider this in their pricing policies. Reducing admission prices across the board will sometimes be a sound way to achieve the goal of greater accessibility to the arts. But it needs to be asked, in each case, whether that policy is the most effective given the desired goal. For it might also be the case that garnering revenue using pricing methods that generate profits will provide the funds that can be specifically directed to programs aimed at inclusiveness. Would general cuts in admission rates to the Art Institute of Chicago, or the San Francisco Opera, be the best way to increase accessibility for low-income individuals? Or would that be an expensive policy that works mostly to the benefit of patrons who can afford to pay more, while producing only marginal help to the intended beneficiaries?

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Comments

  1. says

    Fascinating blog and a great addition to the Artsjournal conversation. Welcome!

    Your analogy is thought provoking, but I’m wondering if we can really compare an economic constant such as groceries to niche products with limited lifespans. Mads and Freja need groceries, want groceries and will seek out groceries throughout their lives – as will their descendants – so the economic model model is constant and predictable.

    But many traditional art forms are discretionary products with diminishing audiences. The pricing choices we make today, if they influence new audience acquisition, can also influence the long-term health and viability of the organizations.

    The flat tax-inspired pricing you allude to may work if demand is constant at both the high and low ends, such as on Broadway or in Danish grocery stores, but not necessarily if overall demand is weakening as it is in, say, classical concert music. It wouldn’t be difficult to describe some cultural sector scenarios where organizations are working feverishly to bring in enough new buyers on the affordable, entry-level end to keep things afloat for the shrinking pool of elite buyers at the top – even if those elites are willing to pay more.

    If an industry is experiencing declining demand for its products, doesn’t dynamic pricing eventually reach a point of diminishing returns?

  2. Emily Hellmuth says

    Thanks for the interesting perspective on pricing structures and Trevor, for the note about demand. While I see how diminishing demand is a factor, I also wonder if that shouldn’t play into the pricing structure. Shouldn’t that just be motivation for us to figure out ways to increase demand by tapping into what potential audiences value? If we are offering a product that aligns with their values, then they will be willing to pay the fees that may be based on a VAT-inspired structure.

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