Houston Symphony Orchestra Problem Solution

The solution to the incremental analysis exercise for making business decisions. This problem is suitable for an undergraduate, graduate, or executive setting and can be completed in half an hour.

Case Purpose and Overview

Broadly speaking, this case provides a practical application of incremental cost analysis for pricing decisions in a service industry setting. It uses the difficulty faced by the Houston Symphony Orchestra’s marketing manager to illustrate the nuances associated with using incremental costing for developing pricing structures. After analyzing this case, participants will be able to distinguish between costs that are incremental to the pricing decision and those that are irrelevant vs. average costs, learn how excess capacity, especially when it is perishable, creates compelling pricing opportunities, why prices below the average cost and sometimes even far below this value, can still be profitable, and how customer segmentation allows more complex pricing structures to be implemented and enables greater economic value to be extracted from the customer base.

Learning Objectives

By the end of the case discussion, participants should understand:

• The concept of incremental or relevant vs. non-incremental or irrelevant costs

• How to think through incremental analysis for pricing decisions

• How the economics of capacity utilization in service industries influences the efficacy of pricing strategies

• The counterintuitive relation between profit and price in such situations, a.k.a., very low prices can be very profitable prices.

Case Background & Current Situation

The Houston Symphony Orchestra faces a common challenge in the performing arts that is quite common not just in this industry but in many other services settings as well. It carries the unenviable dual burden of high fixed costs and underutilized capacity. Let's first verify the financial baseline shown in the next table.

Financial Analysis Framework

Step 1: Current Situation Analysis

In the case, we are told that the marketing manager would ideally like to sell out her entire theater capacity. If this happens, the symphony will make $1,200 per performance as shown below.