NBA Pricing: Teams that Provide the Best Value

Today we are taking a look at pricing in the NBA: according to the Team Market Report’s fan cost index there is a wide range of prices across the league.  Last year, the Knicks had the highest average price at $123.22 while Charlotte’s average was just $29.27.  Rather than compare raw prices our objective is to look at the value provided by teams.

For our first look at value, we created a model of average prices as a function of variables such as team winning percentage, team payroll, metro area population and metro area average income.  This model is used to predict how team and market quality influence ticket prices.  A comparison of actual prices to predicted prices tells us which teams provide the best value.  This is along the lines of looking at the ratio of price to wins but with a bit more sophistication as we also control for factors such as market size and star power.

Astute readers will likely realize that this analysis is somewhat related to our fan equity rankings.  A key assumption of that analysis was that teams price in order to maximize revenue.  Today’s analysis can be interpreted in two ways: teams that price under the market are pricing low either because they are not trying to maximize revenue or because they are mispricing.  For now, we will just say that teams that price below market (according to the model) are providing added-value value.

Over the last 3 years, the top 5 teams in terms of value are the Brooklyn Nets, LA Clippers, Atlanta Hawks, Memphis Grizzlies and Washington Bullets.  These teams provide the best product in terms of winning relative to their market positions.  At the other end of the spectrum are the Knicks, Celtics and Suns seem to be the most overpriced.

Obviously, we have an issue in that the value provided is negatively correlated with brand equity since the Knicks and Celtics are two of the league’s most prominent brands while the Clippers and Hawks are not.  As a further look into pricing we performed an additional analysis, which was similar to the first pricing model but we added social media data (Twitter Follows and Facebook Likes) to the model.  These measures are useful because they are largely independent of owner’s objective functions and observable fan interest is not constrained by prices or capacity.  We also included an interaction between social media success and market size.  We like this model a bit better because it accounts for fan interest and excitement in addition to team and market quality.

When we use this model to compare actual vs. predicted prices we see a few changes.  Now Memphis is the best value followed by Brooklyn, Indianapolis, Charlotte and New Orleans.  Including social media into the model makes the biggest difference in the results for the Bulls and the Lakers.  These teams appear to be underexploiting their brand equity when it comes to pricing.  According to ESPN, both teams have had attendance levels of over 99% of capacity for the past three seasons so it seems that price increases are doable.  Ticket pricing is tough in sports because observable demand is constrained, but it appears that these teams have more pricing power than they realize.  It is also difficult to reach conclusions based on average ticket prices.  As we all know there is considerable heterogeneity in prices based on seat quality.

As always, no analysis is perfect and there are factors that we don’t capture in the market.  For example, perhaps in the case of the Knicks the team has additional pricing power because fans are willing to buy during down cycles in order to insure tickets during winning years.

Mike Lewis & Manish Tripathi, Emory University 2013.