The price is (really) right

Price barrier: fans at a music festival (Getty Images)

It's a grating quirk of travel we've come to accept – that the guy across the aisle may have paid a lot less for his ticket. But in the theatre, concert hall or sports arena, we rest assured, touts notwithstanding, that we've paid the same as our neighbours. Stalls? That'll be £70, please. Dress circle? £55. Balcony, restricted view? Don't bother. It's simple.

Not for long. Dynamic pricing, a system used widely by airlines, is revolutionising the British box office. When Derby County play Blackburn Rovers on Saturday, the price of thousands of tickets will have been determined by computer servers in Indiana, and may go up or down in the days before the game according to demand – or even the weather forecast (not great, as it happens).

The system, which is being touted in Britain by one of the biggest players in a booming US market, also promises to transform ticketing in music and theatreland. There, drama offstage concerns diminishing returns and online "legalised touting", or the secondary market. One theatre executive has called it the ticketing "Holy Grail".

How does it work? Tickets at Derby had been priced according to a simple model. "We split our games into categories," John Vicars, the club's head of operations, explains from Pride Park. "Platinum for a Nottingham Forest game, down to bronze for an unfashionable team on a wet and windy night in January." The ground's 33,000 seats, meanwhile, are divided into five fixed areas, from A to E. This basic, variable pricing applies to ticketing beyond sport. It's not rocket science – and that's the problem.

Attendance at Derby has dropped since 2008, when the club were relegated from the Premier League, but Vicars was convinced pricing was the problem. To prove it, he halved the price of 3,000 tickets for the game against Southampton last season, and offered them on Groupon for £10. "They sold out in 12 hours," he says. "We looked at the data and found 75 per cent of these buyers were new customers or people who had not come to Pride Park for at least two years."

Vicars faced three common problems for people seeking to change the way they price tickets: the grievances of loyal customers paying full whack (season-ticket holders complained); rules (the Football League allows only four price promotions per season); and the potential for even greater loss through discounting. He needed a smart way to optimise prices.

Jan Alan Eglen is an American psychologist enjoying a second career as a professor of dynamic pricing. More than a decade ago, he co-founded Music Rebellion, a system for setting prices for downloads according to demand and other factors. Its success led Eglen to enter other arenas.

Digonex is one of the world's biggest names in dynamic pricing. In the US, it uses patented software at the Indianapolis HQ to crunch data and suggest prices for more than a dozen sports teams. Digonex and its competitors have clients in the entertainment industry, too, but the San Francisco Giants have led the way in dynamic pricing. From 2009, the baseball team have adjusted ticket prices according to details as minute as, say, a crowd-pleasing face-off between two big pitchers. Ticket revenues have risen by 7 to 10 per cent each year since, a financial home run for the team's investors. Chief among them is Jeff Mallett, the former president of Yahoo! and one of Derby County's biggest shareholders. Mallett met Vicars, Vicars met Eglen, and the Rams went dynamic.

Now, after tickets first go on sale, typically at low prices, "the algorithm analyses every purchase for every seat in every area", Vicars says. "Twice a week it reports back to us. It might say, you've sold X seats in that area, we suggest prices go up for Y seats from £20 to £22." The system responds to sales as well as demand, as influenced, for example, by a run of victories or losses, or a bad-weather forecast.

Cardiff City have also signed with Digonex and Eglen is in Britain this week meeting cricket, football and rugby executives, as well as figures from entertainment. The Ambassador Theatre Group, Britain's largest theatre owner, has used dynamic pricing for more than a year. Its chief executive, Howard Panter, of the "Holy Grail" quote, told The Stage magazine that the system "will be one of the biggest single changes in theatre in my lifetime".

If the future is flexible, as all signs suggest, why now, when it's old hat in the travel industry? "I think 2008 changed everything," Eglen says. "On top of a challenging marketplace there are also so many more ways to spend a dollar." Eglen also concedes trust and expectation are more of an issue at Pride Park, say, than on an easyJet flight to Malaga; as Vicars discovered, football or music fans are more likely to care about the product – and any perceived sleight of hand.

There is already a growing sense of distrust about how rocketing prices are decided. Witness the outrage this week among Rolling Stones fans about the price of tickets to their 50th-anniversary gig. Dynamic pricing wouldn't work here – the biggest gigs sell out faster than any algorithm could respond – but in theatre, for example, where empty seats are as challenging as they are in football, box offices must tread carefully.

Eglen says transparency is key, and sometimes suggests visible "dynamic-pricing" areas in stands as a way of testing the water. Vicars has placated season-ticket holders by displaying the "value" of each game, rather than assuming a consistent average. This reduces the chance of diehard fans being seated alongside deal grabbers. Moreover, he reserves the right to say no to the computer.

John Pinchbeck, a tickets-industry veteran, is the co-founder of the Ticketing Technology Forum. Dynamic pricing will be high on the agenda when it meets in London next March. He points to cultural differences between US and UK audiences. Variable prices, he says, "are accepted more readily there and even secondary-market scalpers are tolerated, yet frowned upon here".

Pinchbeck sees "dynamic price breaks" as a possible solution, rather than an infinitely flexible model. Sections or rows of seats within traditionally priced areas (the A-E model) could be held back from sale initially, and their price adjusted later if necessary. Whatever the model, he says, pricing will become more scientific, and could help venue owners to claw back some of the control over prices.

At Pride Park, Derby have played only five home games since Vicars introduced dynamic pricing. Attendance remains a challenge but in spite of a recession that won't shift, Vicars says that yield in pounds per seat, his bottom line, is already rising thanks to dynamic pricing. "We're facing a tidal wave," he says. "You can either bury your head in the sand or do something about it."