The Seven Secrets of Capacity Management
Updated: Aug 20
There are consequences for adding units ranging from hidden discounts to increased fragmentation of radio audiences.
When discussing yield management and revenue management for broadcasting, one subject is usually hidden in the background called "Capacity Management." Typically, when we think about capacity, it's static and the number of minutes per hour for commercials in a format clock. There are times when we make program changes, such as moving to syndication or accommodating for play-by-play broadcasts that revise the capacity number.
Today we examine and address the unspoken practice of adding inventory units when stations reach sold-out conditions. What benefit or damage results from this accordion-style management of capacity? What should we know and do to minimize damage to our product and content?
In March of 1998, Shane Fox, then COO of Maxagrid International Inc., wrote a white paper, "Increasing Commercial Capacity and The Economic Effect On Broadcast Revenue." The in-depth analysis primarily focused on Elastic and Inelastic characteristics of demand and supply, considerations for both factors, costs, and incremental revenue benefit. Shane's conclusions follow:
Over Twenty Years Later
You may think that circumstances are different now, so how does this capacity question apply today? After all, technology, ongoing consolidation in the industry, a pandemic, and a media landscape changing faster than our understanding require new rules. Not so fast in your dismissal based on time; what did Shane recommend, and does it ring true?
Here are seven points and hidden consequences of capacity management.
1. Hidden Discounts: If you add capacity to hit a budget, you protect inventory sold at a lower rate. Even worse, you might be retaining bonus inventory with no dollars attached to long-term contracts with weak terms and conditions of sale.
2. Missed Pricing Opportunities: If solid yield management processes are in place, you garner the incremental revenues to hit a budget earlier in the sales period. What if you got $5 more for every unit you had already sold? Would you still need to add units?
3. Differentiated Inventory: Are you getting beachfront prices for your premium slots? Where you have inelastic demand conditions, the value must be protected with the price. Think of endorsements as an example; are you charging enough? Is there room to push the rate to reflect differentiated demand?
4. Proactive Vs. Reactive: Adjusting inventory at the end of a sales cycle causes distractions and concerns across departments in your stations. Programming may comply while still being concerned about product impact. The traffic department must adjust clocks and logs to accommodate the expansion. Being more proactive with your pricing adjustments in advance of sellout will minimize missed budget goals forcing last-minute tactics.
5. The Market Wide Infection: If one cluster adds inventory in a market, it encourages others to consider the same tactic, softens demand that could raise rates and reduce "fire sales," and adds competitive inventory. Typically, the bottom third of stations in a market are not adding units, and instead, they are still selling their existing supply and may be conducting "fire sales." Softened demand works against the goals of the less demand stations.
What do I mean by "competitive inventory"? The high-demand stations adding units push out inventory with a higher starting value and are more competitive with the overall supply. No one wins in the market when capacity expands.
6. The Listener Contract: For decades, there has been an unwritten contract regarding commercial loads between the stations and their listeners. Over the same decades, there have been numerous studies about how commercial inventory levels hamper time spent listening. I will not enter the debate on commercial loads as that is a programming question. We can all agree that the "Listener Contract" is more critical in today's environment and anything we can do to keep engagement is vital.
7. Supporting Fragmentation: The audio space is overwhelmed with choices, and listening behavior and patterns have changed dramatically. Adding more interruption to our content by increasing capacity is heading in the wrong direction. The explosion of podcasts with low commercial loads and "ad-free" platforms are more attractive when we clutter our content with more messages.
We should bring the subject of capacity management back into the open and out of the shadows. The improved utilization of OTA inventory to get deserved revenues and reach budgets requires a more substantial commitment, to protect the product and improve pricing strategies.
There are consequences for adding units ranging from hidden discounts to increased fragmentation of radio audiences. A proactive approach, coupled with thoughtful terms and conditions, can create a platform that supports capacity management and places stations in a position to hit or exceed revenue goals.
Do not miss "The 2022 Sales Lift-Off" on January 13th. Loyd Ford from Rainmaker PathwayConsulting Works, and Alec Drake, will host Chuck Wood and Scott Howard on our roundtable to discuss a strong finish to Q1, recruiting for your sales staff, and actionable items to help you grow revenues in 2022.
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About Alec Drake:
As President of Drake Media Group, a content creation and sales consulting company, Alec is on a mission to share his unique perspective on best practices to enhance sales performance and drive revenue. The company offers a range of consulting expertise, including sales operations, team and individual coaching, yield and revenue management strategies, event sponsorship formats, and sales marketing.
Drake Media Group, LLC retains exclusive rights to the original content in all articles written by Alec Drake, contained in any podcast appearances, or articles published on third-party platforms.