Wednesday, January 5, 2011

Racing Businesses v Our Businesses

There was a post today that I read with someone talking about how tracks raise revenue. He gave two options:

1) Raise take
2) Raise Signal Fees

For the raise in take or signal fees, this example was given:

"If a track has a $1 million handle with a 20% takeout rate, the takeout is $200K. Rise the takeout to 23% drop the handle to $900K and the takeout is $207K. One reason why the takeout is so high, is time and time again it has been profitable for the tracks to raise the takeout."

That gentleman is correct. This is racetrack business right there. Raise the cut, lose some customers, but gain a little bigger share: Poof, more money. It is the way this business has been run for a century, for the most part (takeout in 1906 was 5%, it is now 22%).

Conversely, you have to go into work tomorrow and you have a meeting on growth strategy. You would like to continue growing and you have 20 clients, but would like to have 25 at the end of the year. That is your goal for growth.

If you walk into your meeting and say "I have a plan. We can raise our price to our 20 clients 20% and we would grow", your associates would think you have been taken over by space aliens.

Clearly if you did that, you would lose at least two clients, and as time goes on you would lose the trust of more and more of your clients - they would be wondering if you are really out for them, and it would breed badwill. The two clients lost would tell others your company is too expensive, too, and you would find it harder and harder to gain new ones because of that. In addition, by raising your price, it would be harder to gain new business, even from whom did not speak to the ones who leave, because you are overpriced.

At the end of the year you would make more money - the bump in revenues would cover your loss of two or three clients. But the fact would be apparent: Your business's future would be in peril.

Jack Nicklaus said "Tiger Woods plays a game that I am unfamiliar". For many of us racing is much the same.

6 comments:

Anonymous said...

Each track follows another : so one raises a price or does anything to chase people away, followed by another, and another and another. Soon enough we have lost many, many customers.

Phil

Cangamble said...

That may happen over one year, but over a couple, the track will find it is making less money bottom line.
I think that is your point, but if they do continue to make more money then optimal takeout would be close to where takeouts are today. I hardly doubt that is the case.
Nobody expects tracks to make less than they can....however, that is the case right now with takeouts as high as they are.

Steve Zorn said...

The problem is that no one knows what optimal takeout in the long term should be. The few studies that have been done mostly focus on a single meet or a single year, and that's not enough to give a good long-term answer. By the time we do know, though, racing may be dead.

Anonymous said...

Steve,

I do not think that is his point in regards to this (but we know that takeout should be lower somewhere.... not higher than it is). The way I read the article, it makes perfect sense. 1) Try to put the revenue squeeze on by gaining 5% on top line. 2) Do it by losing customers, where they spend less/leave, but by only 3% or 4% of top line.
Short term it works, but they are not thinking of the long term damage done that you, me, and anyone else who runs a business thinks of when we make our decisions. That was crystal clear to me. I would never trade 5% top line for a loss of 4% top line, ever. It is suicidal for me because the 4% can turn into 15% in a hurry.

Roger

Anonymous said...

They will only learn the hard way. Boycott all high takeouts at all tracks. Fire CHRB!

Anonymous said...

A growing customer base can be cultivated. A falling customer base has to be protected. Horse racing is in protection mode. Lotteries and slots did not do that to them; they did it to themselves.