Monday, February 7, 2011

Raceway Freakonomics

Does defense win championships? If you listen to any football, hockey or basketball coach, you are darn right it does. This maxim is as good as gold. But is it really true?

The authors of Scorecasting - the Freakonomics for Sports - took a look at that and let us know. It might make us feel really happy yelling "DEFENSE" in our cheap seats, but we could have spent the same time yelling the word offense.

Maxims, or the laws of a sport, jobs or whatever might not be maxims at all. Sometimes if they sound good enough, or catch on, they get matted in the culture and become the way it is. I see this a lot in marketing work. It amazes me to no end to see or read of a CEO telling a firm what he would like to see done with his marketing based on what he or she wants, based on their biases, or "feel". He or she might sell shoes, but  also sells socks as a complementary product, so they want to have a socks campaign. There are others selling socks better and cheaper than he or she is, so a socks campaign is not a very good use of limited dollars, but dammit I like these socks and they are great so we have to target and market socks. Invariably when the numbers come back, the socks campaign has a $0.50 return on ad spend, and the shoes campaign has a $4 one.

We don't tell our customers what they want based on what we think they want. Customers tell us what they want with their money.

In racing this happens, and has happened for dozens of years. If you go to a chat board you might see an insider say "I love bands after the races, so we should have more bands", or "the drivers/jocks should be stars like Michael Jordan, we should promote them", or "I don't bet and love watching top-quality racing. If we had more top-quality racing we can really grow the revenue. Owners of these horses should be given more money to race!". The biggest one we hear often is "if we increase purses we'll have better horses and more racing, and we will increase the sports' popularity". That one was the crux of the slots argument in the late 1990's.

In "Raceway Freakonomics" our revenue in racing comes from primarily two areas. Out of the billion or so for purses, about $650M of it is from pari-mutuel betting and 35% or $350M from slot machines or subsidies like them. So, we have to do one of two things it would appear. Increase pari-mutuel revenue or go for more slots.

In racing, the insider biases are prevalent with pari-mutuel betting. To increase wagering we are told we have to raise purses, or squeeze more money from existing customers. Unfortunately, these ideals which sound good have been proven to not do the job, both theoretically and empirically.

Richard Thalhiemer in his study:

"Wagering would increase by only 6% if purse were doubled. This is a  surprising finding considering the importance that is attached to the  purse variable in all major policy decisions to increase the wagering in  this industry."

Squeezing money from the existing customers is not advised to work as well from the Freakonomics crowd (pdf). We charged 20% when we were a monopoly. How can we now charge 22% and increase it when we are not?

"The high average cost of putting on a horse race is unfortunately almost irrelevant. The only industries that can successfully charge more than the competitive price are monopolies. Monopolies don’t last. Horse racing’s ended years ago. If we charge more than the competitive price, we will lose customers."

The second thing we can do to drive revenue is go after slots. Racing does a great job at this, as we know. Racing never met a form of alternative revenue that they did not like. The problem with slots is that they can be taken away as quickly as they are given. See Pennsylvania, Indiana and Iowa for that, as well as this weeks headlines about Penn National. In addition, slots do not increase pari-mutuel wagering, because the gambling dollar at a venue is not an infinite one.

If we were doing things Freakonomically where we let the numbers guide us, we would be doing things a whole lot differently. We would be catering to customers and trying to grow handle by the two main metrics that actually grow handles - a decrease in takeout and an increase in field size. That does not mean it is easy. One track lowering takeout will not change handle appreciably, just like adding to purses does not increase field size alone. Policy is needed and tested on both, freakonomically.

Everything else - games, giveaways, paying owners by the grade I races they run in, more stakes races, and on and on and on - might sound great and a good deal of them can help from a long-term branding perspective, but the ROI numbers for our two main Freakonomic categories are simply not there.

Letting the numbers guide our business is not some far-out theory; they are done each day by successful organizations. Take a look at the video below and ask yourself while watching it: Would we be better off and would racing possibly grow if we listen to numbers and experts rather than listening to feel-good intuition?



Stumbling on Wins, Super Crunchers and Scorecasting are all available in bookstores or on the web.

1 comment:

Anonymous said...

I'm a big fan of Ayres and Levitt and they have both helped me in business a great deal. The poker internet sites and offshore betting sites have practiced ideals that they espouse and have so for a long time. In horse racing the same ideals have only been explored casually, with deep resistance from various factions.