A poster on Paceadvantage.com summed up optimal takeout once, and I thought it was pretty dang good. I share it here.
- Optimal takeout means maximizing revenue. There is only one takeout rate that will maximize revenue for a given "demand for X" over the long term. Zero will never be an optimal rate, it returns zero revenue...it is officially the least optimal takeout rate (it shares that honor with 100% takeout rate.)
- Optimal takeout doesn't exist in anyone's mind, it's not an opinion. It exists, as an actual number. Nobody knows what it is, exactly...but the truth is out there. It's the takeout rate where you get maximum revenue.
- The reason the cost of the show doesn't matter is because it doesn't...optimal pricing is going to be optimal pricing for any given show, no matter how much you pay the star. You can't do better than maximum revenue. Optimal takeout rate = maximum revenue for the tracks and horsemen.
- Whether maximum revenue pays for the show or not is a separate issue -- because you can't get any more money from your customers. If you raise prices your revenue will go down because they will reduce their purchases at a higher rate than the increase in price makes you.If you lower prices your revenue will go down because they won't buy more of it a rate high enough to make up for the decrease in per unit cost. You end up a net loser again. You can't bring in any more money, ever, than you'd get with the optimum rate. There is no more money for your show.
- If there isn't enough to pay for the show at that point, then your show is too expensive to put on, and you should either consider putting on a different show, or just stop putting on shows -- because you are going to go out of business. Not all shows are blockbusters, many result in bankruptcy.
- It is believed by many that racing is currently charging more than the optimal rate, and is therefore leaving money on the table that could otherwise go to pay for the show.
It really is that simple. You don't want to charge 0% takeout because purses would be zero, you don't want to charge 100% because purses would be zero, too. There is a number, somewhere in between, that makes the tracks the most cash, and funds the purses to their highest possible level. Our current takeout rates were never decided upon by trial and error, or an econometric model (like for example, how a casino does it; Vegas slot machines charged 25% in 1970, but 5% today because they make more cash at 5%). They were decided upon by governments, horsemen and tracks raising them each time they felt they wanted money, with near impunity, because racing held a monopoly*. We're not a monopoly any longer, so the old rules simply do not apply.
Every study since 1970 has said that the optimum level is lower than the current takeout rate for horse racing, and if they're right, tracks are costing themselves money in the long term, when they raise takeout.
It's not about horseplayer greed, it is about answering a simple question that millions of successful businesses have answered before, and continue to answer each day. I am at a loss as to why this easy to understand concept is such a foreign one. The next time you hear "our show is expensive to put on so we have to have high takeout" I hope the above explains why many of us pull our hair out.
* In the early 1900's, the initial pari-mutuel takeout rate in the US was 5%. Source: Colin's Ghost.