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How the World (Outside of Racing) Sets Prices

It's kind of geeky, but I've had a lot of fun reading articles since Monday on how airlines set their prices. Of course, there's the overarching easy answer to that question in the capitalist system, devoid of regulation - the market sets them. But with inventories, capacity, hubs, spokes, backwards and forwards linkages and supply chains and myriad other things, the way the market sets prices is pretty interesting.

Techcrunch had a decent look at it yesterday. Here's what I learned:

Airlines operate on 1% margins. I suspected it was more than that.

They move 900 million passengers a year in the US.

To move massive amounts of people at 1% margins, they need to study reams of data, and formulate a plan that makes things work, at the lowest cost possible.

Up to 15% of the people traveling miss their flights.

Airlines overbook, primarily, because booking 180 people for a 200 person plane (allowing passengers who switch tickets or miss flights would be guaranteed a seat) would result in higher gross ticket prices (from planes traveling with a lot of empty seats).

When overbooked with passengers that need moving, credits can be given which are ROI positive to the airlines, in the long-run. 46,000 people were bumped last year, out of those 900 million trips.

The next time you and I see a $299 return deal to NYC, or a discount flight with a ticket price lower than a bus fare, or when we get bumped,  we at least learned a little about why that happens.

So, we have a multi-million dollar business who studies data, looks at the competition, forecasts, tests, experiments and tweaks, to move 900 million people a year, safely, and with as low a price as possible.

Now, let's look at how racing has set prices:
  •  I bet a lot of people don’t know that when Dan Patch was racing, takeout rates were five per cent. These rates then moved to 10 per cent, and 15 per cent and so on, to where they are today (around 23 per cent blended in harness racing). None of these price hikes were implemented with econometrics, other fancy calculations, with the use of a 1940’s version of Lotus 123, or at the advice of pricing experts. Nor did they have anything to do with supply and demand, which we all know is how prices for hay, trucks and trailers, sandwiches at the track kitchen or just about everything else we buy are set. The rates were hiked because someone (governments, racetracks) wanted more money, and the consumer – with no other gambling games to play – had little choice in the matter. Even when the consumer was speaking — when handle and revenue fell after yet another hike in New York in the late 1940s — the price increases didn’t pause.
Racing set prices on a phantom number, without any data. And the prices they set as a monopoly are being used as benchmarks to set them today.

Remember classic lines like, 'when looking at other takeout rates, we have room to raise them and be competitive', when they raised juice in California? Competitive to what, a made-up number?

While the news cycle is dominated by a black swan, where one customer did something 45,999 didn't the last year, the pricing system done by airlines in near-perfect competition seems to be working as prescribed. Why? Because they set prices by study, experimentation, field tests and everything you're supposed to. Racing might want to try it someday.

Have a nice Wednesday everyone.


Comments

Ron said…
You're blogs are both interesting and informative.
I know much less about sports than I do about horseracing, yet I have been playing DFS games more and more this year with a fair amount of success. Why? 1. Because the rake is always 10%. 2. I quite often cash the smaller prizes which are still more than my bet, which helps me with "churn" and occasionally I will finish 1st in a multi-player game and take home $150 in a game where I spent $9 to enter, for example. When a lifelong diehard horseracing punter like me starts to take some of my action elsewhere, it's not a great sign for racing. As it is, I look more and more for the lowest rake bets and carryovers for my plays now. It's simple math. If you can't overcome the math, why play?
Ron said…
Your , not you're. Stupid phone.