Friday, January 4, 2008

Lower your Prices, Gain Bettors

Reproduced from Harnesslink is a story below on lower takeouts. I once chatted with an industry source who mentioned that "when people win it is amazing how much they bet." This is obvious to anyone who teetered in the 0.95 or so ROI area. Racing is one tough game, because high prices have made it so.

Pinnacle Sports, Betfair and online poker sites (and casino's who lower their slots rakes like Vegas did) know this, and have known this for many years. In the early 1990's when the British government took a tax off lines and placed it on profits, they knew it too. Bookmakers of racing abroad, who slide takeout scales in a psuedo perfectly competitive way, by having low rakes on chalk and higher rakes on longshots know it. When Etrade and others offered out $10 trades instead of $100 ones by embracing and benefitting from the economies of scale of the internet they knew it. Heck, when Wendy's offers a 99 cent double burger, they know it too.

Racing, with special interests and a revenue formula made for 1908, not 2008, has not quite figured it out. Sometimes I think they would rather blame online poker, or sports betting, or offshore wagering for their problems.

Anyway, rant over.

Here is the harnesslink story reproduced below. Remember, this is what happens when someone goes from a player losing a small amount, to a player winning a small amount. So small, that it is only ten dollars the first day, instead of losing $40 the first day. The inflection point is an amazing thing in betting. I hope this is illustrated to non-bettors. And I hope it makes them think.

Low Takeouts are our Friend

I’d like to issue a challenge. Two people are picked at random who have never bet before. It could be anyone really. Each person gets a coach who is a good handicapper. One coach is a track executive picked from any North American racetrack, and he has to play by his rules. The other coach is a professional bettor, and he gets to play by his rules. Each hand-picked person gets a mythical $1000 bankroll. At the end of 150 days of betting we get to see who helps harness racing the most and who will continue to help the game in the future.

Let’s make each player a losing player. Each player has a return on investment of 0.96, or on each dollar bet, they lose 4%. This is a very good player. It is difficult to lose only 4% with such high rakes in our game. But regardless, they will both be losers.

The regular player, coached by the track executive plays by track rules. No rebates. Let’s say the vig, or rake is 15% on win bets. The professionally coached player gets to play by his rules. Rebates are not outlawed. Let’s make the rebate fair. Say 5%. So, the takeout on his win bets is 10%, not 15%.

Each day, each player bets his bankroll in full. Since our starting bankroll is $1000 that means each player makes ten win bets of $1000 on the first day, and so on, depending on his bankroll.

So, all the rules are equal except for the rakes. Now, let’s play and see what player helps the business more.

After day one, the player coached by the track executive loses 4%, with his 0.96 ROI. That means he bets $1000, gets back $960 for a loss of $40.

After day one for the professional player’s student, the ROI is the same. He bets $1000 and gets back $960. He loses $40. BUT, he gets a rebate of 5% remember? So when that $50 is added to his account, he now has $1010. This seems like a minute amount, because after all, what is 5 percent, right? It’s only ten dollars to his bankroll on the plus side!

Now we keep playing, with the same rules, with the two people of completely equal skill.

After 150 days of playing, this is the result:

The track exec coached player is almost broke – he has around $2 left. He has bet in total, around $24,000. Not too bad at all. He played for a long time and he really contributed a lot to purses. 15% of $24000 is $3600. That is $3600 to purses and profits.

The professionally coached player, with the 5% rebate (remember the rebate, 5% is not much at all right?) did better. A whole lot better. That small rebate helped the player win. Not a life changing or earth shattering amount, but it helped. He ended up with over $4000, or $3000 profit. Well, of course he did, you say. He took some of the tracks profit and purses, so he had to have made money. He made money at the expense of us! He took our $3000 profit for himself!

Not so fast.

Our player, with that small rebate, bet over $330,000 in those same 150 days of betting. That’s three hundred and thirty thousand dollars! How about the proceeds to the track and horse-owners for purses? Well we gave a 5% rebate, so instead of charging 15% we charged 10%. 10% of 330,000 is $33,000. That player, with a little help, contributed $33,000 to purses instead of the player we did not help who contributed $3600 – almost 10 times more.

More importantly, that player is still playing. Remember, the first player is broke. I bet the winning player will be playing for a long, long time too. And I bet he will tell friends.

Now you know why in online poker, a player can play for months and months with a small bankroll and he tells his friends to play too, and the game grows. Or why betting giant betfair with their low vig has a million clients and is growing. Their business model assures it.

It’s churn. It’s low takeouts. It helps people win and become long-term horseplayers. Players who are serious about the game and might be, or were, our best customers have left to play new low rake games. Let’s get them back.

Low takeout is our friend.

It is time racing joined the party.


Anonymous said...

One thing the article doesn't take into account is that in order for the player to make money, more people have to lose money, because according to theory, a lower takeout will result in more money going into the track purses and track profit than before.
Of course, this will come from more players who are attracted to bet into the pools because there is light at the end of the tunnel when it comes to being a winning player.
New money will come from poker players, Betfair players, etc. But more importantly, more newbies will wind up coming with their friends who now have a reasonable chance of braking even or even showing a profit.
I think many players have woke up, and it shows. WEG for example, with all their technological advances should be seeing increased betting in large numbers now that anyone can make a bet within seconds from just about anywhere. But they are lucky from year to year to keep the betting numbers from decreasing.

Anonymous said...

I will never understand why the people who are paid to understand "churn" and are in the position to do something about it are the least likely to.
And a token lowering of take-outs on the W4 and P7 is just that: token. It sounds great, but it isn't. It affects far too few patrons so of course it does not have the desired effect. The track executives throw their hands up and say "we tried and it doesn't work".

G. C. said...

I actually read an interview with the head of NYCOTB and he said our patrons do not care about takeout, they just want to be paid on time.

While I would love lowered takeouts and have gone out of my way to bet them, it seems most horseplayers do not care. The low takeout P3 at Sam Houston was a failure, it was out handled by the 25% takeout trifecta over 2-1. The 4% takeout pick 4 at Ellis also did not increase their fan base.

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