21 May 2010

Horse Racing Needs To Try Optimum Pricing Before Cutting Dates

Nick Eaves was recently on Trot Radio, and what he had to say was not very popular amongst harness horsemen in Ontario at all. He has pretty much concluded 100% that harness racing (even Woodbine Mohawk) needs to cut dates because there just isn't enough demand for the product.

I'm not saying there isn't too much harness racing in Ontario today, but what gets me is that the element of pricing is huge when it comes to demand, especially today when there are all kinds of competition in the gambling industry.

How can a reasonably intelligent sounding man, who runs a gambling empire avoid Economics 101 so much? It isn't just Eaves, but his predecessor as well, and virtually almost every race track exec in North America.

To date, Woodbine Entertainment has not even attempted to find the OPTIMUM PRICE when it comes to takeout. Surely, a company that sells a product (gambling) in a competitive environment has to understand that at different track takeouts, you end up with different bottom lines.

Take McDonald's for instance, they know that if they charge $3 for a Big Mac, they make more money in the long run than if the price was $6 or even $1. This happens with experience of moving prices up and down.

The slot industry has found out the OPTIMUM PRICE as well through trial and error. Of course, it can be a little different in one place than another, depending on the customer base, but it generally always falls between a house take of 5% to 10%.

At 15% or 20%, even though the patrons mostly don't have a clue about the slot payback rates, slot operators make less money in the long run because players go broke quicker, which works towards giving them a stronger negative experience. After all it is gambling, and if you walk into any place with a bankroll and lose it too quick, you'll find other ways to bet or quit betting altogether.

The longer a player lasts, the more apt they are to expose friends and family to their gambling habit. This increases the bottom line of the casino....or hopefully, the racetrack when they finally discover OPTIMAL PRICING. Again, lowering takeout in horse racing is a long term thing. It isn't an overnight savior. It took 30 years for racing to find the bottom, now it is time for it to rise up again. Lowering takeout will help the momentum.

Seriously, how can Keeneland have takeouts between 16%-19% and Woodbine have takeouts between 17%-27% if OPTIMAL PRICING has been attempted?


One of the biggest crocks heard is that racing can't drop takeouts because the price of putting on the show is too high.

Takeout price and the cost to run a track are two separate entities. The best way to illustrate this is using a slot operation.

Slot operations are not cheap to run. Many are open 24 hours a day, 7 days a week, and employs many full time staff (employee benefits, maternity leave, etc.). It takes a lot of electricity to run these places as well. Lets say it costs $25 million a year to operate a casino, and lets also assume they at least break even at every hour of operation, so there is no need to cut hours. The casino has an average house take of 8% on their slots. This means, to break even slot players must bet at least $312,500,000 a year. At 8% they do find that people bet $450 million a year (yielding a profit of $11 million). However, at 10% where the break even point would only be $250 million, they find that people bet only $330 million, which yields a profit of $8 million.

Now what does the cost of the operations have to do with how much people will bet? Simply, it doesn't mean squat. The slot operator, using OPTIMUM PRICING, realize that they make more money at 8% versus a 10% hold. The cost of the show is irrelevant, it could be $25 million, $10 million, or $35 million, it just doesn't matter. It is all about the the takeout rate or hold rate, and how much the customer loses collectively at different hold rates.

More of today's customers are aware of track takeout when it comes to horse racing, but even if they weren't, the psychology of losing too fast will always be there. Horse racing needs to attempt to find the OPTIMUM PRICE point. Cutting dates first is just giving up without even trying, and just putting a band aid on the demand problem.

In the Trot Radio interview, Eaves also made mention of the HIPS 2% (4% on triactors) tax that increases the takeout, a horseplayer has to pay. I think it is a great idea to change the way HIPS is funded, and take it out of slots instead. A 2% decrease on WPS and exactors and doubles would be great, if Woodbine can pull it off. A 14.95% takeout on WPS would be the lowest in the land, giving them a fantastic competitive edge.

More importantly, getting rid of it off the parimutuel side would enable Woodbine to experiment with other takeout reductions more easily as well.

I don't get his churn comment? Of course, in the old days when there were fewer exotics, and a lower collective takeout because of it, churn would be higher. But to say churn isn't that good anymore is a bit misleading. Horseplayers generally bet until it is all gone. They might play other tracks, but that is how it works.

Also, the polytrack has led to bigger average payouts (thanks to bigger fields and the fact the polytrack creates more chaotic results than dirt), so fewer people are getting money to churn. So it might take the player who cashes a big super or tri longer to churn back, but they generally do so over time (the churn is coming back from fewer sources than in the old days). And the best churn days are when exactors pay $20 and winners pay a fin. But again, with most of the money coming from simulcast or ADW, people will generally bet the next race coming with the money they cash, regardless where they cash it, so sometimes Woodbine benefits, and sometimes it doesn't. It should be a wash in the end regarding timing of players cashing and betting back.

When you take out $25 out of every $100 bet versus $16, there is going to be a lot less churn regardless. That is the bottom line.

HANA at Keeneland On Youtube
I'm proud to say HANA is getting the exposure it deserves. We are starting to get a seat at the table, and I think our efforts are beginning to pay off, as tracks have actually come to us and ask for suggestions (and why not, we represent the customers, the people who pay for the purses and the track operations):

Incidentally, HPITV viewers may recognize Mike Maloney, as he has shown up on a video that HPITV airs having to do with handicapping.





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