"Too many inexperienced operators are using price as a blunt instrument to generate activity."
In Roger Vincent's front page, below the fold story on golf's struggles, the inevitable discussion about "heavy discounting" comes up and as usual, I just can't comprehend the mentality of holding firm on pricing. I know some of you B-school grads out there can explain to me why deflation of prices during lean times amortizes value equity depreciation dynamics, so please help us understand exactly why it is that we read stuff like this:
To boost business, many private clubs are offering no-interest loans to help the less-well-heeled buy memberships, and public courses are rolling out the equivalent of blue-plate specials, including cheaper rates for off hours and discounts on lessons and merchandise.
Some think heavy discounting is a mistake.
"The trend of downward rates in the golf industry has been the real cause for many courses failing," said Mark Tansey, president of Palm Desert-based Sunrise Golf Inc., the company that will run Escena for its owners. "Too many inexperienced operators are using price as a blunt instrument to generate activity."
Not that golfers are protesting.
Dwain Richardson, a hospital food director with an 18 handicap, enjoys the "twilight" specials at the Tahquitz Creek Golf Resort in Palm Springs. By starting midafternoon he can usually play 13 or 14 holes before it gets too dark to see. He pays only $29 and gets the use of a golf cart plus two free drinks at the bar.
Low prices keep golfers like him coming out, he said, which could cement new habits.
"I would play every other day if I could," Richardson said. "I can see why people get addicted."
Monday, November 23, 2009 at 08:54 PM
Reader Comments (12)
In my business, I analayze companies for investment purposes. Anytime I see companies trying to gain market share by become the low-cost provider and having success, I avoid the entire industry. Why? Because the consumers of the product will grow accustom to these "cheap" prices and the industry will have a very hard time ever getting firmer on prices...so growth in the industry will be soley a function of volume. Therefore once the industry gets saturated with product...it is dead.
As an example, the disk drive industy did this in 1997. And, as an example, Western Digital (WDC) one of the premier players in the industry fell from 55ish to 5 from 1997 10 1999...whilet the entire tech sector was rallying beyond belief.
Structural changes, mergers, diversitures took places from 1999-now and they've moved higher in the last few months along with the entire market...but that has taken more than a decade...and the companies still haven't reached the valutaion levels they were at prior to this price cutting decision.
So, I think that is why price cutting is viewed negatively. As anecdotal evidence, I can't tell you how many times in the last few months I have set off to play a new public course, was expecting to pay $x for my round, when the person behind the counter has said...hey were offering a discount on our rounds and you only have to pay $.5x. I was set to pay full price...but they offered me a huge discount. Perhaps that builds loyalty...but wouldn't a quality golf experience build even more loyalty and charging a fair rate couple with this could only bolster the golfers experience and the courses viability.
Sorry if I rambled or made a typo/mistake here or there. But I think you get my point...right or wrong.
You have a bigger brain than me but a quick question... does it make a difference if the industry is in the entertainment category? I mean, nobody gets a huge jones for a new hard drive but they do for a drive, an approach and a two putt. I think entertainment is different. Would we spend $25 for a meal we can make for $5 if not?
Something had to give.
I wonder how much longer Pebble Beach can charge $495 for a round of golf throughout the year. Their packages don't provide much relief. Mr. Big is hurting, too. $30,000 vacations are a thing of the past, and likely never to return.
The sooner the world deals with roll-back, the better. A globalized roll-back, now that's funny, isn't it?
You think the golf ball has problems.
MRP: when golf courses slash prices, are they basically giving away their franchise value and becoming cheaply priced commodities? Does that even make sense.
Although there are ways to cut some variable costs (maintenance and staffing), golf courses face enormous fixed costs (the “Nut”) relative to their marginal cost per golfer:
1. A minimum amount of staffing/maintenance is required and
2. If there is a loan on the property, the mortgage payment doesn’t go change based upon the number of golfers.
No matter how many golfers show up to play, the Nut does not vary significantly. For the courses: the marginal cost of each additional golfer = 0. Furthermore, the courses cannot store their inventory of tee times for better times. Because all courses face the same cost structure, courses can end up pushing green fees down below sustainable levels in a pricing death spiral.
Example:
a) Good Times. In a market, there are two courses (equal quality) that players can select. Each course charges green/cart fee of $100 per person. Each course is full with 1,000 players per week. With revenues of $100K per week, both courses are fat, dumb and happy as each course faces weekly Nut of only $25K.
b) Recession: Both courses still face a weekly Nut of $25K. Because of unemployment and the recession, 1,000 golfers leave the game. If each course had 500 golfers per week paying $100 per round, they would both be profitable to the tune of $25K per week. Unfortunately for the courses, the reality can be different. With a marginal cost per golfer of zero, one course will begin discounting prices in hopes of attracting additional golfers. Unless the other course matches/beats the discounted price, all 1000 remaining golfers will go to the course with the lowest price. As a result, the second course will lower its prices. Again, because the marginal cost of each golfer is zero, the cycle of discounting/matching can easily continue until one or both courses faces bankruptcy.
Owned by the city, they believe in the brilliant theory that if people aren't showing up, it has nothing to do with the cost.
E.P...ABSOLTUELY!!!! I think that is why Pebble hasn't moved their prices down...they are a unique experience that golfers are willing to pay top dollar for. Well, at least that is what Pebble thinks!!! It will be interesting to see how this whole thing shakes out.
Jack, this first word in my last post should be "good" not "could"...sorry!!
Great topic, would love to contribute more, but packing for looooong weekend at the in-laws in Cleveland.