Golf Resort Economics...........

[brad_miller]

In that vein, what about Priceline.com?

[John_Conley]

Good point.  Priceline.com hasn't done well because they aren't selling their own product - instead acting as an intermediary.

A golf course can sell their own teetimes.

Worth a trial?  Get a local paper to feature the new pricing structure you are going to.  Take phone bids for foursomes starting the week before and get charge card numbers.  After three days, set the price and accept all bids higher.  Notify the bidders and they still have three days notice.

[John_McMillan]

John Conley -

I am quite familiar with Robert Merton, Myron Scholes and the history of LTCM.  I'm not certain, however, of the relevance of their theories or personalities to the discussion of greens fees pricing.  Since you interjected that issue into the discussion, perhaps you might want to clarify its importance.

There are not, in economics, "Nobel winning papers."  Rather, individuals are cited for their contributions (over a lifetime), to a field.  Among these was Black and Scholes  1973 paper on option pricing.  It's one of those papers which is more frequently cited than actually read, and also amusing since similar research was rejected by the Journal of Political Economy for being "too technical" and not having practical applications.  In your exhaustive reading of other Nobel laureate's work, which economic theories did you find without practical applications in the works of James Heckman, Robert Fogel, Richard Stone, or John Hicks?  These economists are viewed within the profession as being overly-empirical, and having done almost no pure theoretical work.  

Lou -

I think people might tend to view economists and economic theory differently from physicists or other scientific theory since people tend to make observations of economic phenomona in the course of their daily lives more commonly than of scientific phenomona.  There are no "hard scientific" theories which have not at some point been modified, but you seldom hear someone say, "while I was observing the movement yesterday of sub-atomic particles, I noticed a movement inconsistent with Einstein's theory of relativity - boy, Einstein and physicists aren't that smart after all."  There is no science which is a complete model of how the universe operates, but I think the limits of economic theory are more visible to people than the limits of theories of "hard sciences."  

Tim -

The economics of price discrimination is applicable to golf course pricing - but once you start allowing flexibility in pricing, you also want to create limits to its flexibility - lest all the old college buddies of the cash register guy start playing the course for next to nothing.  My guess (and I think what you're also hinting at), is that the group at Spanish Bay did not find the right spot in the management chain to make their request.

[John_Conley]

John Conley -

I am quite familiar with Robert Merton, Myron Scholes and the history of LTCM.  I'm not certain, however, of the relevance of their theories or personalities to the discussion of greens fees pricing.  Since you interjected that issue into the discussion, perhaps you might want to clarify its importance.

John:

You are much more familiar with the inside of the world of theoretical Economics than I am or care to be, however I am always interested in ways anything can be applied to help me out.

My observation that the field of Economics has shortcomings is hardly unusual.

Why did I mention Black/Scholes?  It is a very high-profile example that illustrates my point about the limitations of Economics.  You can choose to disagree with me and attempt to enlighten me if you want.  I'll keep an open mind and change my beliefs if I am sufficiently swayed.  But please don't take such an adversarial tone when you really aren't even disagreeing with my statements about green-fee pricing.  (Maybe you are disagreeing?  It has been hard to tell when you focus on tertiary points rather than the substance of my message. - i.e. the "Dutch Auction" phrase.)

How would you price green fees?

[George Pazin]

John & John -

I'm going to hold a Dutch Auction for one of you guys to substitute teach for my wife the next time she can't make one of her economics classes - she doesn't pay me anything when I sub for her, but you guys are clearly worth at least a little more.

What's the incident that almost brought down the world financial system 4 years ago? In my insular world of t shirt printing I missed that. I haven't heard the term Black Scholes since 1988 in my fin class, but being a math geek, I remember that.

[John_McMillan]

George,

Fisher Black, Myron Sholes and Robert Merton developed a formula for pricing options in the 1970s.  In the 1990's, Sholes and Merton founded a firm, Long Term Capital Management, to make trades based on this theory.  In 1997, Sholes and Merton were awarded the Nobel in economics (Black had passed away).  In 1998, the fund was close to bankruptcy.  Many banks had loaned LTCM money, and complained that they (and the world financial system) would be damaged if LTCM defaulted.  A group of Wall Street Banks (not a government intervention) re-financed LTCM and changed its management.  That the world's financial system was almost brought down I think over-states the impact of LTCM's failure, but the morale of the story is that even very smart guys can make very big mistakes in financial markets.

[Kevin_Reilly]

John & John -


What's the incident that almost brought down the world financial system 4 years ago? In my insular world of t shirt printing I missed that. I haven't heard the term Black Scholes since 1988 in my fin class, but being a math geek, I remember that.

The collapse of the hedge fund Long Term Capital Management, which was averted when a syndicate of Wall Street firms stepped in and provided capital to the firm.  LTCM was started by some bond traders from Salomon Brothers and a bunch of guys with surplus grey matter, like Merton and Scholes.  They made highly leveraged bets on fixed income and currency arbitrage opportunities, and it was their leverage that killed them when liquidity became scarce.

Now back to golf....

[John_Conley]

Long Term Capital Management, a misnomer if there ever was one, was a very high-profile Hedge Fund run by John Merriweather.  If you aren't familiar with how such a fund gets paid, 1% of the money run annually + 20% of all profits from trading activities is customary.  Financially, the incentive is to take chances to make big pops.  The safeguard for investors is that principals are supposed to have all of their own money in the fund, and thus be most devastated by losses.

Because they are only available to "Accredited" investors - ultra high net worth individuals and institutions - Hedge Funds are not bound by the same regulatory scrutiny that Mutual Funds are.

Leverage magnifies investment returns, and the numbers tossed around for LTCM are staggering.  50 X and higher.

A big selling point for the Fund was that principals included some of the people from the Black/Scholes arena.  Surely the academic types would oversee the Wall Street wheeler-dealers!  Accounts of the Fund's demise border on comical to those who didn't invest.  Early returns in LTCM were OUTRAGEOUS, benefitting from the leverage.  Like the internet stock bubble, the bigger ascent only triggered a steeper drop.

Concerned about abnormal disruption to the global financial markets, the Federal Reserve Board and other regulatory bodies asked the largest players in the United States capital markets to support an orderly unwinding of the Fund's positions.  Citigroup, Goldman Sachs, JP Morgan, etc... were all involved.

The bailout was not to save the fund's holders, but to prevent a meltdown.

[John_Conley]

My reply took longer to type!

John - Would you at least call it a quasi-government bailout?  The member firms were ASKED to intervene.  You are correct that some had more exposure than others and may have made louder pleas.

The Nobel winners described the activities of the Fund as "sucking nickels" out of the financial markets by exploiting inefficiencies whenever one existed.  Since nickels aren't too lucrative, the leverage was necessary to make it worthwhile.

One example of a trade they made was to go long the 30 and simultaneously short a 29 year Government bond (or vice versa).

I'm all for getting back to discussing golf, but we segued because I was trying to illustrate the extent to which I saw economic theory helpful in telling an operator where to set his green fee.  "Market forces" are at work, and even the other John acknowledges that: "the moral of the story is that even very smart guys can make very big mistakes in financial markets."

[John_McMillan]

A Dutch Auction works as follows -

An initial price is announced, and any wishing to purchase at that price are accomodated.  If there is quantity remaining, the price is reduced, and additional sales accomodated.  The price is continually reduced until the quantity for sale is exhausted.  

While it might work for a course like Bethpate Black - where there is great demand for the course, and all available tee times are sold when first available, a Dutch Auction would work less well at a below-capacity course.  In particular, the fact that for Saturday's tee times, some will make their decision a week before, some on Monday, some on Thursday, and some on the same day, the buyers are never in the same "place" for the auction.  

I think the most effective ways to get golf course economics better aligned are to  (i) lower the top greens fees and (ii) do a better job of price discriminating to one or two classes of customers.

[John_Conley]

Shoulda know better than to get into a discussion about pricing with an Economist!  

Obviously a Dutch Auction isn't perfect, and what I propose may be a modified Dutch Auction just like they play a modified Stableford on Tour.

I 'm not proposing the "Filene's Basement" pricing model John mentions where you keep lowering the price until sold out.  I suggest taking the time you can sell the spots and squeeze more revenue out of it by choosing a profit maximizing price.  Lastly, the price charged to everyone should be the lowest anyone is willing to pay that has a "winning" bid.   Otherwise you get some people paying more for the same experience.  I wouldn't want them leaving feeling that they "paid too much" (tagline on a horrible series of local ads for an appliance store) for fear they might not come back.

Regarding the timing of when tee times are made... If I know my Saturday AM tee times are in most demand, selecting an 8:30 shotgun maximizes the number of these times available.  Telling patrons to place bids on Sunday and Monday for next Saturday isn't a problem for me.  Once sold out and priced, should I care if those calling Thursday and Friday are too late?  Not really, because you'd already be booked.  Plus, it will give them added incentive to bid early the next week.

Enemies in the daily-fee golf world are rainouts, walk-ups, and cancellations.  To avoid the latter they take overbooks.  What a nightmare!  If everyone does what they tell you the result is an overcrowded course where the experience is diminished for everyone - even your best customer who never cancels.

Much of this problem can be avoided by taking charge card numbers in advance to make sure of the seriousness of your client.  Someone who calls all over town to make a few times for Saturday, then only goes to the one his buddies chose is NOT a good customer - even for the place they decided to go the week it is their turn.

The Wilds has a widely-known fee structure in the Spring and Fall - Pay the Temperature (Fahrenheit).  It works for them because people in that market are familiar with it and can decide for themselves if $40 on a certain day is too much.  On a nice day, $65 is attainable by the course.  While unconventional, it appears to work very well.  Can anyone tell me why a Dutch Auction WOULDN'T work - as opposed to why it MIGHT NOT work?

Too labor intensive?  Okay, hire a temp to run it for the first Saturday each month and let that price hold throughout the month.  Courses in areas frequented by travelers have a hard time setting rate.  Here, the PGA Show comes to town for one week each year.  If a course undercharged 150 players for 5 days $15 each, they have to wait a year to put that information to use.  Even then they'll wonder, "have conditions changed at all to make this year any different than last year?"  Hard to tell.

I have seen some very high-end courses with disgusting overbooks the week of the PGA Show.  People teeing off at 1:00 don't even finish some days.  Should everyone suffer?  The number of rounds potentially played in one day is finite.  Offering access to those willing to pay the most is good business, not price gouging.

I'm not even sure that I agree with John M. about the less-trafficked times.  If the auction doesn't "sell out" on Saturdays in the summer, you can still select the "winners" at a price point that maximizes revenue without maximizing rounds played.  Allowing low-ballers on at $10 just because the tee sheet has an opening will decrease the value of services rendered.  After all, if the course is acknowledging that it is only a $10 experience, it must be a $10 experience.

A photographer once explained to me why he wouldn't do free work or even discount for friends and family.  His reasoning was that his services are worth a certain amount REGARDLESS of who renders them.  It WOULD BE DOING the family member a favor to have him, since their relationship should give them a certain comfort level they might not have with someone they didn't know.  While it doesn't sound like a good PR move if you'll have to dine with them at every Holiday, it did cause me to consider discounting in a certain light.

The knee-jerk response in our market is to say a course is charging too much if they aren't busy and to assume locals should be given better treatment in the Winter because they'll be there to play in the Summer.  I don't subscribe to either way of thinking because it ignores the fact that we (residents) BENEFIT from every course built in our area, whether or not we choose to play it.  $175 too much for Champions Gate (a number that had come WAY down in the year they've been open)?  Fine, but that will pull people away from Celebration, Falcon's Fire, Hawk's Landing, and other area courses.

[John_McMillan]

At the risk of being forever banned from the forum, I'll post my first (and hopefully last) post with an economics graph.

Suppose you have 11 golfers - each with a different willingness to play a golf course.  The first guy is willing to pay up to $100 to play the course, the second guy $95, and so on down to the 11'th guy who is willing to pay $50 to play the course.  These golfers are represented by the bars in the graph.  You can "connect the bars" and come up with a demand curve for golf at the course.  I've also put in a "supply curve" or the cost to the course of having someone play a round on it.  



In a competitive market, the course would charge $65 per round, and sell 8 rounds on the course - to the golfers willing to pay $65 or more to play the course.  The course's profits would be the triangle bordered by the blue and green lines.  

The "problem" from the course's point of view is the golfer's profit (consumer surplus) represented by the triangle borderedby the red and blue lines.  The golfer who was willing to pay $100 to play the round only has to pay $65 - so he comes away from the round very happy.  

Alternative pricing schemes are used to "convert" consumer surplus into golf course profit.  The most familiar example of price discrimination is the way airlines price their tickets.  Business travelers and recreational travelers have different willingnesses to pay for airline seats - so the airline charges them different prices to travel.  

A mechanism of price discrimination is the Dutch Auction.  In the golf example with a Dutch Auction, the first golfer would bid $100, and off he would go to play his round.  The second golfer would bid $95, the third would bid $90, and so on to the golfer who would bid $65.  The course would collect $100+$95+$90 ... +$65 in revenue, or $660 from the eight golfers, instead of 8 * $65 = $520 from the golfers under the flat pricing scheme.  The Dutch Auction is "efficient" in the sense that it extracts all the consumer surplus that can be extracted.  This is the pricing scheme used by the Federal Government to auction off Treasury Bills - and the "efficiency" property appeals to the Government as a pricing system.

An alternative way to price discriminate is to figure out a characteristic which differentiates the golfers, and market based on this characteristic.  An example is how High Pointe marketed their course this fall.  Over the summer, they had collected a database of all the golfers who had played the course, and who lived within 30 miles of the course (presumably, golfers with a different demand to play High Pointe from the golfer from Detroit who spends a week's vacation in the Traverse City area).  High Pointe mailed to these golfers "coupons" to play the course in Sept and Oct for a discounted fee.  In the diagram, this would be the same as setting a greens fee of say $80, with a $15 coupon mailed to the $65, $70 and $75 golfers.  

What doesn't make sense to me is why one would run a Dutch Auction for tee times, and then charge the lowest accepted bid ($65) to all.  This is exactly the same outcome as the competitive market.  It might work if the owner had no idea what the demand for his course was, or if the demand varied greatly from day to day (as in the "pay the temperature" example), but I don't see this as the most pressing problem in pricing rounds of golf.  To me, the problem is how to most efficiently price discriminate - to identify classes of customers with different demands, and price to these segments.

[John_Conley]

Got it!  And great insight.

My reason for charging all the same price is to avoid the feeling that somebody paid too much.  It would kill repeat business and incent people to bid lower in the future.  Any economic discussion about what to charge today fails to account for how it may disrupt demad tomorrow.  With over 100 courses within an hour of downtown Orlando, I'll refuse to go back to a course if they treated patrons badly.

Segmentation is difficult to perfect, but is already being done at virtually every course at least some part of the year.  It seems to address the issue, but doesn't solve the problem - how to get people to collectively play more golf.

We see a lot of preferred rates to seniors on mornings during the week and Florida resident stuff.

Back to the Spanish Bay example... notice that the group went to Bayonet and still played that day.  Spanish Bay's revenue loss was another's gain.

[RJ_Daley]

While our resident economist and economics enthusiasts debate some pricing models that are interesting and partially understandable to us lay folk, I wonder about the original question from a different perspective; that of the art of being an operator/businessman.  (certainly not that I am one  :-/ )

What do the John's have to say about the resort/daily fee operator who knows his customers tendancies and how effective his business's other profit centers work.   I mean as in the original example, the group that offered to pay considerably less, and if those groups tend to stay and have drinks, buy pro shop merchandise, and avail themselves of other services and goods you are prepared to offer them.  I don't know the answer to that question at Spanish Bay, because I don't know the ambiance of the lodge/grille/proshop or what all they have there.  But perhaps if the proper atmosphere is set, resort players may want to linger to savor a special end of the round experience in the bar, or buy a hat or shirt as a souvenier to commmorate the once in a lifetime round (as many resorts like that are).  

As a personal aside, I have been comp'd a couple times at some nice places, and feel the urge to at least buy some nice souveniers, and/or have some food and dirinks. I doubt if I'm unique in that regard.  So, isn't there some intangibles in the discussion of the pricing models that our friends above have debated about the Spanish Bay thing, namely the art of running the business and knowing the clientele's tendencies and possibilities.  It almost comes down to a decision on the spot for the DOG to size up the guys making the offer and estimate if they are fellows that are a bunch of hacks and cheapskates who will merely tear up the course and not even have a drink...  Isn't business a little about such speculations and decisions?

[Joel_Stewart]

Adam:
Is Pebble Beach also experiencing such low play as Spanish Bay?

I have seen quite a few newspaper ads for Pebble and know that Pasitiempo is experiencing quite a drop in play.