Think You Can Discount Your Way Back to Prosperity? Not Likely

For this article, I promised less philosophy and more math. Taking on topics like discounting, utilization and per round costing, I can assure you we'll be running some numbers as we look at your yield management tactics. There has been lots of talk in the industry about pricing strategies and discounting concepts as many of you are searching for ways to increase rounds. What I hope to show you in this article, is how to use certain calculations to help determine if you're making the best decisions for your golf course when it comes to your yield management strategy.

With the exception of some resorts that employ seven day pricing, we all have been doing yield management discounting for years – such as different rates for weekdays to reflect lower demand for those times. The best way I have found to determine how much yield management you actually do is by calculating your “Achieved Greens Fee Percentage” (AGF%). You can do this in four easy steps:

1. Start by noting the highest price you have as a “rack rate”, which is usually your price for your highest demand time (i.e. Saturday morning).
2. Add your total Greens Fee Revenue, plus any Season Pass and/or Loyalty Club Revenue. If you price your rate with carts or use carts as a promotional tool, also include your Cart Revenue.
3. Divide that total by your total number of Rounds to find out the Average Revenue per Round, taking promotions into consideration.
4. Divide the Average Revenue per Round by the highest rack rate to calculate your AGF%.  

Let’s run the numbers of an actual course to see how we calculate the AGF%. We will use this course as our example course throughout this article.

1. The example course's highest rack rate = $66
2. Greens Fee/Cart Revenue = $1,194,061
                Season Pass/Loyalty = $191,752  
                                          Total = $1,385,813   
3. Divide $1,385,813 (Total Revenue) by 30,502 (# Rounds) = $45.43 (Average Revenue per Round)
4. Divide $45.43 by $66.00 (Highest Rack Rate) to calculate the AGF%. The example course's AGF% is 68.8%.

This means that the cost (or “discount rate”) of all the different promotions used at this course was 31.2%. This number may seem high, but you have to remember this includes all your rates: Weekday, Weekend, 9 and 18 Hole, Senior, Junior, etc. Years ago we used to see about 20 different rates; today we routinely see over 100 different SKUs for Greens Fee rates, from Dew Sweeper to Super Twilight and every grit dribbler and denture wearer rate in between.

The above approach of using AGF% may seem simplistic on the surface, but you can use this method to do a more complicated analysis. Most courses are using cart fees, range balls, merchandise, food & beverage items and maybe the kitchen sink as promotional tools. To compare year-to-year results, you can introduce your varying promotional programs by using revenue per round data for each of these departments.

Try comparing your AGF% over a two year period and you can start to see what the effect of changing promotional discounts has been for your course.



Here’s where this analysis can get tricky – to establish a “rack rate” benchmark, you need to take the highest rack rate likely your Weekend Greens Fee ($66 in both years at our example course) and add per round totals from Year 1 to both years in order to do this comparison. What you can see in the table above, is that the course had essentially the same “discount rate” in both years (32.5% in Year 1 and 32.0% in Year 2), even though they used different promotions in both years – in Year 1 they used a heavy dose of Season Pass/Loyalty and Cart Rate promotions; whereas in Year 2, they used Merchandise (free balls primarily) and Food & Beverage promotions. What you can see is that Year 2 revenues declined by 3% and if you do some math, you will find rounds went down by 3.7%. Clearly, we’re getting some mixed signals as to whether their Year 2 strategies paid off because revenue per round went up, but overall revenues went down. This really means we have to look at a few more data points.

So far, we hope this exercise illustrates that most golf courses are doing a lot more yield management than they realize. It also means that a lot of the “new” ideas for yield management and discount marketing may not be so new. What we really want to do is show you how to evaluate these “new” programs with our closer look under the hood. Let’s start by looking at how to evaluate your cost per round.

How many of you pay attention to how much it costs to produce every round you sell? If you do this regularly, you are on the right track; but if you don’t, you should. Here is another simple exercise to help you figure out your production costs and compare how different promotions change both your revenues and expenses; especially when you include the variations in Cost of Goods Sold when using Merchandise and Food & Beverage promotions. The example course's production costs are based on 30,502 total rounds (year 1) and 29,360 total rounds (year 2) as noted in the AGF% table.  

Two things should jump out at you when you look at these results along with the results from the AGF% table:

1. Even though Revenue per Round went up slightly, and the “discount rate” was actually lower; rounds went down 3.7%. Combined with a 1.2% increase in Total Operating Expenses to produce a 2.9% decline in Operating Margin, a 3% decrease in Revenues resulted.
2. You really need to look at the entire picture of Rounds, Revenue, Achieved Greens Fee % and Expenses to get an answer of whether your strategies worked or not.

These two exercises should confirm the common sense rules for evaluating your promotional programs:

1. If you discount your rate, your rounds have to go up at a rate larger than the discount rate for the promotion to generate more revenue. A 10% discount has to generate 11.1% more rounds to break even.
OR
2. Your Gross Margin needs to go up by more than the amount of the discount.
OR
3. Some combination of rounds increase and Gross Margin improvement need to exceed the amount of the discount.

These exercises are good for looking at your entire year – let’s look at how to apply them to specific promotions. In one of our previous articles we urged you to make use of the Fore! Reservations Course Utilization Reports. Let’s say that your 2009 report showed Tuesday course utilization was 37% and in 2010 it was 35%. If you use a 10% discount to try and improve in 2011, your course utilization had to go up to 41.1% to break even – is it realistic to expect you can increase your course utilization by 17.4%? (We get to this figure since 6.1% (41.1% - 35%) is 17.4% of 35%).

Now, let’s look at a couple other discount programs increasingly used by many golf courses, and how you can use these tools to evaluate whether these programs actually work or if you should even consider using them. Let’s look at the practice of bartering tee times, and the many new electronic coupon programs like Groupon.

Some of you elect to barter tee times for services ranging from internet reservation capability to web hosting and email services into yield management and beyond. Your rounds have to go up by the same amount of the number of redeemed barter rounds in order just to break even. If you plug the redeemed barter rounds into our exercises above, you will likely see that a favorable mathematical result is very difficult to find. For example, if you barter 3% of your rounds and you have a 2% increase in rounds, you’re going to show a loss in green fee revenues and revenue per round.

The same is true of Groupon, or any other electronic or paper coupon program you might use. These have to represent “true” incremental rounds that are not being used by your existing customers.

“Although customers generally get their money's worth from their Groupon deals, merchants typically lose money on every Groupon they sell.” Milwaukee Journal/Sentinel, April 4, 2011

Really, all you have to do is realize that merchants receive 25% of retail value for every Groupon deal sold; and then look at your cost to produce a round of golf. As usual, I had my annual Christmas debate with my brother, and this year’s subject was Groupon – then the relatively new “hot” internet discount tool. We’ve actually had three or four of our regular clients ask us about Groupon, so I was prepared.

My brother trotted out all the usual platitudes about the benefits of Groupon (the same benefits you hear about virtually every discount program):

• We will bring you new customers
• You will get the benefit of all their additional spending on food & beverage and merchandise
• You get a chance to turn them into loyal, repeat customers

We ran some extensive analyses to investigate and try to verify the above three common claims in preparation for our annual State of the Industry presentation in Orlando in January. The results are too detailed to adequately explain here, but please feel free to This e-mail address is being protected from spambots. You need JavaScript enabled to view it if you’d like to discuss our Groupon or third-party findings further.

Discounting and yield management in golf have been around a long time. Most of the programs that pop up today are really simply updated derivations of programs that have been tried many times before. In the end, the mix of yield management pricing tools you use have to be tracked and evaluated for how well they actually worked. Too often, we see discounts that are enticingly generous but have little chance of producing the increase in course utilization necessary to improve revenues. By running the numbers outlined in our exercises, you will find out whether your promotion strategies are working or not. And, remember that every round you sell has a cost.

Stuart Lindsay

"Lindsay, a lifelong Milwaukeean, has made a career of a seemingly
thankless task: Helping businesses and individuals understand the
inner workings of the golf industry. He began delving into golf course
economics while with Deere & Co., and continued after founding
Edgehill Golf Advisors in 1989. The work combines his naturally
analytical mind with his passion for golf." - Golfweek, April 2008

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Edgehill Golf Advisors
10134 N. Port Washington Road
Mequon, WI 53092
Telephone: 262.241.7088
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