(This is a repost from my 12-7-08 Blog) I had to read the following ‘blip’ of an article in the NGF Newsletter twice to make sure I understood what Jim Koppenhaver was saying. Raise Green fees to become more profitable??? Geesh, does he want to kill golf all together?
PRICE INCREASES: COMING TO A COURSE NEAR YOU IN 2009
A prospective client called out of the blue a couple weeks back and opened the conversation with, “I understand you’re advising all your clients in Chicago to take a price increase in 2009?” I took a step backwards and, after exchanging some personal information, their particular situation and the context of advice I’ve given to clients recently on pricing in 2009, we had a serious discussion regarding the basics of profitability as it relates to revenue vs. expenses and debt servicing. His perspective was that it would be suicidal in today’s continuing supply-rich environment while I argued that you can’t choose to continue losing money in hopes of chasing higher rounds annually that don’t materialize.
This back-and-forth battle being waged in many markets across the country will become, in my opinion, a defining issue in 2009 as it relates to the financial health of many individual facilities and the overall markets in which they operate. While not true for all markets, there are a number in which the pricing leaders have to consider creating a potential decline in rounds for the benefit of higher gross revenue and profits.
In this issue we’ll take a cursory look at the growing importance of understanding price elasticity and competitive pricing dynamics:
- We’re at this business juncture primarily due to our collective inability to grow rounds demand, therefore it becomes a share game or managing profitability in a flat demand environment
- Our “essential expenses” have been escalating and we’ve been trying to operate more efficiently to offset them but we’ve run out of runway on that front
- Discounting continues, either offsetting or in excess of our rate card increases which has negated any revenue upside (encouragingly, it appears that increasingly consumers shifting play patterns are a contributing factor vs. firesale specials)
- The key question is, “What is the price elasticity for my facility in this local market based on history?” (i.e. increasing price 5% to take an 8% reduction in rounds doesn’t increase revenue)
Back to my prospective client conversation, I told him that we were, in several recent engagements, strongly recommending that our clients consider “real” price increases for the 2009 golf season.
For them, it’s a simple matter of economics that they will lose money in 2008 at EBITDA (operating revenue less debt service primarily) and, barring a federal government bailout or a rich, patient (stupid) investor, some combination of pricing action and continued refinement of expense control are necessary to balance the books in 2009. It’s going to be a tough juggling act but, in many situations, I don’t see how intelligent operators can avoid pricing in 2009….
I understood Jim’s thinking on ‘revenue vs. expenses and debt servicing’. In a normal business environment or in another industry this could be sound advice, but not in an industry that is primarily based on consumer’s discretionary funds. Many golf courses are up to their Flag Sticks in real high-interest debts for mostly the development of the golf course to service real estate sales around the golf course. To me, they asked for it, so why should the golfers of the world be asked to bail them out.
I know there has to be something I am missing in Jim’s article since it blows me (and probably 28 million other golfers) away to think that raising green fees to increase profitability for secondary debit in a recession. That is insane.