RACETRACK PARI-MUTUEL PRICING

My first job out of college was in sales and marketing with the Georgia-Pacific Corporation.  I was located at a distribution complex that had a modern sales office and a vast warehouse full of various sizes of plywood, prefinished decorative paneling, Formica, and other building-material products.  Georgia-Pacific was (and still is) a vertically integrated company with its own forests, production facilities, distribution centers, and trucks.  Customers were retail lumber yards, cabinet shops, and retailers like Sears.  Home Depot and Lowe’s were yet to be founded.

The outside sales force was compensated on salary plus a percentage commission on the dollar amount sold.  Therefore, the built-in incentive was to cut prices and go for as much volume as possible.  On the other hand, the distribution center manager had a different goal:  He wanted the combination of sales volume and profit margin that optimized profitability.  Thus there was an ongoing push and pull between the sales force and the sales manager.  (The sales reps and the sales manager also often differed on whether to extend credit to companies with a poor record of paying on time.)

Takeout on pari-mutuel wagers is conceptually similar.  While racetracks could undoubtedly boost betting handle by dramatically slashing takeout percentages, net betting revenue would decrease if the reduced takeout percentages were not compensated for by sufficiently increased wagering.  If, for example, the takeout were decreased by 25% on exactas, betting on this type of wager would have to expand by 33.3% to break even on net revenue.

Like the sales force reps at Georgia-Pacific, knowledgeable bettors want the lowest takeout possible.  By contrast, as with the Georgia-Pacific sales manager, the racetracks should strive for a takeout that yields the optimum net revenue (i.e., betting handle x takeout percentage).  Yet racetrack executives with pricing authority have not demonstrated a willingness to meaningfully experiment to find the takeout percentage on various types of wagers that is optimum.

That’s perplexing and even calls into question basic competence in marketing.

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