TAKEOUT: HORSE RACING’S MSRP

Nominal or published takeout percentages on bets at racetracks are somewhat akin to the MSRP, or the manufacturer’s suggested retail price, on the vast majority of new automobiles…in that they are the price in name only and are negotiable.  While buyers may have to pay the MSRP on cars in high demand, nobody but the most naïve buyer pays the sticker price on run-of-the-mill makes and models.

If a bettor spends enough money, he or she will be able to get a discount in the way of a rebate.  For example, Churchill Downs, Inc. has a business entity, Velocity, that caters to its best customers.  Velocity is a separate holding under the advance deposit wagering (ADW) profit center TwinSpires.  Churchill Downs describes it as “a business that is licensed in the British Dependency Isle of Man focusing on high- wagering-volume international customers.”

Monetary rebates have the net result of reducing takeout rates for the most prolific bettors, as measured by the cumulative amount wagered over some specified period of time, just as special deals and rebates on cars lower selling prices.

Suppose, for example, that the aggregate amount wagered at a racetrack on win bets during its fiscal year was XYZ dollars and that the published takeout on such bets is 17%.  Further, say that 70% of this total win-bet handle was derived from large-scale bettors who received rebates to varying degrees.  Thus the racetrack’s weighted average takeout rate for win bets was lower than the advertised 17%…and maybe much lower.

Additionally, because rebates vary across racetracks, each racetrack will have a different takeout structure from the one it shows to the overall public as well as compared to other racetracks.

Ergo, one must have access to the betting data held by the racetracks and ADWs to know with any degree of surety what the true takeout percentages are for the potpourri of bets at each racetrack and ADW.  Yet those of us who are not privy to the data can reliably infer that reduced takeout rates via rebates have a salutary effect on handle…or else the racetracks and ADWs would not give them.

Quantitative insights regarding the effects of reduced takeout rates on betting handle (i.e., price elasticity of demand) could be obtained by statistically analyzing the historical data in racetracks’ and ADW databanks pertaining to high-volume customers.  However, the elasticity coefficients for this cohort are likely to be much different than for casual bettors who are not nearly as cognizant of or as concerned with takeout rates.

For this reason, the reactions or responses of casual bettors to takeout rate reductions need to be determined via controlled experiments in which racetracks lower rates, for instance, on exactas for at least a year while simultaneously launching well-funded promotional campaigns for less-sophisticated bettors that educate them on the advantages of lower takeout on returns.

It could be that racetracks and ADWs have been correct all along in reducing takeout rates only for large-scale bettors and keeping them extraordinarily elevated for relatively price-insensitive individuals who bet infrequently or in comparatively small amounts.  On the other hand, reduced takeout rates for all bettors might eventually boost overall betting volume enough to compensate for the lower rates.

Until scientifically conducted studies are initiated, we are left to hypothesize and speculate.  Meanwhile, pari-mutuel handle stagnates and the horse-racing enterprise in North America continues to downsize.

Copyright © 2015 Horse Racing Business

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