Analysis of Pellucid’s Article & Responses

On April 3, 2006, The eNewsletter Outside the Ropes printed an article discussing software tools to market golf courses and increase the rounds purchased. They did an analysis of three different business models in an attempt to develop a common cost comparison across the models. Those models were commission, transaction fee and barter.

The analysis attempted to use an allocated cost per round of golf as a way of assessing the cost of barter. The resulting calculations imply that the bartering option is by far the most expensive and implies golf courses should avoid this model.

On April 14, 2006, the author of the article responded to Cypress Golf Solutions’ e-mails disputing the findings. In his e-mail, the author develops new calculations from a profitability perspective which claim to validate his calculations in the article. They use revenue from the golf course net total operating expenses and result in lower profitability for both barter scenarios he uses. Again, his implication is that bartering is less profitable for the golf course and should be avoided.

In summary, the author's assertions are based on one dubious assumption: that all courses sell a set percentage of their available inventory. However, he redefines the available inventory for those courses participating in a barter system and applies the fixed sale percentage. In order to accept this assumption, the author would have to produce evidence that courses participating in a barter system sell fewer rounds of golf than other courses. He does not present any evidence to indicate this.

In addition, the author uses a flawed cost allocation model as a way of backing up his assertions. We explain why this cost allocation model is not mirrored in other similar industries and why this model would lead to bad long-term pricing decisions.

Finally, we present analysis that indicates the opposite of the author's assertions. Courses participating in a barter business model are more profitable under the author's assumptions, especially in the case where they are interfaced. In the case where they are not interfaced, we present a decision threshold for choosing which tee times to barter in order to be confident they are achieving better profitability than their counterpart courses.

Analysis
The article published on April 3 has several accounting and mathematical flaws that skew the results of the calculations. In addition, the response from the author on April 14 contains another accounting flaw in an attempt to calculate a full-profitability analysis of the three options. We will address those flaws and propose more accurate calculations on a number of topics:

• Cost allocations for “spoilage inventory”
  
• Profitability analysis for the three business model scenarios
  
• Faulty application of statistics in the second barter calculation
  
• Faulty profitability analysis in the April 14th e-mail
  

Cost Allocations for “Spoilage Inventory”
In the newsletter article, the author uses a simple cost-allocation formula to estimate the cost per round of golf to the course. His formula is:

• Cost Per Round = Operating Expenses / Weather Adjusted Capacity
  

However, since this is time-sensitive inventory which will “spoil” if not used in time, it would be more appropriate to calculate the cost per round based, not on the weather-adjusted capacity, but on the entire capacity. Essentially, weather-adjusted capacity omits “spoiled inventory” as well. Thus, the author chooses to ignore one type of spoiled inventory, but does not discount unsold rounds, or rounds that will go unsold eventually, as spoiled inventory as well. Thus he overstates the cost per round.

In order to establish a true cost per round, one must either use all capacity or divide by unspoiled inventory, which would exclude rounds that will go unsold.

Other businesses with time-dependent inventory tend not to use this cost allocation method. For example, in the airline industry where the inventory is time-dependent as well, if they were to use this profitability metric, they would make very different business decisions than they do now.

Imagine a flight with 150 seats costs $30,000 to fly. The cost allocation method would mean that each seat costs the airline $200. If the day of the flight, the airplane is only 85% occupied, that would mean the airline would have 30 unsold seats and about to incur a loss of $6000. In order to avoid this loss, at the last minute, the airline would sell last-minute seats for $200 plus a very small margin to not incur this loss. As we all know, airlines do not do this. In fact, once the airline is leaving “profitably”, the airline will sell last-minute seats at a premium to accommodate low-price sensitivity demand. They will do this even if it means that several seats will remain empty.

In fact, quite to the contrary, when it becomes obvious that these seats will remain empty, airlines often comp these seats to airline employees or accommodate stand-by passengers. They certainly do not incur a $200 per seat loss for these non-revenue passengers. They calculate their profitability based on the sold seats for the flight and make sure that they cover the $30,000 operating expense for the day. They justify the non-revenue use of seats which would not have sold anyways, assuming the relative cost base of the seat is zero. They certainly do not book this as a cost.

Airlines make these decisions based on their ability to maximize their profit for the flight. In some cases, lowering all prices in order to sell out every seat is not as profitable as charging a higher price and leaving some seats unsold. This results in more total profit for the airline. They would never be able to achieve these results if they used the cost-allocation method proposed by the author.

It is clear that in the hotel and airline industries, which also have time-sensitive inventory, do not operate their businesses using this cost-allocation model. Golf courses should take the lead of the travel industry and calculate their profitability based on the total capacity during the day, not for each round – or “seat”, if you will.

The author's approach ignores the simple fact that if the golf course maximizes its profit during a day, they may in fact leave holes unsold. His method simply “pushes peas around on the plate” – creating losses for unsold holes and overstating profitability for the sold ones. This method is misleading and doesn’t allow the cost structure necessary to achieve maximum profitability. A better approach would be a full profitability analysis of the course on a particular day.

Profitability Analysis for the Three Business Models
We will take the approach of analyzing the profitability of the course on a particular day, after which the inventory spoils and has no value. We will use the following assumptions. The average golf course sells 52.3% of all rounds on an average day for an average of $30.52 per round. Their capacity is 64,296 during a 9-month period, and therefore the course has approximately 234 rounds per day to sell. In addition, the author quotes operating expenses of $749,196 which amounts to approximately $2,725 per day.

Model 1: Commission Model
Assume that third-party sells only 5% of the course’s rounds on a particular day and pays a 10% commission per sale. On that day, the golf course takes in:

• 234 x 52.3% x $30.52 = $3,735
  

They pay a commission on 5% of the sold rounds or:

• $3,735 x 5% x 10% = $18.68
  

Thus, the day’s profitability is:

• $3,735 - $18.68 - $2,725 = $991.32
  

The course nets $991.32 for the day.

Model 2: Transaction Fee Model
Assume a base fee of $100 per month (or $3.33 per day) with a booking fee of $2 per round. They have the same revenue and pay:

• (234 x 52.3% x 5% X $2) + $3.33 = $12.24 + $3.33 = $15.57
  

Thus, the day’s profitability is:

• $3,735 - $15.57 - $2,725 = $994.43
  

The course nets $994.43 for the day.

Model 3: Barter Model
Assume that the golf course sells the same number of rounds as they do in Model 1 and Model 2. They have no variable outflow in this model and net:

• $3,735 - $2,725 = $1,010
  

The course nets $1,010 for the day; making the barter model the most profitable.

Let’s say one objects to the assumption that the number of sold rounds is not the same since the inventory at the beginning of the day is down 4 rounds. In order to buy into the author's mathematics, you would have to assume that two of those rounds would have been sold had they not been bartered away. This analysis requires more data than is available, but we can make some assumptions.

We approach it by analyzing two cases, one where the course is interfaced with bartering software, and where it is not.

Case I: The course is interfaced, so that the bartered tee time can be changed if it appears it will sell otherwise.

Here, the only way the barter will result in a loss of revenue is if the course sells out to 98.3% on a particular day (since the bartered tee-time only represents 1.7% of the inventory.) In order to calculate this probability, we would need to know not only the percentage of sold rounds in average, but the variance of sell-outs day-to-day.

Given that this percentage was calculated over 275 days, we calculate:

Therefore, the z-score for one particular day selling out over 98.3% is:

This represents a one-tailed probability under 0.000001. In other words, practically speaking this would happen infrequently. Therefore, the profitability calculation above would work. There may be the odd day where it happens, but on average, there would be no revenue lost.

Case II: The course is not interfaced, but selects its bartered tee time during spots that are not likely to sell.

Here, the barter will result in a loss of revenue if the tee time that hasn’t sold very often, suddenly sells. Instead of calculating the probability of being wrong, we will calculate the “sales threshold.” We define the “sales threshold” to be the percentage of times the tee time has sold over the last 9 months. The goal is to select a tee time under the “sales threshold” in order to breakeven with the best case scenario among the business models (Model 2) with an average daily cost of $15.57.

If p is the probability of selling a bartered round, then average lost revenue per round associated with a barter is:

• $32.52 x p
  

We need to add up the chances of selling one of the rounds, two of the rounds, three of the rounds, and potentially all four of the rounds. In addition, we want the sum of the lost revenue to be less than the cost of model 2, $15.57:

• $32.52 x P(1) + $61.04 x P(2) + $91.56 x P(3) + $122.08 x P(4) < $15.57
  

Where P(n) = the probability that n of the rounds would have sold during the bartered tee-time. This is:

If we solve this equation for p we find that p < 12.75%. We want to be 95% confident that we choose bartered tee-times that are less than 12.75% likely to sell. Using the Binomial Distribution, we find that we need to choose a tee time that has sold less than 8.8% of the time during the last 9 months. Our “sales threshold” is 8.8%. If we choose a tee time that has under our “sales threshold”, we are more profitable than the best competing model (Model 2).

Note that this calculation is overly conservative because it makes a strong assumption: if a bartered round would have sold, it could not have been sold at a different available time – in other words, you lost the business entirely. This certainly doesn’t happen often, and therefore, we believe the calculations from Case I are more appropriate. However, Case II forms a worst case scenario.

Faulty Application of Statistics in the Second Barter Calculation
As a side note, we want to address the second cost calculation the author makes in his article. He claims that a “Vegas-style” analysis of the cost would result in a $17,558 cost for bartered time. He comes to this number by asserting that there is a 52.3% chance of selling a round of golf.

This calculation is faulty in that it equates the percentage of rounds sold with the probability of a round selling. This is a common misconception among those not familiar with statistics, but it is incorrect. It assumes that all rounds sell with equal probability, which is clearly not the case. In addition, it ignores the variation of sold capacity over time. The actual probabilistic calculation is more involved, as we have shown above.

Faulty Profitability Analysis in the April 14th Email
Finally, the author responds in an e-mail dated April 14th that he has considered the fixed cost aspects of his calculations appropriately. He does this by calculating the number of rounds sold under four scenarios:

1. The commission business model sells 33,627 rounds in 9 months
   
2. The transaction fee business model sells 33,627 rounds in 9 months
   
3. The barter business model sells only 32,527 rounds in 9 months
   
4. The barter business model sells only 33,057 rounds in 9 months
   

The author provides no evidence in his article nor in his e-mail that golf courses participating in barter business models sell fewer rounds of golf. Again, his assumption is that sold rounds are a fixed percentage of the inventory available for sale. The entire assumption is dubious. If, in fact, courses participating in barter business models sell on average the same number of rounds of golf than other courses, then the barter business models would have sold a higher percentage of the available inventory than the other two models.

If all courses sell approximately the same number of rounds of golf, then the author's calculations would result in the barter business model being more profitable, rather than the other way around.

Conclusion
There are two main conclusions from this analysis.

1. The author's calculations do not appropriately reflect the “time-sensitive” nature of golf course inventory. A flat allocated cost model will overstate the value of unsold inventory, overstate the per-round profitability of sold rounds, and potentially lead courses to make bad business and pricing decisions.
   
2. With the appropriate data and especially with interfaced software, golf courses participating in a bartered software system can easily be more profitable than courses participating in other third-party models. We believe the threshold to ensure profitability is quite low and achievable for most courses.
   

Is Barter Really Better? Round Two ...

After several email communications with the author of "Online Tee Times: Is Barter Really Better?" we received the "numbers" behind their 3rd party cost comparison via email. The author also just disclosed these numbers in their most recent article "The Internet Tee Time Marketing Debate: Hardly a Consensus" printed in the April 17, 2006 edition of Outside the Ropes, Volume 5, Number 8, published by Pellucide Corporation.

Here are the numbers they used to refute our statements that the costs were not applied equally and the comparison was apples to oranges:

This was our email response to the author:

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With all due respect, we are tracking your math and just don’t agree with it or the way you presented it in OTR [Outside The Ropes]. We are going to recap something from the OTR article in hopes you will understand why your readers were mislead by your math.

“…Course Utilization is about 52.3%, which means that the average golf course theoretically has about 48% unsold inventory available to target for better marketing or for "bartering". Most golf course operators tend to view this unused inventory as having a "zero cost basis", so most bartering starts with the assumption that what they are exchanging has no value.”

The above paragraph is the key to how the reader will interpret your cost comparison. You are stating that the barter rounds come from the 48% unsold inventory; that is why course operators view them as having a zero cost basis and no value. The reader expects that you are now going to show how they do have a cost (and are even more costly than commission or transaction fees).

So if the barter is coming from the 48% unsold inventory here is what the numbers should have looked like in the email you sent us:

You said the cost for barter was $12,818 (not $0 as shown above). But if we replace the $0 with $12,818 we would have a problem, we would be double counting some of the fixed costs and comparing apples to oranges in the partner cost comparison; just like we said you did in our blog.

So, in order to support your partner cost comparison in OTR with the numbers in your email, you took 100% of the barter (1,100 rounds) away from the “Rounds Sold for Course” side of the equation; directly contrary to what you stated in OTR.

But even this is not fully consistent with your cost comparison in OTR; you said the cost was $12,818. But that is only part of what the course is loosing, if they would have sold the barter rounds then the loss (using your numbers) would be $33,572. Why did you not state that in OTR?

In the Barter 2 comparison you take about 52% of the barter rounds away from the “Rounds Sold for Course” (instead of 100%); leaving 48% sold for the course.

This is actually a better deal for the course, but you make it look worse in your OTR cost comparison, further confusing the reader.

As we stated in the blog, the most important question is whether the course would have sold the time or not. If they would have sold it, not only can you apply the cost ($11.65) but you should also apply the value the course would have received for the time. If the course would not have sold the time you cannot assign a fixed cost to it and compare that cost with other variable commissions.

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We have enlisted our yield management consultants (Cambio Partners) to also respond to the article. They will present a much more detailed analysis and provide an accurate model for determining the cost of bartered rounds in our next blog.

Cypress Response to "Online Tee Times: Is Barter Really Better?”

Our first posting is in response to a recent article titled “Online Tee Times: Is Barter Really Better?” printed in the April 3, 2006 edition of Outside The Ropes, Volume 5, Number 7, published by Pellucid Corporation. For a complete copy visit their website www.pellucidcorp.com.

We are responding to two of the main discussion points in the article:

1. The GolfSwitch Patent

2. The “Real Cost” of Tee Time Barter

The GolfSwitch Patent

The author makes several statements about the recently awarded GolfSwitch patent and the effects it may have in the marketplace:

“… it is our opinion that this is a major development and will fundamentally alter at least some processes of booking tee times over the Internet.”

“The patent award to GolfSwitch (or affiliates) may change the process for the better in terms of ease of use …”

“It is our opinion that the recent patent award to GolfSwitch will help clarify the position of 3rd Party Tee Time distribution …”

“How GolfSwitch decides to deploy its now patented application for use by golf courses will probably re-engineer the pricing examples in this analysis…”

The author, however, does not make any attempt to support these statements with an explanation of how the patent would have those effects.

The GolfSwitch patent, in our opinion, protects a very specific way of connecting users with golf course inventory through a real-time, multi-threaded (concurrent) communication approach; an approach not used by many competitors (including Cypress) because it is ultimately inefficient and less functional for the end user. The patent was originally filed in 1999 and, in our opinion, is an attempt by GolfSwitch to protect what is now aging technology; which has already been leapfrogged by Cypress and others.

The Real Cost of Tee Time Barter

The author starts by laying out the three major ways 3rd party distributors charge courses for their services:

1. Commission (up to 15% based on the inventory being sold)

2. Convenience Fee/ Booking Fee (usually $1 to $2 per round)

3. Barter (usually 1 Foursome per day)

The author discusses current golf course utilization rates stating that, “Utilization is about 52.3%, which means that the average golf course theoretically has about 48% unsold inventory”.

The author then estimates the annual operating cost of a golf course and divides it by the number of available rounds (adjusted for weather), to arrive at a per round cost of $11.65. It is basically another way to think about operating costs by assigning them to each round of golf.

What the author does next we find particularly surprising. He compares the three different charge models (1 through 3 above) and assigns the per round operating cost of $11.65 to only the barter times:

“If our average golf course trades tee space at the usual 1 Tee Time per day rate, this means they are trading 1,100 rounds (March - November); which make the cost of barter 1,100 X $11.65 = $12,818”

We strongly disagree with the author’s assertion that $12,818 represents the cost of barter. It represents the operating costs associated with 1,100 rounds of golf, regardless of whether they are bartered away, sold by the course (or any 3rd party) or not sold at all.

He further states that “Clearly, our cost methodology shows that the ‘barter option’ is the most expensive.” The author has compared apples with oranges by mixing variable commission costs with mostly fixed operational costs.

The costs associated with commission and convenience fees are variable; they will change depending on how many tee times are sold by the 3rd party distributor. In addition, those variable costs can be assigned to the sale of those specific tee times.

The cost the author assigns to the barter time is a fixed cost that applies to ALL tee times whether they are sold or unsold. It is not a cost that can be assigned only to the barter times. Comparing these different costs in the same frame of reference is inaccurate to say the least.

Consider the following example with one golf course using the 'Commission' model, one golf course using the 'Convenience Fee' model and one golf course using the 'Barter Times' model:

• If the 'Commission' model golf course stops using their 3rd party distributor could their costs change? Yes, they could save up to 15% in commission fees.
  

  
  

• If the 'Convenience Fee' golf course stops using their 3rd party distributor could their costs change? Yes, they could save $1 to $2 per round.
  

  
  

• If the 'Barter Times' model golf course stops using their 3rd party distributor do their costs change? No. Their cost is still $11.65 per round for every tee time sold or unsold.
  

So what does matter? The real question to ask is, ‘Would the golf course have sold the barter round without the benefit of the 3rd party distributor?’. To answer that question you should consider the following points:

1. As the author stated, golf courses are 48% vacant. So, if you used no method for selecting a barter time (other than random selection) you would start with almost a 50/50 chance of selecting a time the course would not have sold.

2. The golf course's tee time history can be reviewed to find tee times that are rarely, if ever, sold by the golf course. Unsold times are not usually sporadic in nature; they are usually grouped together and be can be easily, and repeatedly identified.

3. Just because a barter tee time gets sold by a 3rd party distributor, does NOT mean the golf course would have sold that time without them. The reason courses work with 3rd party distributors is because they have distribution and marketing expertise that the course does not.

In addition to the points mentioned above, Cypress employs the additional guidelines listed below to help ensure barter times would not have been sold by the course:

1. Cypress places no requirement on the barter time, other than it must an 18-hole tee time. The course selects the time and is expected to give Cypress the worst time of the day; meaning the hardest to sell and historically shown to rarely, if ever, be sold by the course.

2. The golf courses can change the designated barter tee time from day to day or week to week if they choose. They are not locked-in to a specific time.

3. Course utilization can be monitored and if it appears that the course may be able to sell the barter time, it can be moved to another, less utilized day.

4. On interfaced courses the barter time can be automatically reassigned if the golf course has an immediate opportunity to sell it.

Cypress barter times are sold through private channels, either through email clubs, membership pages or used as promotions to motivate and/or reward golfers for booking course times. They are not available for general public consumption.

If the golf course is concerned about the sale price on barter times, Cypress will set a mutually agreed to floor that the tee time will not be sold below. Keep in mind, a single barter tee time per day represents about 2% of the golf courses available inventory (weather adjusted). Overall price integrity cannot be eroded by price adjustments that affect only 2% of inventory.

In closing, let’s use the author’s numbers to talk about the real crisis that is going on in the golf industry, a 48% vacancy rate. Using the author’s numbers, that is a cost of almost $360,000 annually per course; in terms of lost sales, it is almost $940,000. Cypress believes golf courses should be working with anyone and everyone that can responsibly help them solve that problem. Discussing the specific form of payment at this point is secondary.

Cypress is not the only solution and we believe there are lots of distribution partners that can help golf courses increase rounds and revenue. The Cypress platform is wide-open; using our technology, the golf course can distribute inventory to any partner they choose. We are willing to work with anyone the course requests and we do not charge transaction fees for our service.

Our recommendation; golf course operators should start listening to the people that actually help them sell tee times, not the people who only sell them information.

For a free Cypress whitepaper please visit our website and complete the online form www.cypgolf.com

We welcome any and all feedback right here on our blog. However, we are very busy growing our business and helping golf courses throughout the country increase their rounds and revenue, so we will probably not have time respond to every comment in a timely manner.