Sunday, October 19, 2008

Profit-maximizing Revisited

This is a followup to one of my earlier posts, profit-maximizing an amusement park. I have recently read that at Kings Island this fall, while soft drinks are still $4 for a large and the souvenir cups are $6.99 with $1.99 refills, the park is advertising a passholder drink wristband that gives unlimited drinks for $8.99. I find this to be pretty interesting. I should also note that this past summer at SFGAdv we saw a deal where a $12.99 souvenir cup came with free refills all day. So it appears that the "big parks" are at least toying with different ways to do the "unlimited drinks for one fee" thing.

Why are the price of drinks of important? The bottom line is that soft drink sales are the backbone of many amusement park's bottom lines. Soft drink sales are almost pure profit. The soda itself comes down to mere pennies per cup, the cups are usually a few cents above that unless you get a plastic mug, and the amount of labor to pour a soda is still pretty cheap. I've heard it said one time that soft drinks are usually the profit margin for all of Disney. They pay all their expenses out of everything else and soft drinks are the extra. Expenses go up? Raise soft drink prices.

With the current economy, will we see one of the big park chains go for it and incorporate this fee into the gate and offer guests unlimited drinks à la Holiday World and others? Or at the very least will we see more parks try this unlimited drinks for a fee approach? Or maybe as an included perk of passholders rather than a passholders-only upcharge opportunity? Lots of ways to use it.

I like the wrist band idea, incorporating it into the price of a season pass and just swiping it at the concession stands instead. So what would the right price would be for bumping up the pass price? One thing to be afraid of is the sticker shock would set in pretty quickly doing this to a season pass. Most park's season passes are the price of three or four regular admissions. If a park like KI is doing unlimited drinks for $9, then the cost would probably be $30 to $40. I don't think $130 would be too much to ask for a season pass that offers unlimited drinks. Look at HW pricing and their season passes are exactly in the range. The beauty for a chain like CF is that they could still offer a platinum pass with chain-wide admission and parking, add drinks to that list and still offer it for under $200. The big chains have already started including parking with season passes and now they're offering drink deals - it can't be much longer before someone makes unlimited drinks an included perk. Again, thinking of the economic fears in general, I'd say this offseason is the time to impliment any sweeping pricing change that may become permanent. The timing for a big park to try it just seems right.

You can speculate all you'd like about how many drinks people buy, but KI is telling us - it takes $9 to make unlimited drinks work for us. The park has the numbers- they know what the drink per cap is: take drink revenue and divide it by the number of visitors and get a number that represents the average amount spent by a guest on drinks. All you have to do is round up a buck and everybody wins. The park increases revenue and the guest feels like they're getting a deal. It offers incentives to buy passes for people who otherwise might not (increased revenue) and gets a certain amount of money for drinks up front (guaranteed revenue) and very little in the park has to change (just the system for verifying passholders - if even).

It's as simple as multiplying that by the average number of visits a season pass makes - and if we assume the price of a pass compared to the gate tells us that number then we're at about 4 visits on average. Voila! $36 on a season pass and you get free unlimited drinks.

Parks are doing it. Holiday World, Lake Compunce, Magic Springs - please tell me you're not naive enough to think they aren't getting their drink money upfront. Change is scary to people. The flipside is that people adapt and forget very easily. But people seem to go happy-stupid when you say unlimited or free and, as I've mentioned, I think the timing is right with the economic fear and all for someone to take a stab at it on a bigger scale.

Here is an example: If Joe Sixpack pays 5 dollars per visit on drinks and visits six times a year, that is about $30. Sue Lugnuts pays $5 per visit on drinks and visits three times a year, which brings her amount to $15. total profit for the park at the end of the season from Joe and Sue is $45. Joe and Sue both buy season passes with an extra $25 tacked on. The total profit is $50. Voila! The park made $5 more. You may argue that Joe and Sue will drink more because it is free, but the cost of making drinks is peanuts, therefore that is a moot point. Also, by the third or fourth visit Joe and Sue have forgotten that they paid $25 extra dollars and see the park as that much more of a value. In turn they may spend more money on food, souvenirs and games.

I really like the idea of bumping up season passes even more and then including drinks as a perk. (thus pushing more passes and getting a pre-guaranteed amount of drink revenue in the process at a time when people are supposed to be afraid to spend)

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