Pricing A Theme Park For Profit

If you’re a regular around here, you’d know by now that I don’t know the first technical thing about phone systems – In know how to market and sell them, but that’s where it ends. 

And boy was this emphasised a few years back – after spending 3 or 4 days sitting through presentation after presentation at the Alcatel-Lucent global conference in Paris, France.

I’d been flown over by the Australian Distributor, due to the amount of units my company Infiniti Telecommunications was moving at the time, which was a great honor. And except for the keynote presentation from James Surowiecki, author of The Wisdom of Crowds, everything that was said at the english speaking conference, may has well been in French.

As soon as the conference ended, and I had a spare day or two, I couldn’t wait to jump on a train and hit up EuroDisney.

I’ve always had a fascination with amusement parks, and try and visit DisneyLand or Universal Studios each time I’m in LA for an extended period of time… so spending the day unwinding, and dealing with stuff more on my intellectual level was a welcomed relief from the onramp 10 port mix board conversations I’d been thrown into at the conference.

So when I came across this fantastic cases-study by Peter Hill, author of Pricing for Profit: How to Develop a Powerful Pricing Strategy for your Business on the work he did with Dr Fun’s Amusement Park, I had to republish it here. It’s a great real world look, at a number of pricing for profit strategies, implemented successfully in a UK theme park Peter worked with.

Enjoy…

Amusement_Park

Dr Fun’s Amusement Park Case Study

I got involved in this business almost immediately following the most fantastic 4 days of my business career. In 1996 I attended what was called “The Accountants Bootcamp”. I could write for days on issues covered and the impact on me and my business, but once again that is not the remit of the book.

The point was that I came straight out of this brilliantly energetic and inspiring course and was asked to talk to Jim, the son of the owner of Dr Fun’s Amusement Park.

Now I knew the business having visited it many times with my own family, and having spoken to another of my clients who knew the family well, and who made the introduction to Jim.

The first meeting went well, and I used a great bit of computer modeling software that explores the impact on profit of small changes to the number of customers, how often they buy, the amount they spend, pricing and overheads etc. (Download the free iPad App Pricing for Profit to see this for yourself.)

Jim was almost knocked off his chair with the massive potential to improve profits, and arranged for me to present to his whole family within a couple of days.

This was a typical family business. John (father) founded the business on the back of a hobby for steam trains that simply got out of control. Jim, his brother Andrew and his wife Sarah, and Johns wife Maureen, all worked in the business, and none of them had any training in how to run one.

Once again the family was knocked off their chairs by the ideas and financial analysis I showed them. The only blockage was a family “advisor” Peter, whom I had crossed swords with before. At the end of the presentation when I asked for questions, Peter was the first to speak. He nodded wisely, and said

“You haven’t told us anything we don’t already know”,

And followed this gem with

“And to be honest the ideas you have suggested are pretty simple ideas that anyone could come up with, most of which I have already suggested to the family”

Peter sat there with a smug look on his face. The family said nothing and waited for my response. I didn’t want to get into a complex argument, experience had told me that many people like Peter manage to get under the skin of family businesses and rightly or wrongly the family will side with them in a punch up.

I chose to agree with him. I said that he was absolutely right, 99% of what I do is common sense, and I would hope that he would indeed have explained these ideas to the family already. It really isn’t rocket science.

The killer question was though…

“What have you done?”

I sensed a reaction from both Peter and the family, so I drove home the knife. I asked how long he had been involved, and discovered that it had been 18 months, during which time the business had continued the decline that had been happening over the previous 10 years, but accelerating each year.

I then asked if he could tell me any single idea that he had put in place that would improve the financial performance of the company. He mumbled something along the lines of “it’s not a simple as that” which considering he had just commented on how simple the ideas where was a bit of stupid comment to make.

The final blow (and Jim had told me this in advance) was to ask how long they felt they could continue the current decline in the business before the Bank would pull the plug.

A walk in the park! Peter like many so called ‘business angels’ or ‘consultants’ talked a good storey, but simply didn’t do anything to change the business. Without change failure was inevitable. To quote again,

“It is a sign of madness to keep on doing the same things, and expect a different result”.

The Bank had in fact given them to the end of the season to turn the business around or hand the keys back.

I was home and dry and Peter was high and dry!

There was a lot to do at DFAP. The accounts were a mess, they had family issues about performance, and in fact thought that one family member had his hand in the till!.

We later discovered that theft around the park was rife, and other major problems went unchecked. A few of the big issues are explained below…

Mr_Blobby

Blobby, Blobby, Blobby!

To illustrate the scale of naivety, the family got mugged by Mr. Blobby! For those that don’t know, Mr. Blobby was a TV kid’s character made infamous by Noel Edmonds. If you haven’t seen him you were lucky.

Mr. Blobby was pushed very hard in the mid 90’s, and in fact appeared in many amusement parks, promoted by Noel Edmond’s company, ‘Unique’ under license from the BBC.

Unique had approached DFAP and persuaded them to build a very expensive indoor Blobby play house and to sign up to a 5 year contract to have Blobby as an attraction they could promote to bring in visitors.

Now it would be inappropriate to go into all the financial details, but I do want to look at the overall point and its relation to the concept of pricing.

Unique did a good job, and managed to get the family to agree to the large capital spend, an expensive 5 year license agreement and a daily appearance fee, based on the value of what was a huge “brand” at that time. There was of course a price for all of this.

When I got involved a few years later, I asked the obvious question of where were the calculations showing that the profit from new visitors would exceed the costs. There were none! The Bank, the Accountants, the lawyers, and Unique all failed to ask the right questions. What is the payback period? How many new customers do we need? Spending how much? To pay for all the costs of having Mr. Blobby in the park.

It is not for me to say whether Mr Blobby was a wise investment, but as an accountant I was appalled that such a huge commitment had been made without working out the financial dynamics. If the numbers had showed a need to double visitor numbers, the family and its advisors could have made a judgement as to whether that was likely. Without the numbers it was a stab in the dark.

Later in our work we undertook a customer survey to identify the key features of the park that the customers liked and that had influenced their desire to visit. By far the biggest reason for coming and also the greatest feature for satisfied customers was the range of steam trains running around the park.

Wow, would you believe it? Here was a family adventure park that had grown steadily over the past 20+ years on the back of its great steam train collection, and we discovered that the reason most customers came was…steam trains! They had been duped into spending massive amounts of money (The costs of Blobby alone had turned profit to loss in each of the previous 4 years) on the suggestion that it would increase visitor numbers and visitor spend, without a single document to back up the proposition.

Clearly a first step was to try and get out of the contract. Unique being the sharp and smart business they were had a watertight contract, and all we were able to do was to remove the daily appearance fee, and turn the play house into a “normal” indoor play zone without the Blobby branding. This still meant that the business was paying tens of thousands each year for a license to use Blobby that was worthless.

Do I blame Unique or Mr Blobby? Absolutely not. Their job was to sell the concept. It was DFAP’s advisors job to challenge the logic and debate the merits.

Cash controls

This was a business that operated almost exclusively in cash. The turnover of over £1m a year was around 20% credit cards, and 80% cash.

Bearing in mind mine and my firm’s background of accountancy, we were curious as to the level of financial control.

One key check in any retail outlet is to make sure that the ‘Z’ readings agree to the cash in the till. This shows the number of times the till was rung up, and the total takings for the day. Obviously we would expect the money in the till to be close to (but rarely exact due to human error) to the figure on the till roll total.

A sample check of 20 days takings showed 20 exact totals reconciled to the ‘z’ readings. To say this is rare is an understatement! Luckily each ‘Z’ reading shows a serial number which increases by 1 each time a ‘Z’ reading is taken. There were gaps of one or two numbers between each days reading, suggesting that the till was “zero’d” more than once each day.

What was happening was that someone would open the till at the start of the day, wait until an hour or so of trading had been done, and do a ‘Z’ reading. This effectively wiped the takings at that point out of the till. At the end of the day the ‘Z’ reading for the remainder of the day would show less than the cash in the till for the whole day and the extra was put into the employees back pocket. This meant they could always balance exactly to the second ‘Z’ reading, and they thought no one would know.

Well no one did know, because no one checked.

What did we do? Well we started to check and we made sure that everyone knew we did. We also hired someone who was a friend to work in the park for a week to see if they could find any more loopholes that staff were exploiting. He highlighted another abuse that we needed further research on to take further.

We found a company that could interrogate an electronic till to find out what had been done to the system that did not seem “normal” based upon their experience. They found an unusually high proportion of ringing errors. This is where a customer is given the wrong change and the till is reopened to correct the error. What appeared to be happening was that staff were giving the customers the wrong change deliberately. If this was noticed, then the till was opened without question and the extra change given. If it wasn’t noticed, they waited until a convenient point and then opened up the till and took the correct change themselves.

Once we had found these issues we very publicly caught our “spy” stealing and frog marched them off site and pretended to get the full force of the law on to them. This sent shockwaves through the park.

The effect was of course significant improvements in takings from each till.

Now the message here is that if you let people have uncontrolled access to cash, many people will take a small amount. Justifying it to themselves as the “unpaid hour that they did as overtime” so that they convince themselves it isn’t stealing. If this isn’t found, they repeat the process, getting bigger and more daring with the amount they take. Eventually it becomes a “perk” of the job, to compensate for the low wage rate and long hours.

Theft is theft, and cash must be controlled. You owe it to your staff to keep temptation out of their way. If you employ more than 5 people the odds are that simple human nature means that one of them is dishonest, so don’t leave cash control on trust!

Also, when you look at the price you charge, don’t forget to allow for stock losses, theft, shoplifting etc etc. It must be built in to the costs of your business.

Returning to the business, there were a couple of other big issues we looked at…

Entrance

Price increases

It was obvious from the very start that there was absolutely no sophistication to the pricing strategy of the businesses. In fact to call it a strategy is nonsense. All the pricing was based on “what we charged last year…plus a bit”.

To start with we look at the entrance price to the park.

Now it had to be said that this was a unique situation. We had been told that the bank had given the family an ultimatum to “sort it out or hand back the keys”. That meant two things…

Firstly, we needed to be bold and adventurous. There was no benefit at all in being close but under doing things, but we could afford to be aggressive to the point where it may have affected future seasons returning visitors as at that stage we were not likely to be in business anyway. Thus the only issue was short term financial success and we could worry about the future next year. In other businesses we do need to ensure that changes do not take us one step forward and three steps back.

Secondly, the sense of urgency meant that we had no time for sophisticated ideas, and that the family simply let us get on with the job. Once again in other businesses half of the battle is getting the existing owners and staff to understand and agree to any changes before they are made. They are always too conservative and lots of effort can be wasted in simply agreeing what action to take before any progress can be made at all.

So we looked at the price that was then £4.95 for a standard entrance, and increased it to £5.95, i.e. a 20% increase in the typical entrance fee. There were of course various discounts for senior citizens, very young children, and some family ticket options. However in principle we simple put all the gate prices up by around 20%.

You can imagine the reaction of the family. They felt that they would have an empty park the very next day. After some debate, we agreed to build in a safety net.

After a few phone calls we hired a market researcher (substitute pretty blond girl if it makes more sense). She was briefed with a clear script to be used if certain situations arose.

Now what we were looking for was any instance of a visitor arriving at the park, unloading the car, approaching the entrance and upon seeing the prices published on the large board at the entrance turning around and walking away. On the basis that the prices were not published anywhere else, we concluded that the only trigger points for a customer to react to the price hike were…

a) on the phone if they rang up to check (we covered this which is explained later in this case study)
b) At the entrance to the park on arrival
c) On the way out if they did not feel that the attraction had lived up to the cost on entry.

We trained the market researcher to look for any of the second category situations. If she saw a visitor turn around at the gate she would approached them and ask the question

“I noticed that you didn’t go into the park today, can I ask why?”

Now on the basis that the only critical issue they could have encountered would be the price on the board at the entrance, we believed that the response would always be…

“It was too expensive!”

She was then trained to ask them how much they had been expecting to pay. Now we did not care what answer they gave, it could have been £10, £20, £30 for the family, or indeed any amount at all.

What ever the amount suggested, she would then ask them…

“If I gave you a voucher that would let you go into the park for the day at the amount you were expecting, on condition that you fill in a customer survey form for us at the end, would you like to change your mind and go in?”

Now on the basis that we were letting them in for exactly the amount that they expected to pay, with a very small condition, we expected every one to agree to enter the park.

What this did was to give us a safety net to catch any visitors that may refuse to pay the new higher price. It gave the family the confidence to put the prices up for a week’s trial period and still make sure that they didn’t lose massive numbers of visitors.

The market researcher was hired and trained ready for the following week when the increase was put in place.

She had the most boring week of her life, as not one visitor turned around!

To be fair I had predicted that this would be the case. As a family man myself, I knew damn well that if I had packed the family into the car, driven for just 30 minutes, unloaded the kids, pushchairs and picnics, they was just no way I would turn right round for the sake of an extra £5 on the total entrance fee. Just the thought of the drive home with kids arguing in the back and moaning about a wasted trip, means it just wouldn’t be worth it!!!!!!

However, the principle of trying to build a safety net before making radical changes to any pricing structure is well worth looking at, and some ideas are explained elsewhere in the book.

The impact was dramatic. Gate receipts were of course up around 20%, with absolutely no additional costs. Consequently all of this went straight to the bottom line.

From a business and financial point of view this was a tremendous success. However, the family were still very uncomfortable about the simple 20% price increase. We agreed therefore to do two things to improve the value for money and make them feel happier with the increase.

The first thing we did was to focus on the core visitor, the children between 3 to 15. We produced a small goody bag for all the kids, which included a number of black and white train pictures to colour in, and some crayons to do it. We also included a “treasure trail map” with things to find and check off around the park, which were represented on various picture signs and symbols within the park.

This went down fantastically. Kids loved it. The problem was that there were around 800 to 1,000 kids a day! Eventually it simply became impossible to produce them quickly enough.

The big success was the FREE RETURN.

When we looked at the proportion of visitors that returned more than once, we discovered that it was a negligible number. These holiday makers went instead to other parks, or used the beaches or shopping centers around the area.

We concluded that these visitors were spending their money elsewhere, and we wanted more of it. The free return ticket simply said that anyone paying full price to enter the attraction could return to the park free of charge as many times as they like in the next seven days.

This proved an enormous success. What we found was…

  • A much greater appreciation of value from the customer
  • A reduction in complaints
  • More customers returning for part days, i.e. after a morning shopping, or when the sun goes in and the beach becomes a bit too cold.
  • A massive increase in spend per head within the park, as visitors that returned for free decided to spend more on food, drink, sweets and souvenirs etc.

Consequently we found the number of returning visitors increased to just over 21%. Now you can imagine the impact of 21% repeat customers, who whilst they get back in for free, were spending more when they were there!

In fact it turned many years of loses into a larger profit than they had ever made, even after our fees for the work which were based on the success of the project.

Once these changes were up and running we started to look at some other areas where pricing could be improved.

Amusement_Park_Food

Catering facilities

Within the park there were the usual food outlets with tea, coffee ice cream etc, and one main cafeteria style restaurant facility. One of the things I looked at was the average spend in the cafeteria, which looked very low. After a bit of research I could see that one problem was that it was connected to the indoor play area, and parents often sat with just hot drinks whilst watching their kids play. This could be for 30 minutes or more, and meant that the tables were often full of people with just drinks so that families wanting to eat in there just couldn’t be bothered to wait.

We therefore looked at lots of ways to increase customer numbers to increase revenues. This included staff dedicated to clearing and cleaning tables as soon as the previous visitors left, and placing a screen between the cafeteria and the play area so that parents had to use bench seating on that side rather than block up tables.

Whilst not directly a pricing issue, it is once again important to think about how easy it is for the customer to do business with you. Making a business streamlined so that you can get more customers through it is just as valid a way to increase revenue as putting the prices up.

Finally when we got the cafeteria into shape we looked at what customers bought and what the prices of each item were. The start point for any pricing strategy is to find out clearly what you currently charge and how much profit that delivers. We needed to find out for example how much it actually costs to sell a portion of chips, or the difference between the costs of a 7” pizza verses a 9” pizza.

This was actually an easier exercise than we expected as there were very good records and not very high volumes!

Let’s look at the pizza issue.

When we calculated the profit on the two main pizza choices we found the following data…

Cost to produce

Selling Price

Profit per pizza

Number sold per 100

7” Pizza

£2.90

£4.00

£1.10

50

9” Pizza

£3.20

£5.00

£1.80

50

Clearly what we can see from this data is that the costs of producing a 9” pizza are only marginally above the 7”. The labour costs to make them and the cooking time are almost identical, and there is only a small extra cost for the additional ingredients.

Now if you were in this business you would obviously want to sell more 9” pizzas than 7”, when at the time of our test, they actually sold almost exactly the same of each.

The question is “what can we do to encourage customers to move from the 7” to the 9”?

There were lots of ideas considered, such as…

  • Free extra toppings on the 9” at a cost of say an extra 10 pence.
  • Increase the cost of the 7” to make it appear much less value for money.
  • Decrease the cost of the 9” so that it seems better value than the 7”, but still at a higher profit.
  • We even considered removing the option of the 7” altogether.

Obviously there are pro’s and con’s with each option. Our preference was actually a combination of the middle two.

We reduced the 9” by 10 pence and increased the 7” by 50 pence. The figures then looked like this…

Cost to produce

Selling Price

Profit per pizza

Number sold per 100

7” Pizza

£2.90

£4.50

£1.60

40

9” Pizza

£3.20

£4.90

£1.70

60

As you can see, we were able to move 10% of the customers from the 7” to the 9” option.

The impact on profit for each 100 pizzas sold can be calculated as follows…

Old Prices

50   7” pizzas

 £1.10 profit each

=

£55.00

50   9” pizzas

 £1.80 profit each

=

£90.00

Total profit per 100 pizzas

=

£145.00

New Prices

40   7” pizzas

 £1.60 profit each

=

£64.00

60   9” pizzas

 £1.70 profit each

=

£102.00

Total profit from 100 pizzas

=

£166.00

As you can see, we were able to move the gross profit for each 100 pizzas from £145.00 to £166.00. An increase of almost 15%.

We called this “directional pricing”. I.e. we directed the customers to the products we wanted them to buy based on the profit we were making.

Conclusion

We did so many things for this business, and pretty much all of them worked. But the most astounding issue came at the end of the year and is something I use to make a key point.

Despite the huge profit we generated across the season, and the fact that the bank were back on board, Jim wanted to drop back to the old prices and remove the free return.

His logic for dropping the free return was that 21% of visitors came back for free, and if we therefore charged them £4.95 they would make a lot more money. He had forgotten the fact that these visitors only returned because of the Free Return offer, and that prior to this the return rate was negligible. He also ignored the huge increase in spending within the park from these customers.

His rational for dropping the prices back to the old level was based on a number of complaints. I asked him to explain and he said that he had needed to handle a large number of complaints about the value for money of the Park. Now I can sympathise with him as handling complaints is never fun. I asked him to tell me how many he had had.

The number of angry customers was 40. This could of course reflect families of say 5 people i.e. 200 visitors. These could perhaps be only a 10th of unhappy customers with the willingness to argue as opposed to simply never return. Perhaps 2000 visitors were unhappy.

But whatever the number, it must be put into context with the total visitor numbers. Across the same period they had 100,000 visitors!!

His reaction to a few complaints was to drop the price for 98% of customers that didn’t complain because of the 2% that might have been unhappy based on the 0.2% that actually complained. £100,000 less gate money to satisfy a handful of unhappy customers.

Excerpted from Pricing for Profit: How to Develop a Powerful Pricing Strategy for your Business by Peter Hill (978-0-7494-6767-8). Published July 2013 by Kogan Page. Copyright 2013 by Peter Hill. Reproduced by permission of Kogan Page.

about-pete
Pete Williams is an entrepreneur, author, and marketer from Melbourne, Australia.

Before being honored “Australia’s Richard Branson” in media publications all over the continent, Pete was just 21 years old when he sold Australia’s version of Yankee Stadium, The Melbourne Cricket Ground For Under $500! Don’t believe it? You will! Check out the story in the FAQ section (it really is our most asked question).

Since then, he’s done some cool stuff like write the international smash hit ‘How to Turn Your Million-Dollar Idea Into a Reality’ (+ the upcoming ‘It’s Not About the Product‘) and he’s created a bunch of companies including Infiniti Telecommunications, On Hold Advertising, Simply Headsets and Preneur Group.

Lots of other people think he’s pretty good too! He’s been announced as the Global Runner-Up in the JCI Creative Young Entrepreneur Awards for 2009, the Southern Region Finalist in the Ernst & Young 2010 Entrepreneur of the Year, and a member of SmartCompany’s Top 30 Under 30.

Download Pete’s First Book For FREE!

“Now that I've got the rights back from the publishers, if you enter your email address below, you can instantly download a free audiobook version of my first book, How to Turn Your Million-Dollar Idea Into a Reality.” - Pete