Sport and Recreation Management

 

A Question of Price

Pricing Sport and Recreation

What price do you charge for sport events or programs?

In Australia, many sport and recreation organisations are faced with the perplexing problem that the true cost of providing sport events and programs does not equal the price that people pay.

True Cost is greater than Price

There are many reasons why this is so:

1. Recreation is deemed to be not as essential as other living expenses

2. Recreation is an item in the personal expenditure budget that tends to be reduced or cut when savings need to be made or big bills have to be paid

3. People have expectations that the provision of sport and recreation is a government responsibility paid for out of taxes

4. Historically sport and recreation has been organised by volunteers for reasons of mutual self-help to keep costs low

If the true cost of providing sport and recreation is often greater than the price people pay, how can recreation organisations afford to provide the service? It is because the community pays in principally three other ways:

a)	Through their taxes - the government uses tax payers' funds to provide grants to recreation organisations e.g. for salaries of sports administrators
b)	Through their every day expenditure - corporations sponsor sport and recreation organisations and this sponsorship is just another one of the costs you pay for when you purchase any goods or services
c)	Through occasional extra items of expenditure - buying raffle tickets, attending fundraising nights, etc

This method of funding the gap between the cost of recreation services and the price that people pay works well provided that governments continue to provide grants, organisations are able to attract sponsors and there are enough energetic people to sell raffle tickets and organise fundraising events.

COST = User Pays + Govt. Funding + Sponsorship + Fundraising

For many recreation organisations the task of attracting sponsors is virtually impossible, for any real money that is. Similarly, the task of continually organising fundraising events is too demanding. This leaves many organisations dependent on government grants for survival in their present form. A loss or reduction in government funding usually leads to a drastic reduction in the level of service provided.

You may well ask what is to stop recreation organisations from increasing price if necessary?

The greatest worry is that an increase in price will lead to a decrease in consumption of services or a reduction in participation. This is basic economics - supply and demand curve theory. The question is:

How much will participation fall if price increases?

Look at these two different scenarios:

Scenario (a) - demand is inelastic

	Participation	Price	Revenue
Before price increase	100	$10 each	$1,000
After price increase	90	$12 each	$1,080

The net effect in scenario (a) is an increase in revenue. Although price increases 20%, participation decreases only 10%, therefore the change in participation is smaller than the change in price. This is an example of demand inelasticity. Goods and services that are deemed to be essential i.e. petrol is usually inelastic. People have to buy essential goods whatever the price.

Scenario (b) - demand is elastic

	Participation	Price	Revenue
Before price increase	100	$10 each	$1,000
After price increase	70	$12 each	$840

The net effect in scenario (b) is an decrease in revenue. Although price increases 20%, participation decreases by 30%, therefore the change in participation is larger than the change in price. This is an example of demand elasticity. Most goods and services tend to be elastic. If the purchase price of a Nissan car increased 10%, the number of buyers would probably plummet - they would buy Hyundai or Toyota!

The next question is:

Is sport and recreation elastic or inelastic?

The main reason why recreation organisations are fearful of increasing prices is because people believe that sport and recreation is elastic. But is it? If your favourite game is tennis and the cost of a nights tennis increases from $8 to $10, will this result in you taking up some other sport? Or will the price increase result in you giving up sport?

The answer to these questions depends not only whether people are so hooked on tennis that a price increase makes no difference but also on another very important concept - perceived value.

Let's introduce another equation:

The customer will be satisfied when	Cost = Perceived Value
Customer will be unsatisfied if	Cost is greater than Perceived Value

The simple statement that an increase in price will have a detrimental effect on the organisation is not necessarily true. If the new price (after an increase) is in equilibrium with the customers perceived value of the goods or services you are selling then the effect on consumption or participation may be very small or negligible.

The next question is:

What happens if we decide not to increase price?

Well that's fine! If you feel that the risks to participation are too great then do not increase price. However you should be aware of some underlying market forces.

In recent years, the consumer of sport and recreation services has been winning in two ways:

1	The range of recreation services and activities has increased greatly over the past 30 years. Technology brings new forms of recreation. The number of sports is increasing.
2	Sport and recreation services and activities are being more professionally organised than ever before
3	The number of facilities for sport and recreation is increasing.

But some providers of recreation services have been losing. They are losing because:

1	The marketplace for recreation is becoming ever more competitive
2	Recreation organisations are faced with new costs that did not exist 30 years ago to the same extent e.g. player insurance, salaries, promotion costs

In effect what has been happening in the last 30 years there has been steady progress in the quality and quantity of services provided by recreation organisations. This progress has escalated costs. On the other hand, the competitive nature of the recreation marketplace has ensured that prices charged by recreation organisations have not kept pace with rising costs. This gap between costs and revenue has in many instance been filled by commercial sponsorship or government grants or both.

This gap between costs and "user pays" revenue will be difficult to close. Recreation organisations may find difficulty increasing prices to reflect true costs unless they simultaneously increase their efforts to promote the value (the perceived value) of their services to their membership and the community.

If ever the extent of public funding of sport and recreation organisations is cut then any or all of the following may occur:

a)	Some recreation organisations will go out of business
b)	Some recreation organisation will survive by increasing prices to reflect the true cost of service provision
c)	Some recreation organisations will survive by paring back their service provision to a more affordable level.