If your location-based leisure venue doesn't cater to the growing upscale market because you believe the cost of pleasing that type of customer will eat up any extra profits, this must-read article could literally change the way you do business. Read on to find out whether the affordable luxury market or the price conscious market is the most profitable business model.
Over the past several years, we have been writing about the growing upscale market, also known as affordable luxury and New Luxury. Even the Different joe for different tribes and Death of iceberg articles in this issue discusses the phenomenon of a quality market segment from the standpoint of coffee and food.
We have also written a number of articles about the importance of quality-of-place - the ambiance, décor, acoustics, level of finishes - and how that impacts attendance and revenues.
So we thought we'd take a look at how affordable luxury and quality-of-place (we'll refer to both as 'quality') affect the economics of developing and operating location-based entertainment facilities (LBEs).
The first thing to recognize is that not all customers are the same, and you can't please all the people all the time. So it is essential to target some clearly defined market niche. The difference between the Starbucks and Dunkin' customer described in Different joe for different tribes is a good example of this.
One of the potential market niches is quality. What quality does is target a particular market niche - the niche willing to pay a premium, or higher price, for that quality. We sometimes call this the value market, the consumers less sensitive to price and more sensitive to the value of what they get for their money. This contrasts to the price-sensitive market, where price drives the buying decision. Wal-Mart and Target are examples of these two different markets.
Now here's where it gets most interesting. The quality market is willing not only to pay a higher price, but also a price that generates a higher profit margin and profit per item sold. A business for the price-conscious consumer might be able to generate a particular margin for a particular type of goods, services or experience. An affordable luxury business will derive a higher margin for that same type offering, but one of a higher quality sold in a setting with a higher quality experience. So let's take a look at two very theoretical examples of businesses that sell widgets.
|Profit from Sale of One Widget|
So for a single widget, Business B gets a 25% higher price. But affordable luxury also generates a higher margin (25% versus 20%), so Business B earns a 56% higher profit per widget than Business A ($1.88 compared to only $1.20.)
Now you might want to argue that Business B has a higher cost of business to deliver the quality. That is 100% correct.
|Cost for Sale of One Widget|
The affordable luxury business has a cost of $5.63 to sell one widget, 83¢ more than the $4.80 for the price conscious business. But Business B still makes 68¢ more profit per widget. Quality pays.
This isn't just some hypothetic example. Research by The Boston Consulting Group, which is constantly researching and monitoring the New Luxury market, shows that New Luxury companies are only 20% of a category's unit volume, but capture 40% of its dollar volume and 60% of its profits.
So let's take the widget example and apply it to LBEs. There really is no difference, other than instead of offering customers a material widget, LBEs sell experiences: a game of bowling, a round of miniature golf, admission to edutainment play activities, a ride and also food and beverage. So if you offer people a quality experience, including food and beverage, in a quality environment, you can capture guests who will pay a premium. This generates higher per capita expenditures and higher profit per admission (this of course assumes the trade area contains the needed demographics/socio-economic lifestyle groups.) So LBE B that attracts the Affordable Luxury market can make a much higher profit with the exact same attendance as LBE A, which caters to the price conscious market -- even after accounting for the cost of a higher quality facility and higher cost of doing business.
The mistake most LBEs make is to think they are in a cost-conscious market, so they end up appealing to the lowest common denominator and totally miss the affordable luxury market. Quality is never designed and built into the facility and its operation. The affordable luxury customers will most likely not even come, or if they do, not every often. Just like the Starbucks tribe, they feel uncomfortable in a facility that doesn't match their aspirations (see Different joe for different tribes).
The affordable luxury market is out there in most trade areas. It is the most profitable business model to capture. But to do it, you have to offer quality as the Affordable Luxury consumer defines it.