Economic Model

Example of a Country Club's Summary Income Statement

1. Answer the following questions about four elements of your firm's economic model:

Revenue Drivers

• Is there a wide variety of revenue drivers or only a few? wide variety! dues, golf, food & beverage, tennis, golf, fitness & aquatics, spa & salon, childcare and card play.
• Are prices negotiable? No
• How often do they change prices? Is it frequently (hourly, daily, weekly, or biweekly)? Moderately frequently (monthly, bimonthly)? Or rarely (semiannually, annually or longer)? Rarely, prices are reviewed annually during budgeting and changes are made at the start of each annual season
• Do they use bundling, market segmentation pricing, loyalty schemes, etc? I'm not sure, but I think it might be market segmentation pricing. For example within Food & Beverage we have several restaurants ranging from causal to formal with accompanying prices so the members can self-select to be customers of the desired price/restaurants.

Margins

• Are their margins relatively low (e.g., a grocery store) or high (e.g., a jewelry store)? Margins are low since we are a not for profit. In fact since dues are collected each year to effectively subsidize our prices, our budget reflects a target loss to hit for each department. However the organizational overall breaks close to even but to the good, and the more to the good the better.
• Do they offer highly customized services which allow me to charge significantly higher prices? We do offer highly customized services such as our catered events and our special requests for menu items in the restaurants given 24-hour notice, but we still follow our not for profit price formula to set the price.

Volumes

• Do they have significant capacity constraints? Absolutely, and they are based on the physical space of the facility. Just like any restaurant we can only sell as many tables as we have, just like a tennis court we can only have as many players as we have courts, the spa and salon is constrained by how many pedicure chairs we have, etc.
• Are they a relatively high, medium or low volume business? Every usage of the facility, even the no-charge included usage is a transaction in our point of sale system. Every meal is a transaction in the restaurant, every manicure is a transaction from the salon, etc. but also "free" usage of the gym is a $0 charge transaction to track customer usage. It feels like a high volume business.
• What is the quantity of items sold relative to the competition over a specific time period? We look at daily, weekly and monthly volume. Whether we are high, medium or low comparatively varies, we certainly don't compete with a national retailer like Target, but we are also defnitively busier than neighboring salons or tennis centers or residential country clubs. However, our retail spaces are small so clothing and equipment purchases are much lower than a neighboring retail store with more choices and the ability to offer steep discounts. Our season matches competitor seasons, so volume analysis stays comparable throughout the year. Of our 3,600 members we can have up to 1,200 (a third) come on property as customers in a typical day, and on special occasions and events much more.
• What is the average value of a transaction in the business and how does that fare against competition? I cannot get you this data.
• Do they offer highly customized services which decreases the volumes they can handle, or are their goods and services very standardized allowing them to increase volume? We offer both highly customized services and standardized services, but both are easily processed as part of our volume. We overcome slow downs in customization by making it standard to offer it, so everyone from line staff to managers are prepared to process the transaction.

Cost Structure

• What is the business’s proportion of fixed to variable costs? If they have a high fixed costs structure, they have high operating leverage which means it takes longer to reach breakeven, but once there, much more of your revenue flows straight to the bottom line. High operating leverage (high fixed costs) suggests a riskier venture, at least initially. Fixed costs are very high, anywhere from 50-66% of the a department's revenue, so profit margins are very low and breaking even is a big part of our financial analysis.
• Do they outsource so as to convert certain fixed costs into variable costs? No, outsourcing is not part of our model. We only outsource valet and housekeeping services, which are also essentially fixed. We need the whole building cleaned regularly, so that is fixed cost, and we make sure valet is available each day, so we can only vary it either by closing early if no customers dine late at the Club or by staffing up if we have a big event.

2. Draw conclusions on the attractiveness of the firm's combination of margins, volumes, operating leverage, and revenue drivers:

It's tough to determine the company's "attractiveness" since we are a not for profit. Definitely hitting target losses to "break even" or do better than breaking even are great financial benchmarks that mean we had a good year.  We focus on measuring our success by how happy our members are, so we do lots of surveys and collect constant feedback about member satisfaction, and talk less about how much money we are making. Managers have to keep an eye on both however because members may say they are happy but if they aren't using the Club, they aren't putting their money where their mouth is or voting with their feet!