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Self Capitalizing Gratuities

April 1st, 2007

The Houston Zoo recently had an offer that they would give you $1 off your admission during spring break if you came to the zoo via Houston Metro (our bus system). This, in effect, paid for some, possibly all of your transportation to the zoo.

Why would they do this during the busiest week of the year? I mean, every spring break, they have more people than they can even get into the zoo. Why would you offer a discount to anyone during your PEAK season? That’s when most companies RAISE their rates.

The answer of course, is that the offer was a self-capitalizing gratuity (SCG). This is a term for discounts that actually pay for themselves through the increased revenue they generate.

As an example, let’s look at The Houston Zoo during spring break. We are members of the zoo so we don’t pay admission at all, but we also don’t visit during peak days and times. However, we spend a lot of time in the museum district where the zoo is located (we are also members of the Houston Museum of Fine Arts and the Museum of Natural Science) and can tell you that during peak times, every parking spot within miles is long gone.

So what usually happens is the parking lots fill and then the streets fill and then people begin parking illegally and the parking tickets begin to flow and people change their plans and go to the beach 60 miles to the south instead of fighting all the traffic.

By encouraging people to visit via public transportation, the zoo is able to free up parking spaces for those who didn’t know about the discount or couldn’t take advantage of the opportunity for some reason. The zoo, you see, can hold far more patrons than it’s parking lot can hold cars. So when the parking lot is full, the zoo still has plenty of room for visitors.

Some have suggested that the zoo remove the 280 granite blocks that form the courtyard and replace that area with a paved parking lot. While this would help the zoo on a small level it is not as cost effective as the implementation of a well-crafted SCG.

Be careful not to confuse SCGs with SLGs (Self-Liquidating Gratuities). SLGs pay for themselves, but don’t generate ADDITIONAL income. For example, when you offer a discount for a library system that books you for two shows instead of one, you both benefit. But the additional show is effectively done at a discount.

This is not a problem but recognize the difference between having something pay for itself (SLG) and having an offer than brings in 100% pure profit. SCGs are self-CAPITALIZING, in that they bring in only pure profit. When the zoo offers a discount for someone who rode the bus, that patron is (in effect) pure profit since if they would have come in a car they would not have been able to enter the zoo at all. There is no additional cost to the zoo to have that patron enter so their entry fee thus has a zero cost base.

When you further calculate the average concession sales that each customer makes, you can see that SCGs are a great way to grow a business.

If you are considering new ways to grow your business, think hard about how SCGs can help you out.

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