Gaining Customer Buy-In Is Key Driver To FEC Revenue Growth

There was a time when the prospective operator of an arcade or a family entertainment center could start by reading the "vibe" of a city or town, choose the appropriate attractions, wheel in the games and open the doors. That was then, but this is now. Today, a fresh coat of paint, dim lighting and clever business name no longer guarantee success. Even a mall location, once the gold standard for arcade sites, offers no assurance about the cashbox. Success requires taking a series of quantifiable steps, beginning long before the first game is played and continuing through the life of the location. This is the process recommended by Frank Seninsky, chief executive of Amusement Entertainment Management and Alpha-Omega Amusements (East Brunswick, NJ), and an industry veteran who has witnessed just about every FEC iteration over the past four decades.

Seninsky pointed out that the amusement industry has become increasingly complex and competitive, and thus demands a higher level of professionalism and expertise than ever before. The good news, he said, is that the types of data collection and analysis, and the best business practices that once were the exclusive domain of large corporate entities, are now within easy reach of even a modest single-location operator.

Success in today's operating market depends, at base, on paying careful attention to patrons' per-capita spending, Seninsky emphasized. "It's a very simple concept uniquely conditioned by market areas within a city, or in some cases a region. What does the average person spend after deciding to leave home for 2 to 21â_x0081_„2 hours for leisure entertainment, including food?"

Consumers choose among alternatives. How much does it cost to go to the movies and purchase popcorn or another snack, and a cold drink? How much to patronize the bowling alley, rent shoes, bowl two games, purchase a slice of pizza and a soft drink, and visit the gameroom? And how much does it cost to visit an FEC? By researching the expense of consuming the equivalent time allotment within the area, the FEC planner can determine the average per capita spending rate.

Demographic information is available for sale by marketing companies that can provide surprisingly granular detail. Typically broken out by "mile rings" (e.g., a radius of 0-5 or 5-10 or 10-20 miles around the site), distances can be converted to travel times to demarcate the actual target market. A researcher can then study that market's demographic characteristics, including trends in entertainment budgeting and per capita spend, and relate this information to the FEC's pricing. Research could also project setup time, penetration rate and, ultimately, and FEC's potential attendance.

One simple formula Seninsky applies to an FEC site is: Gross Revenue = Average Per Capita Spend X Attendance. This is the average amount each customer spends per visit multiplied by the number of all customer visits yields gross profit.

The gameroom guru's definition of "attendance" includes customers who visit once or many times per year. "That's the simplest formula you can use to see the big revenue picture," Seninsky explained. "To increase gross revenue, either the average per cap or the attendance -- or both -- must be increased. However, you have to keep the per capita figure very close to its market-determined amount."

This is a key point, he insists. If patrons spend less than that average on each visit to the FEC, it loses money to its competitors. That loss also is incurred if a patron goes elsewhere to grab a snack. A facility for which a higher than average per capita spend is calculated might attract the region's higher-end socioeconomic segment, but it will discourage another large segment who either can't afford it or consider other entertainment choices better deals.

There is a relatively narrow range of per-visit spending in each area that comfortably fits local consumers' budgets while enabling the operator to design a viable business plan. "You have to hit that sweet spot. You have to know where your ranges are," Seninsky explained. "Part of what some in the industry are preaching is only to go after the high-end market, which is small -- and trending smaller over the past decade. I just don't see that as the only viable long-term answer for the FEC industry."

Seninsky's thinking is not far from the quip popularly attributed to pioneering fur trader and international merchant John Jacob Astor, who advised, "Serve the classes, live with the masses. Serve the masses, live with the classes."

The problem with going upscale, according to Seninsky, is the expense. The operator is going to spend a lot of money at the outset on rent, obtaining a prime location and remodeling or building the facility. Those expenditures, combined with overhead, add up quickly. Charging higher prices -- above the market area's average per capita -- will limit attendance, too.

There is also an element of the oxymoronic in discussing a "luxury FEC," Seninsky pointed out. "That's not who we are as an overall industry. What is an FEC? What is an arcade? History shows that our industry's roots grew and spread wide because we were known as the cheapest form of entertainment. FECs grew because we were a competitively priced entertainment option," he recalled.

"That's a dilemma when feasibility work is performed. There are dozens of specific ranges and criteria that must be adhered to, on both the revenue and expense sides, to predict with certainty the attendance and per capita spend figures. For example, on the expense side, a rent cost benchmark is 15% of gross revenues."

CALCULATING THE BASE

In one of the presentations Seninsky has made for industry groups, he asks the audience to imagine a 15,000-sq.ft. FEC with a surrounding population of 250,000 within 20 miles, a typical midsize market. This kind of location, given an average per capita spend of around $12 per visit, has the potential to generate about $1.2 million in revenue on an attendance of 100,000.

This performance looks pretty good, until he drills down into the really important numbers. Such an FEC will typically be visited by only 25,000 customers who walk through the doors an average of three times a year. That translates to 75,000 visits. Then add on birthday party attendance that will likely add 10,000 children visiting 2.5 times a year, which adds an additional 25,000 visits (20 parties a week with 10 young patrons per party). In total, that means it takes roughly 35,000 customers to produce the 100,000 visits that generate the $1.2 million. That participation is about 15% of the 250,000 market population. In much larger markets, FECs are grossing the same revenues with the same base of 35,000 customers (because there is more competition) and drawing much less than 15% of the market population.

Is there a way to expand the customer base to include a larger percentage of that 250,000 population? And, even more importantly, can the current customer base be encouraged to visit more frequently and spend the per capita on each visit?

Seninsky explained that operators historically have adopted a number of good and bad strategies in an attempt to increase revenues. These strategies include raising prices during peak periods; increasing marketing and advertising budgets to attract new customers; becoming more high-profile within a community through charitable and outreach programs; and lowering (or adding more value to) prices during nonpeak times. All these solutions have had a more or less positive effect in the short term, but didn't provide the kind of sustained revenue lift needed to sustain the operation over the long run.

"Look at the numbers closely," he advised. "You might discover, for example, that 3% of your customers have the potential to contribute 20% of your total revenue. What I've learned is that, if you want to make money, the first thing to do is create more VIP customers. These are a small group of people who come approximately once every two weeks. That's a direct revenue increase."

According to Seninsky, the VIP strategy has worked well at some venues during the recent recession. He reported that revenues at FECs with which he as worked actually have increased over the past six years, compared with other operations that have posted losses of between 15% and 30%.

"What are we doing right? The No. 1 goal was to grow our VIP programs," he observed. "And we've grown them to where the registered VIPs are producing 20% of our revenues. I believe this was a major reason why revenues were up."

As part of the strategy, Seninsky and his partners were aggressive in designing and implementing their VIP programs. Registered players who spent a pre-set amount -- $500 per year, for example -- received special VIP cards entitling them to a 10% discount on each visit, with no expiration date. The program also enlisted those VIPs to recruit other customers. For every VIP signing up a friend who registered for the program and spent $10, the sponsoring VIP received $25 in bonus credit.

Seninsky's group quickly discovered, within several months, that a large majority of VIPs brought in people who became the next group of VIPs. The "true cost" to the FEC of the $25 bonus credit is around $5. And there's more: roughly 90% of the newly minted VIPs began recruiting their friends as soon as they were awarded status. At one FEC, the VIP roster grew to more than 3,000 within a few years.

An essential part of Seninsky's strategy is to encourage members of the existing customer base who are not interested in becoming VIPs to do so. For his part, Seninsky must induce them to register, then provide incentives for them to bring in friends or family members, and get them registered in turn. If each customer brought in just one new customer, it could increase attendance by 35%. The benefit becomes even greater when the new customers start bringing in more new customers.

"Truthfully, I do not expect that revenues will double," he said. "But I do believe that a 25% to 33% increase is within reach. It's also a much easier and less costly alternative to simply banking on regular marketing strategies to increase attendance."

These are not new ideas. Casinos, bars and chain restaurants, among other venues, have been using similar strategies for years. And FECs themselves commonly market their birthday party services in just this way, enticing kids who attend one to book their own parties, or to return to the FEC as regular customers. What is relatively new is the ability (and the growing need) to apply these same principles to individual adult customers.

Instruction on the best FEC operational practices, not unlike the VIP customer strategy described in this issue, is available at Foundations Entertainment University, which assembles three times a year. This year's first FEU, class No. 35, took place during January in Phoenix. The next two sessions will be held in Chicago, Jul. 21-23, and Dallas, Oct. 13-15. The $489 tuition fee includes 2-1/2 days of classroom instruction; lunch and dinner on Tuesday and Wednesday (the special hotel rate includes a breakfast coupon); a Tuesday-evening tour of local entertainment centers; and a comprehensive manuscript book and CD. Informal one-on-one consultations with instructors enhance the value of the program.

FEU, now in its 12th year, covers financial feasibility, planning, design, financing, development, marketing and managing a successful location-based entertainment business. Frank Seninsky is a founding member of the faculty, which also includes Randy White, White Hutchinson Leisure & Learning Group; Jerry Merola, Amusement Entertainment Management; Alan D. Fluke, AEA Management Group; engineer Peter Olesen, Entertainment Concept; and Kevin Williams, KWP Ltd. Frank Price's Birthday University is usually held in conjunction with FEU.

Graduates of FEU's class No. 35 come from a wide variety of entertainment facilities operating in North America and Puerto Rico. They include operators of indoor and outdoor FECs, children's centers, parks for trampolines, skating or water attractions, bowling alleys and roller rinks, along with laser tag arenas, nature farms and arcade game operations.

Visit foundationsuniversity.com.