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The Reston Recreation Center Market: Usage & Revenues under Different Pricing Strategies Terry Maynard, June 8, 2013

Issue: What is the market for a Reston recreation center and what are the impacts of managing it with different pricing strategies? A partial answer, focused on aquatics, is presented in the attached spreadsheet based on data in B&D’s 2013 market update. The following is an explanation of what the spreadsheet shows. At the top of the spreadsheets are B&D’s 2013 tables of the “Participants” and “Participants Most Likely to Use Private/Public Facility” by activity taken directly from its report (p. 2.7). They show the Reston and non-Reston (two circles) markets for each activity planned for the new recreation center. In the light blue columns on the right, I have totaled the non-Reston numbers and calculated the non-Reston potential share of the market. In both cases, the potential non-Reston market share runs at better than 90%. The third table below the two preceding tables uses the “core” user data from the table just above and shows how many of the non-Reston “core” users would use the recreation center under varying assumptions of “capture rate”.   The first row (YELLOW) uses the assumption in the B&D analysis: 95% of all users are Restonians. The next few rows show the number and share of users under varying assumptions of nonRestonian usage. The GREEN row (10%) reflects what B&D characterizes as a “conservative” estimate of non-Reston “capture rate,” that is, 10% of the “core” users who do not live in Reston will use the facility. The RED right-hand column shows the percentage increase in recreation center use by using one of the more realistic estimates (including the “conservative” 10% estimate in GREEN) over the base (YELLOW) 95% Reston usage assumption. The point is that usage would nearly triple if 20% of the non-Reston market used the recreation center and nearly double under B&D’s “conservative” 10% non-Reston usage norm.

The next table down does exactly the same thing as the preceding table, except that it restricts itself to the aquatics market—since it is the key market driving the recreation center proposal and I wasn’t going to try to work through all the sub-markets. It shows that aquatics usage would double if 20% of the non-Reston market participated and increase by about one-third using B&D’s 10% standard. Next is an effort to understand how two alternative pricing structures—Low Rate (Reston-focused) and Market (competitive pricing)—would affect usage and revenues for the recreation center. Again, I simplified the task by looking only at the “adult daily admission” cost structure; there are literally dozens of cost structures by age and duration (20-swim, yearly, etc.). Nonetheless, I believe this simplification does not distort the results because RCC (& the B&D study) apply the same pricing structure alternatives 1

to all the prospective recreation center’s activities. As a result, the tables don’t show actual usage and revenues for everything in the recreation center, they are indicative of the relative impacts of changing prices and participation assumptions. The ensuing four tables look at the impact of different pricing structures. Each is these tables has a salmon-colored heading.  The first table shows the impact of changing participation assumptions affects usage and revenues under the Low Rate schedule for daily adult swim admissions, that is, $4.00 for Restonians and $8.00 for non-Restonians in Fairfax County. (Non-county participation is so small as to be irrelevant to this limited analysis). The YELLOW row shows the base case described by B&D: 95% Reston participation. The ensuing rows show how usage and revenues increase if higher rates of non-Restonian participation occur. The RED right-hand column reflects the percentage increase in revenues over the base ( YELLOW) case. Two key points: o Non-Restonian usage exceeds Restonian usage at a less than 10% non-Restonian “capture rate,” and dominates usage at higher rates. o Revenues increase one and a half times at 20% non-Restonian participation and nearly half at ten percent non-Restonian participation. The next three tables examine the effects on participation at the Market Rate schedule under different assumptions of price elasticity (i.e.—the degree to which participation changes as a result of changes in prices). o The most surprising finding is that there is very little change in the revenue impact from the base Low Rate structure. Non-Restonian participation increases slightly and Restonian participation declines as elasticity increases, but there is virtually no change in revenues as elasticity grows. o More importantly, as reflected in the right-hand RED column, all three cases again highlight the growth in revenues and overall usage by assuming more non-Restonians to participate in the recreation center.

What this analysis does not examine is how much operating costs would rise with these operating revenues and usage. My guess, based on the basic generalization of economies of scale, is that the growth in revenues from the greater participation would outstrip added construction, debt service, and operating costs associated with the revenue growth. So what does this all mean? To me, it means that there is a huge untapped potential for a recreation center in Reston, but it lies largely in people who live beyond Reston. I believe it is unlikely that a Reston-focused, Low Rate price structure (as examined by B&D) will ever achieve a “successful” recovery rate (covering 80%-plus of operating costs), much less generate an operating surplus as all Fairfax County recreation centers have. The result will be that Restonians will see an increase in their local property tax rate. On the other hand, a Fairfax County recreation center in Reston based on the County-wide pricing structure would almost certainly achieve an operating surplus in my view. Not only would the needed tax contribution be spread more broadly (and equitably), but the dollar sum of that property tax burden is actually likely to be less than if the recreation center becomes a Reston-focused, Reston-paid for facility. In short, the proposed RCC approach would be an unnecessarily costly and inefficient use of tax dollars. 2

B&D Market Update 2013--Reston & Non-Reston Market Shares, Number & Revenues
All Potential Users Activity Fitness Activities Weight and Fitness Gymnasium Aquatics Total Core Participants Core Potential Users Activity Fitness Activities Weight and Fitness Gymnasium Aquatics Total Core Participants Reston 7,302 25,699 4,132 2,138 39,270 Participants 0-5 Market 5-10 Market 20,401 72,048 16,165 6,368 114,981 63,878 227,455 51,639 19,019 361,990 Total Non- Non-Res % of Reston Total Market 84,279 92.0% 299,503 92.1% 67,804 94.3% 25,387 92.2% 476,971 92.4%

Participants Most Likely to Use Private/Public Facility Total Non- Non-Res % of Reston 0-5 Market 5-10 Market Reston Total Market 24,462 3,035 8,039 32,501 91.5% 13,958 36,971 148,802 91.4% 111,831 3,534 9,592 38,749 91.6% 29,157 1,449 3,897 15,736 91.6% 11,839 235,788 91.5% 21,977 58,499 177,289

Rec Center Use by "Core" Users--Overall Market NonReston Reston % NonUsers Users Reston Users Assume 95% Reston Use 21,977 1,157 5% Non-Reston "Core" Use 5% 21,977 11,789 35% 10% 21,977 23,579 52% 15% 21,977 35,368 62% 20% 21,977 47,158 68% Aquatics Market Reston Users 1,449 1,449 1,449 1,449 1,449 NonReston % NonUsers Reston Users 828 5% 787 1,574 2,360 3,147 35% 52% 62% 68%

% Increase in Use over 95% Total Users Reston Use 23,134 33,766 45,556 57,345 69,135 46.0% 96.9% 147.9% 198.8%

Assume 95% Reston Use Non-Reston "Core" Use 5% 10% 15% 20%

% Increase in Use over 95% Total Users Reston Use 2,277 2,236 3,023 3,809 4,596 -1.8% 32.7% 67.3% 101.8%

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Usage and Revenue--Aquatics Market--Daily Adult Swim Admission Reston Users
Low Rate Pricing Structure Reston Revenues Price $ 4.00 Assume 95% Reston Use $ 5,796 Non-Reston "Core" Use at: 5% $ 5,796 10% $ 5,796 15% $ 5,796 20% $ 5,796 Reston Users Non-Reston % NonNon-Reston Users Reston Users Revenues $ 8.00 1,449 $ 6,626 76 5.0% 1,449 1,449 1,449 1,449 787 1,574 2,360 3,147 35.2% 52.1% 62.0% 68.5% $ $ $ $ 6,294 12,589 18,883 25,178 Total Users 1,525 2,236 3,023 3,809 4,596 $ $ $ $ $ Total Revenue 12,422 12,090 18,385 24,679 30,974

Non-Reston Users

Totals

% Increase in Revenue to Base "95% Reston Low Rate Pricing"

-3% 48% 99% 149%

Market Rate Pricing Structure with No Price Elasticity Reston Revenues Price $ 6.00 Assume 95% Reston Use $ 8,694 Non-Reston "Core" Use at: 5% $ 8,694 10% $ 8,694 15% $ 8,694 20% $ 8,694 Reston Users Non-Reston % NonNon-Reston Users Reston Users Revenues $ 6.00 1,449 $ 458 76 5.0% 1,449 1,449 1,449 1,449 787 1,574 2,360 3,147 35.2% 52.1% 62.0% 68.5% $ $ $ $ 4,721 9,442 14,162 18,883 Total Users 1,525 2,236 3,023 3,809 4,596 $ $ $ $ $ Total Revenue 9,152 13,415 18,136 22,856 27,577

-26% 8% 46% 84% 122%

Market Rate Pricing Structure with Price Elasticity = -.2 Reston Revenues Price $ 6.00 Assume 95% Reston Use $ 7,825 Non-Reston "Core" Use at: 5% $ 7,825 10% $ 7,825 15% $ 7,825 20% $ 7,825 Reston Users Non-Reston % NonNon-Reston Users Reston Users Revenues $ 6.00 1,304 69 $ 412 5.0% 1,304 1,304 1,304 1,304 826 1,652 2,478 3,305 38.8% 55.9% 65.5% 71.7% $ $ $ $ 4,957 9,914 14,871 19,827 Total Users 1,373 2,130 2,956 3,783 4,609 $ $ $ $ $ Total Revenue 8,236 12,781 17,738 22,695 27,652

-34% 3% 43% 83% 123%

Market Rate Pricing Structure with Price Elasticity = -.4 Reston Revenues Price $ 6.00 Assume 95% Reston Use $ 6,955 Non-Reston "Core" Use at: 5% $ 6,955 10% $ 6,955 15% $ 6,955 20% $ 6,955 Reston Users Non-Reston % NonNon-Reston Users Reston Users Revenues $ 6.00 1,159 61 $ 366 5.0% 1,159 1,159 1,159 1,159 865 1,731 2,596 3,462 42.7% 59.9% 69.1% 74.9% $ $ $ $ 5,193 10,386 15,579 20,772 Total Users 1,220 2,025 2,890 3,756 4,621 $ $ $ $ $ Total Revenue 7,321 12,148 17,341 22,534 27,727

-41% -2% 40% 81% 123%

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