A Dangerous Hold: Win Per Unit in the Gaming Industry

Many operators and suppliers focus on win per unit (WPU) as the metric by which to measure the success of gambling content in our industry. Suppliers use this metric to measure the performance of their latest slot machines, and to compare their performance vis-à-vis older slot machines and competitors’ latest offerings. This metric also allows an operator to quickly assess the relative performance of various machines across the casino floor. WPU is a simple calculation. It takes the actual win or, better yet, the theoretical win of the slot machine for a defined period of time and divides by the number of units and days the units were on the casino floor. (See Figure 1.)

Figure 1: The Win Per Unit Formula
Figure 1: The Win Per Unit Formula
The metric, when used correctly, provides a tactical tool for measuring the revenue performance of the various slot machines on the floor and allows the operator to segment the slot machines in various ways to better understand each slot machine’s contribution to aggregate revenue performance for the casino. The WPU of an individual slot machine or a group of similarly configured slot machines allows for comparison versus various subsets as well as the entire population of slot machines at the casino. The challenge with using this metric by itself to make decisions regarding purchasing, placement and configuration of slot machines, however, is that it oversimplifies the various drivers of revenue performance of slot machines for a casino enterprise. For many companies, the oversimplification of this metric can lead to the incorrect identification of cause and effect in analyzing the entire slot floor, a group of slots or an individual slot machine. As with all metrics or models, the assumptions and their use depends on the context and their application by the analyst. Following are six factors to consider to help ensure the proper use of WPU.

1. WPU is a Metric, Not a Strategy
The WPU on a slot machine doesn’t tell the whole story. An increase or a decline in WPU on an individual slot machine doesn’t tell you if the change in performance is directly impacting aggregate revenue performance. Just because a slot machine is popular and has a higher WPU than average, it doesn’t necessarily mean the game is earning incremental dollars from the customer base. Clearly, in markets that are not growing, or perhaps are declining, making decisions on individual or subgroups of slot machines based on win per unit statistics may lead to incorrect conclusions about revenue contribution. Macro market conditions can leave an operator with little clarity at the win per unit level as to which slot machines are earning their keep and which have become undesirable to the addressable market. We need to be careful to not confuse a machine’s WPU with successfully placing and positioning that game on the casino floor.

2. WPU is Used to Rationalize Capital Spending
Some operators use a simple model to justify capital outlays for slot machine purchases. An example is provided in Figure 2, which was created by Goldman Sachs to educate investors in our industry. The model assumes an operator takes a game’s WPU net of the game it replaced (or some proxy, such as floor average) and assumes that the difference is reflective of incremental revenue contribution for that game. Figure 2: Economics of Purchasing a Slot Machine from a Casino Operator’s Perspective
Figure 2: Economics of Purchasing a Slot Machine from a Casino Operator’s Perspective

The operator forecasts a decline over time of those cash flows, and then performs a simply internal rate-of-return calculation based on the cost of the new machine. In most cases, if the game is performing well enough, the operator can justify purchase of the new game. However, this model doesn’t properly account for the game’s incremental or marginal contribution to aggregate revenue and fails to take into account other costs associated with owning and operating the game, such as game conversions or capital costs.

3. WPU Fails to Take Into Account Cannibalization of Other Machines
The age old question when placing new slot machines in a casino is how they will impact the performance of the other games on the floor. This concept of cannibalization is important, because if new games are simply moving dollars around the floor rather than increasing revenue, the operator cannot expect to earn a return on the invested capital. A new game’s WPU may make it look like a high flyer, and therefore the internal rate of return on the purchase may look great, but the new game may simply be cannibalizing the performance of the games surrounding it, leaving the casino with no return on the capital deployed. Therefore, the application of WPU to justify capital purchases on slot machines requires additional details to ensure the casino is earning a return.

4. WPU Doesn’t Provide Visibility Into the Sustainability of the Revenue Streams
I have heard operators express disappointment in capital outlays for slot machines when the WPU increase doesn’t last long enough. Operators sometimes refer to the game as not having “legs.” Certainly, a decline in WPU signals that a game is having problems sustaining expectations; however, the challenge may have been in putting too much emphasis on WPU in making the capital outlay in the first place. In purchasing slot machines, it is important to take into consideration other metrics, both quantitative and qualitative, that may provide confidence in earnings sustainability. I am a big proponent of analyzing player ratings for additional insight into the performance of slot machines. Player ratings describe the revenue contribution to WPU by players who use their loyalty cards. Qualitative research techniques can support quantitative metrics when making capital outlays for slot machines. Both player ratings and qualitative research techniques can help operators predicate the ability of a game to sustain its performance with greater confidence.

5. WPU Doesn’t Focus the Operator on Maximizing Revenue
The link between WPU and aggregate performance can be improved with proper analytical techniques and model design. However, the biggest problem I have with WPU and revenue maximization is that it focuses the operator on maximizing the yield of casino real estate. The slot machine analysis process becomes spatial in nature, and thus explains why we have historically been dependent on WPU as a metric. Digital devices such as smartphones, tablets, PCs and laptops have fundamentally changed how consumers interact with digital content. The deployment of slot content onto these devices requires new metrics and perspectives to justify capital deployment toward new technology delivery mechanisms. In a WPU world, these devices may have a difficult time competing for capital outlays, despite the opportunity that these devices have to increase aggregate revenue while reducing capital costs.

6. Moving Money Around the Slot Floor Sends the Wrong Signals to SuppliersFigure 3: Consumer Spending on Commercial Casino Gambling
Figure 3: Consumer Spending on Commercial Casino Gambling

Suppliers use the WPU of their latest product as a means to help sell the slot machine to operators. If their latest product is performing at 1.5 to three times the house average, they argue that a large portion of that improvement is incremental; therefore, the operator should purchase the slot machine. Suppliers than allocate R&D resources to activities that they think will create higher-earning WPU devices, particularly in comparison to older slot machines that are on the casino floor. Clearly, the flattening of consumer spending on commercial gambling, as seen in Figure 3, can be caused by a number of factors, such as the economic condition of the country; however, the graph certainly doesn’t support the notion that the industry is deploying slot content that is growing the market, which makes the WPU metric for allocation of R&D and capital spending weaker than ever.

Letting Go
While the WPU metric has an important place in operating our casino floors today and in the future, and while it provides important early-level guidance, decisionmakers need to augment their decision-making process with improved operating models that are based on sophisticated quantitative and qualitative data. In addition, allocating capital to replace existing slot machines without an operating model that provides increased guidance on the actual incremental contribution will continue to depress casino returns. Operators and suppliers need to revisit how they allocate capital to R&D products that continue to shift money on the casino floor without growing the player base. The danger of R&D capital allocation that simply moves revenue from older devices to new ones is that operators will not be able to sustain the capital outlays necessary to maintain their floors. We, as an industry, need to find a way to build and deliver products that grow the addressable market, and the first step is to unhook from a metric that may be driving imperfect decision making.

Leave a Comment