How Much Is Your Casino Investing in Players?

Abstract: This white paper is the first in a series. In this first installment, the Actual Cost of a $5 Free-Play Incentive, as it relates to how much ‘Required Theoretical Investment’ a player has to play to earn that incentive is evaluated at all properties in one local market. Also evaluated are the implications of this cost when adding Free-Play incentives and multiplicative point promotions relative to overall reinvestment strategies.

Casinos spend time and effort determining the best way to market themselves, beat their competition, and reward players for their loyalty. Unfortunately, there are no fool proof formulas or textbook strategies for developing the perfect marketing mix for a casino. More often than not, progress tends to come down to trial and error. Luckily, casinos can arm themselves with a wealth of knowledge, techniques and partners that can make this daunting task easier and more manageable, removing some of the error from the marketing process, or making their trials productive.

The following is a small portion of data collected in a recent study of Southern California casinos, but the math behind the data can be applied to any casino with a player’s club. The portion presented here looks at the reinvestment in players who participate in the casinos rewards program. The following shows, assuming a Hold Percentage (also referred to as House Advantage) of 5%, how much ‘Required Theoretical Investment’ (R-Theo) a player must spend to accumulate a $5 Free-Play incentive. This is important because with all the “points” and COIN-IN conversions, it is easy to lose track of what the customer is actually spending. If a customer’s average wallet is assumed to be $100, some of these casinos are offering rewards that may not stimulate more play, and may even cannibalize the player’s wallet. The information collected also helps explain how some promotions significantly reduce the amount of R-Theo a player has to spend before receiving the next incentive. Lastly, it calculates what the base reinvestment is and what solutions or opportunities there are to adjust reinvestment in favor of the casino. There are various pros and cons for the use of incentives. A casino is ultimately a business and as such is always trying to maximize profits. In context, this means that if a casino is giving out these offers, it should be offering them with a complete understanding of profitability per player. This is the first step to achieving the Optimal Offer™.

The Study
Eight Southern California casinos that target the San Diego market were visited. This view is limited but exhaustive in the local market and therefore insightful in many ways. Of the insights uncovered, one was how much R-Theo a customer had to play to receive a $5 Free-Play incentive. This is an excellent starting point for a series on players’ clubs programs, because it is a common practice amongst casinos to allow players to earn and redeem points, making it possible for players to achieve rewards, and to apply that insight to other casinos.

Each of the eight casinos explained in some form how their point system worked. Two casinos offered points based on Theoretical win (T-Win), a form of time based rewards and the other six print very clear definitions of what each point is worth. Those same six casinos also offer a Free-Play incentive and explain to customers exactly how many points it takes to earn that incentive. The use by these six casinos of clear and similar definitions makes for a more straightforward comparison of the results. Moreover, the definition of these two variables leads us to a simple calculation. By assuming a value for Hold Percentage (Hold), the required theoretical investment amount a player has to spend to receive these incentives can be determined. Assuming the same Hold for each of the casinos allows us to evaluate the six casinos equally. But, for more accurate results a casino can plug their own Hold and point values into the formula to determine what their players’ required theoretical investment is. Players may spend more or less to receive these awards, but the aggregate will equal the Required Theoretical Investment.

The Calculations
(Points for $5 Redemption x COIN-IN Per Point) x Hold % = Required Theoretical Investment

Understanding the Base Reinvestment Rates requires some quick definitions:
• Points for $5 Redemption: How many points does the club state are needed for the Free-Play or Cash Back redemption?
• Dollars of COIN-IN Per Point: How much COIN-IN is needed for 1 point
– Although a brochure may read $1 = 1 point, the $1 is actually COIN-IN. COIN-IN represents the total dollar amount of all wagers placed. Not necessarily the amount of dollars spent or lost.
• Hold Percentage: To calculate the estimated COIN-IN the dollars spent are divided by Hold.
– “For example, consider the player who inserts a $20-bill into a slot machine, with a 5% house advantage, and plays until he has no credits remaining. On average, this player will generate $400 in coin-in, or wager, before losing the entire $20 (i.e., $20/0.05 = $400).” (Lucas and Kilby)
• R-Theo: The dollar amount is an inverse of t-win, removing player “luck” from the equation. Players may spend more or less to receive these awards, but the aggregate will equal the theoretical investment amount.
– Conversely the R-Theo can be calculated by multiplying COIN-IN by the Hold.
• Base Reinvestment Rates: $5 Free-Play Incentive divided by R-Theo.

Figure 1. How to Calculate $5 Free-Play Award
Figure 1. How to Calculate $5 Free-Play Award

The Results
The required theoretical investment and implied reinvestment rates vary widely within this exhaustive local market area sample. Understanding the amount a player is actually spending impacts every area of the casino. For instance, are the theoretical investments by players covering additional comps, like buffets, cigarettes, and drinks? Does it cover labor cost? More importantly, does it cover all the sunk costs associated with running a casino? These are questions that could have different answers at each individual casino. Still there are other implications of these results that go beyond the internal issues, such as: does this information create an external competitive advantage?

Table 1. Base Reinvestment Results Per Casino
Table 1. Base Reinvestment Results Per Casino

To a casino, what is more alarming is that these results do not account for or include Free-Play given at sign up or any multiplicative point promotions that might be awarded. Although how Free-Play is converted to COIN-IN varies widely over the industry, Free-Play is not “Free”. Whether initial Free-Play is counted toward COIN-IN or not, any win accumulated as that Free-Play is reinvested by the player will accrue as COIN-IN. Free-Play given at sign up will reduce the required theoretical investment by the Free-Play amount. Similarly, multiplicative point promotions will reduce the R- Theo investment by the multiple. The implication of this is that a casino can easily cannibalize a player’s bank roll/wallet by offering too many marketing promotions to the same individuals.

Although there is no formula or textbook strategy for developing the perfect marketing mix, Stics® can help create personalized strategies to get a casino nearer that ideal marketing plan. Regardless of the various investment avenues, each casino is investing in its players and intends to invest optimally. Although it is hard to understand the effect of incentives, especially Free-Play on profitability, one tool that makes progress managing Free-Play is Stics® Predictive Analytics, which can identify to whom to offer Free-Play and how much to offer them. Knowing this information can lower total marketing reinvestment costs, without changing your current players club reward system; and can help get your most profitable players to your casino. Stics helps tailor your Free-Play offers to an amount or percentage of reinvestment that is affordable and intended.

Stics offers a variety of products which can address marketing questions like this one and others. Our models are continually refined to keep up with changing attitudes and realities of players, promotions and the economy.

About Stics
Stics is an innovative predictive analytics company providing customer insight that empowers clients to predict and rank customer value. Its best-of-breed models are delivered through highly efficient, cost-effective Software-as-a-Service (SaaS). This makes Stics the most affordable predictive analytics option available. Stics provides products/services for the casino and hospitality industry, as well as software providers, direct marketers, and government contractors.