The most misunderstood and miscalculated cost of marketing to table games players is the cost associated with discounts offered on gambling loss (also known as rebate of loss). In most instances, the casino executive’s perception of discounting cost is lower than the actual cost. This shortcoming is primarily due to misinformation that is passed around the gaming industry, discounting’s association with player loss instead of theoretical win, and many executives’ inability to frame the logic behind the calculation of true discounting cost. In addition, the problem stems from the executive’s failure to take the three primary driving factors that influence loss discounting into consideration: house advantage, game volatility and hand decisions. In recent times, discounting has been used by knowledgeable players as a method of manipulating the casino’s marketing department into providing them with games where the tables are turned against the casino.
The promotional tool of discounting player loss started out innocently enough several decades ago as a method for motivating credit players to pay outstanding debt on markers. If a credit customer had not paid his casino-issued credit within 90 days, the casino credit department would offer to reduce the debt by 5 to 10 percent in order to recover monies owed. Money in the cage was better than money in a customer’s pocket, and since the customer had lost the money at the casino, the reduction was considered “incidental.” Of course the customer could count on his late payment, and discounted debt would be held against his credit history and any future credit extensions.
In the late ‘80s, when the very high-limit players began to appear on the gaming scene, casinos entered into a war to see who could attract the most “whales” to the casino. One method used to motivate high-limit customers into gracing you with their presence at your gaming tables was to promise them a percentage of forgiveness on credit or front money if they lost their entire credit line or deposit. At the end of play, marketing would receive upper management’s blessing to literally tear up a dollar amount of “markers” that had been issued to the customer when playing at the table. The amount of the “rebate” usually was limited to 5 percent, 10 percent at the most. It was also based on the customer’s time at the tables and his past customer playing history. Discounting loss had been turned from a method of debt collection into a promotional tool.
In recent times, marketing departments have turned up the heat on loss discounts. This is due to the expansion of casino gaming, and the competitive nature of the industry regarding higher-limit or VIP players. Today, it is highly likely to find discount of loss terms that exceed 10 percent (some as high as 20 percent), as well as discount structuring that allows the customer a loss discount, even though he has not lost the maximum extent of his credit line of front money. In addition, discounting is not used exclusively on a handful of VIP players. Many casinos structure for their high- and mid-range players. Due to the discount of loss morphing from debt collection to a marketing tool, the increase in competitiveness in the VIP player market, and marketing’s extended use of the program to a variety of players, the actual cost of discounting loss has become extremely blurred. In many instances, upper management understands that the cost is quite high, but when approached on this issue, they become uncomfortable. To remain competitive, they know that discounting keeps them in the ball game, and are reluctant to move away from this promotional strategy. In fact, many of these executive would prefer to turn a blind eye to the true cost. They just “don’t want to know.”
Computing the Cost
The cost of any loss discount needs to be based on the percentage of loss occurring per trip or discount period. A reasonable cost percentage (of theoretical win) can be predicted through the use of statistics and a standard deviation-based model. In this situation, standard deviation is used to project what the cost of the discount will be, based on the possibility of the player losing a projected amount of dollars based on the percentage of time it will occur. Compiling a project based on knowing customer metrics and loss discount terms is the only method the casino executive can use to arrive at a reasonable cost estimate, and to determine the actual worth of value that the VIP customer brings to the casino. In the past, miscalculated programs have created situations where the accumulated cost from discounts, comps, airfare, promotional chips and special events far overshadow the customer’s theoretical win rendering the customer unprofitable.
The executive calculating this cost needs to take a number of game and customer playing metrics into consideration. The primary metrics are:
• Customer’s average bet
• Game mathematical advantage (H/A) based on the game (and sometimes customer’s playing ability)
• Game/wager volatility
• Hands played during period of discount
• Discount structure; loss minimum limit, discount percentage and tier structures
In the example provided in Tables 1 and 2, the game of baccarat will be used. Creating a loss discount model around the game of baccarat is simpler than other casino games, since baccarat experiences a fixed H/A of around 1 percent, and is subject to a low volatility. In Table 1, the model created was based on a single-tiered structure; the customer was offered one minimum loss limit goal in which to receive his or her loss discount. As you will see in Table 2, a double-tiered loss discount model, the cost will be more using the same terms as the single tier discount.
In the example in Table 1, the customer has been given a loss discount structure that requires him to play baccarat, and if he loses $100,000 or more, the customer will receive a discount on his loss, usually a reduction of markers held against his credit or cage front money. In this situation, the casino has projected the cost of the loss discount program to be approximately 13.3 percent of theoretical win (T-win) per each 700 hand “trip” made by the player. In this situation, the cost per trip is calculated at $5,370. In reality, the customer will either receive $10,000 or more, or walk away with no discount when he wins or doesn’t lose enough to reach the $100,000 minimum. Please also note the metrics input into the model by management. These percentages and dollar amounts are based on the customer wagering $5,000 on the average per hand, and wagering that amount on 700 baccarat hands. Changes to either one of these input metrics will change the result of the projection. Note: 700 hand decisions were selected totally arbitrary for this example. It represents a single trip to the casino. In reality, the longer the period for calculating discount of loss, the lower the actual cost percentage.
Based on the single-tier discount model, the true cost of the discount is 13.3 percent. Most executives believe that the cost percentage runs parallel with the discount percentage, but this is rarely true. Also note that discounting lowers the game’s H/A from 1.15 percent to 1 percent. Instead of providing the casino with a T-win of $40,250 during the period of play, the actual calculated T-win is $34,880.
Not All Discount Programs are Created Equal
In some instances, management finds that marketing can attract more customers to their casino if they offer a “multi-tiered” discount structure. Multi-tier structures allow the casino to offer the customer a lesser discount if they fail to reach the loss minimum goal. In Table 2, I have reconfigured the loss discount model to accept a double-tier discount model, utilizing a lower tier of 5 percent discount for any loss of $50,000 or more, but less than $100,000. The additional tier incentive does not come without a cost. Table 2 illustrates that the cost of discount increases 13.3 to 14.7 percent, and the adjusted H/A drops to approximately 0.98 percent.
Discounting customers in the game of baccarat is primarily straightforward, and the costs do not rise to a point where the discount cost is excessive as compared to the discount percentage of the incentive program. This is not always true when discounting is extended to other casino games. In the next example, the discount model addresses the game of blackjack. Blackjack is different from baccarat because it is subject to a slightly higher volatility factor, and a varying H/A.
Table 3 examines the cost of the same single-tiered discount program applied to the average high-end blackjack customer. You will note that this blackjack customer plays at a mathematical H/A of 1 percent. This is estimated based on the number of decks used, the house rules of the game, and the amount of errors the customer makes by not following basic strategy to the letter. In addition, due to the nature of the game of blackjack, the volatility factor is increased to 1.1.
Table 3 illustrates the effect of the lower H/A and elevated game volatility. The cost percentage of the discount has gone up by almost 4 percent points when compared to the example in Table 1 of the single-tiered baccarat discount model. There’s also a big drop in the adjusted H/A and the T-win. However, none of these drops should be considered alarming to the casino executive.
The game of blackjack can be elusive when determining the correct H/A for this discount model. What if a blackjack customer uses basic strategy and combines that with a casino that offers more liberal blackjack rules? This factor is noted in Table 4. The model was changed by only one factor, which was the game’s H/A. As one can see, the cost of the discount of loss has increase dramatically. In comparison to the previous example in Table 3, the cost of the discount has skyrocketed from 17 to 40 percent. Calculated theoretical win dropped while the standard deviation of the event stayed the same. This customer will experience the same fluctuation as the customer in Table 3 based on the same volatility and wagering level, but the casino will theoretically win less money from the reduced H/A of the smarter blackjack player.
One final example: What is the effect of a higher volatile wager like a pass/come wager with odds in craps? Does it drive the cost as well? The customer in craps experiences a higher house advantage when wagering on the line or come of 1.4 percent. With slightly higher H/A of that of the player baccarat and the average player in blackjack, wouldn’t the cost of the discount be lower under similar metrics? Actually, the answer is no. Why? Because the customer will not only wager on the line/come, he will split his wagering between the pass/come and the odds. In addition, odds are not subject to a mathematical advantage, and are highly volatile due to the multiple pay off aspect.
Table 5 has been set up to reflect the effect of 5X odds on the line/come bet. The customer will no longer wager his entire $5,000 on the line/come, but will wager $1,000 on the pass/come with the remaining amount placed on the odds. In addition, the odds, which pay 2:1, 3:2 and 6:5, increase the wager’s volatility to approximately 5.0 if the customer always takes full 5X odds after establishing every line/come number.
Because of these changes due to the nature of craps and multi-odds, the cost of the discount skyrockets to 42.7 percent, or 4X greater than the intended discount rate of 10 percent. Note: If the casino opted to offer a discount program in conjunction with 10X odds, the cost of the discount on loss incentive would leap to 77 percent of T-win. A discount program used with 20X odds turns the customer into an advantage player, providing the casino with a discount of loss cost of 152 percent and a customer advantage of -0.7 percent H/A.
The wise casino executive needs to know the true cost of the discount of loss program before making the offer to the customer. Factors surrounding the cost must be considered. These factors include actual H/A of the game, number of hands prior to giving the discount, game volatility, and the effect of a discount tier structuring. In addition, limiting the use of only one discount structure for all games is dangerous. A different model structure needs to be developed for each game type. In some instances, a 10 percent discount works well with baccarat players, but does not provide the same net T-win with the smarter blackjack customer, or the multi-odds craps wagerer.
Every marketing department that offers loss discounts as a playing incentive needs to build or purchase their own discount model. One of the best models available is a discount of loss model created by consultant Jim Kilby. The Casino Marketing Manager software (the latest edition as 5.0) can be found at http://jimkilby.net/casmktmgr.html. Although pricey, the information gleaned from the model will save your organization thousands by providing management with the necessary information for constructing less costly loss discounting programs.