Chapter 11 PRICING: REVENUE CONTROL

Chapter 11 PRICING: REVENUE CONTROL
Steve Durham The House Advantage

Terminology: Drop, Payouts, Hold
Money people use for purpose of placing a bet; includes money won from the casino. Also the amount that a player is willing to risk. Historically, money spent to gamble was “dropped” into some sort of collection container. Today money is placed in a “drop box.” Other terms for the drop: Write (Keno), Handle (Sportsbook), Take (Bingo )

Payouts Money paid for winning wagers, becomes part of payouts. Occasionally called a “paid out.” Win / Hold Interchangeable terms for money casino “holds” onto after gaming ceases. Difference between Drop (money wagered) and Payouts (money paid for winning wagers): Win/Hold = Drop - Payouts

Paper Trail of Revenue Sportsbook department – each dollar
bet is logged; all actual bet activity is accounted for. Customer places a bet Employee inputs information into computer Ticket is issued for transaction Receipt officially recorded when transaction is registered in the computer Employee must balance hard copies with computer receipt at end of shift Hard copies and computer-stored information constitute the revenue in the gaming centers Bingo, Keno – like sportsbook, managers know all activity that occurred in their departments during a specific period of time.

Table Games Approximately track drops and payouts
Not every transaction is recorded No digital record or hard copy of each transaction exists Customer exchanges currency for chips Dealer follows specific procedure exactly Displays dollar and chip transaction for surveillance Calls out bill size for Pit Supervisor Currency Dropped into drop box following specific procedure Drop box is collected by security and drop team Taken to vault Opened and contents counted as revenue for table

Electronic Gaming Devices
Each transaction is recorded by a computer chip in the machine. Computer chip transmits data to mainframe. Coin Goes into drop box in the bottom of the machine. Drop box is collected by security and drop team. Taken to vault. Opened and contents counted as revenue for machine. When drop is counted, total is compared to computer record.

Paper Trail of Paid Outs
Table Games Approximate measure using fills Order form to request more chips for a specific table Used to represent the paid outs Pit Supervisor Examines rack Determines how much of each denomination is needed Completes a “fill slip” on computer Fill request is transmitted to Cage

Table Games (cont’d) Cashier Dealer
Places fill slip face up so surveillance can see Fills the order Security also counts amount of chips Cashier keeps copy Security takes fill slip copies and chips to pit Dealer Security waits for end of hand Dealer verifies fill amounts Dealer signs fill slip, Dealer transfers chips to rack, and drops fill slip Security and Pit Supervisor observe entire transaction

Cage Operations Responsible for the control of money Cashier Cage
Maintains inventory of cash and equivalents Four areas: cashier cages, soft count room, hard count room, vault Each area has a manager who reports to Controller (or similar position) Cashier Cage Acts as a bank for guests Exchange currency, chips, coins, electronic gaming tickets; cash checks

Hard Count and Soft Count Rooms
Drop Team Consists of cage employees and a security guard Collect table game drop boxes and electronic gaming device buckets; replace bill validators on casino floor Hard Count and Soft Count Rooms Soft count room inventories paper money; hard count room inventories coins and chips Each has a different employees to count the cash or cash equivalents Drop boxes opened individually, one at a time. Money is transferred to the vault, which prepares the banks for employees

Controls in Place Signatures Separation of Duties
Provide a traceable line of responsibility Assures employees are not accused of theft if the funds disappear Separation of Duties Each person has specific responsibilities Multiple Employee Involvement More than one person involved in transaction Lessens likelihood of theft or collusion Surveillance Observe transactions via cameras in ceiling Digital record created

Duplicate / Triplicate Forms
Verify the transfer of responsibility Confirm the exact description of the funds Cash Countdowns Party receiving funds counts down the amount Both parties confirm by signing Digital Trail Provides a trail that should match the paper trail being created simultaneously Hard copies can be “lost;” digital trail discourages temptation to steal or embezzle

Supervisory Oversight
Man Trap Small anteroom in the vault or count rooms Door must be closed and locked before door into the secure area can be unlocked and opened. Entry and man trap are heavily covered with surveillance cameras, constantly monitored. Supervisory Oversight This is essential to control - Pit supervisor watches dealer; cage supervisor watches cashier; drop team lead watches drop team - Supervisors watch to be sure employees strictly follow all procedures relating to cash handling - Monitor employee behavior toward customers and other employees

Hold Percentage Hold Percentage = Hold ÷ Drop Variation by Drop Period
Varies from period to period Constant over long term (many trials) Variation by Drop Period Pit managers look at hold percentage by individual gaming table to be sure controls are effective. When the percentages are not what are expected, it is often hard to say whether someone is stealing or if there is just a natural, statistical variation.

Finances Access to Capital
Early Nevada operations utilized profits to purchase additional table games or slots New entrants into market were self-funded Organized crime Funds from illegal activities Funds from labor union pension funds Nevada law changed, allowing licensing of corporations; opened equity and debt markets Bill Harrah Listed on the New York Stock Exchange Other sole proprietors followed

Future access to capital depends on four factors:
Public Perception External financing allowed expansion, new development. Greater availability brought more acceptance and funds from public markets. Future access to capital depends on four factors: Success of individual companies and industry as a whole Continued stability in legality of gaming Tight regulation of industry Continued social acceptance of gaming as entertainment

Financing Expansion: Equity vs. Debt
Allows greater financial flexibility Gives up some control, dilutes partners/owners percentages by increasing number of owners Equity partners expect continual dividends Debt A fixed payment; comes to an end Primary control vs. stockholders Interest portion is expense deducted from profits

Chapter 12 PRICING: COMPS AND CREDIT
Jeff L. Voyles MGM Grand

Pricing Pricing – represented by the house advantage; the price the player is charged to play Fairness – responsibility of regulators, operators Management needs to: Offer the right price mix to attract and maintain guests without taking unfair advantage Find a balance that allows player to extend time played, enjoy their experience, and permit casino to make a profit Regulations allow for a broad range of payback percentages, allowing the casino to fluctuate house advantages throughout the casino floor.

Casino Comps and Player Ratings
Complimentary – something given free, or as a gift; often known as a “comp.” A casino comp strives to maintain a balance between profit and customer reward. History Offered to known guests with little research Method was inconsistent, unprofitable, unreliable Casinos realized importance of analyzing player’s betting, determining their worth for comps Now, floor supervisor is responsible to examine play of every qualified player

Player Ratings Table Game Ratings
Process by which a table game floor supervisor monitors the gambling routine of a patron. A gaming device monitors a player’s action through a computerized rating system. Data produced determines value of a player. Table Game Ratings Once required betting limit is met, supervisor asks if guest cares to be rated. At conclusion of play, floor supervisor closes out rating, calculates average bet, records time played, total amount in/out, and the win or loss.

Casino Expected Win / Theoretical Win
Average bet and length of play – important aspect of player rating. Data used to determine player’s worth by calculating theoretical win, determining comps the casino can offer. Theoretical win – expected win by casino throughout a length of play. The longer the session, the closer actual win is to the theoretical win. The Central Limit Theorem states that over a large number of independent trials, the casino will see a normal probability distribution. THEORETICAL WIN = HOUSE ADVANTAGE x GAME PACE x AVERAGE BET x DURATION

Computerized Systems Designed to provide constant source of information; accessed for review at any time. Digital ratings on every table game; player’s card swiped to generate accurate ratings. Future of comps will rely greatly on advancement of technology. Interested in players self-comping, possibly through a computerized kiosk system Casinos must find a balance between the use of too much technology and personal attention.

Challenges and Concerns
Casinos must rely on tremendous amounts of labor for evaluating and inputting the data necessary for a casino to administer comps. Customers may also experience frustration if they are new to a gaming property. An unknown player to the casino who asks for a complimentary may be placed on a qualifying basis status. Casinos must be cautious when requesting information from a player.

Advantage Players Individuals with sophisticated skill levels that reduce, and sometimes eliminate, the house advantage by exploiting certain opportunities. Some request to not be rated, they value their anonymity and longevity more than receiving comps. Managers must be familiar with a normal theoretical expectation of all games, and recognize when a player’s action falls outside the normal standard deviation. The standard deviation tells how much deviation can be expected when large numbers of independent trials (wagers) are experienced.

Human Error False Ratings
Errors in ratings create inconsistencies, which result in disagreements with players. False Ratings Consist of a rating that represents a gambling session that never took place. Created to generate artificial theoretical win, gain comps without having to gamble. Can be entered with relative ease because of the large number of rated players an employee is responsible for, therefore allowing the false rating to go unnoticed.

Inflated Ratings Actually took place, but reveals larger average bets and longer time played than actual. Very difficult to monitor and prevent. Guests are sometimes very generous, offering their comps to other guests or employees. Extremely difficult to identify due to the sheer volume of players and comps distributed. Vital to the success of a gaming company to identify their market and adjust the complimentary system to fit their specific region.

Slot Ratings Slots encourage higher gross handles (total amount wagered), volumes of players, lower costs, and less risk than table games. Data tracking system out-performs all data collection efforts in table games. Technology allows vital performance data to be collected from slots while tracking pertinent player information for the marketing department. Each guest is evaluated for the potential value they bring to the casino. For a guest to be rated on a slot machine, the guest must place his or her card in the slot designated for player tracking.

Player’s Group Early 1980s – slot clubs (and later, table games) began to reward players for frequently visiting the casino. Includes all players who sign up to have their play tracked and evaluated through table games or slots to receive promotions, rebates, comps. Strength of casino is how well they manage the database of players they have created. Casinos must continue to reinvent the way they present themselves to the customer and how they respond to their needs.

Casino Credit Types of Credit
Closely associated and coordinated with the complimentary systems that casinos use to attract players to the property. Types of Credit Most common – casino-issued counter check, or marker. Rim card – document used on table game to track credit transactions of a high roller who requests multiple credit transactions; eliminates need for player to sign multiple documents throughout session.

Credit Process Player fills out a credit application.
Amount of credit is requested; casino credit department reviews application. Customer must sign a signature card; represents legal signature. Guest with established credit line is the only person eligible to use the account. Amount is determined by evaluating many different factors: amount of credit already established at other casinos, guest’s credit score, bank balances, past delinquent accounts.

Credit Distribution Floor supervisor verifies player has credit available before dealer is instructed to distribute amount. Player signs marker; given to the pit clerk to match the signature against a digital signature. If the signature matches, marker is filed. Floor supervisor and dealer must also initial portion of the marker with player’s name, amount, table number, and time the marker was generated. Slip is put in drop box on the game. Supervisor and dealer also sign table card and put it back on the game table, concluding issuance of the marker.

Credit Extension A casino marketing executive must first evaluate how the player lost the credit line. The credit extension is coded as a TTO, meaning “this trip only.” Casino hosts are able to grant or extend credit to a guest if they are authorized to do so. It is the responsibility of the marketing executive to determine whether the player is fit to continue or should refrain from gambling for a moment to reevaluate his or her situation.

Credit Hold Casino can require guest to use casino credit only after front money or winnings are exhausted. Long periods of time between visits require a player check-in and new signature card to release the hold on the account. A player may also have bad debt from slow pay or no pay from previous trips. If players attempt to obtain credit and use the money for non-gaming related activities. If a patron cashes out an entire credit line with one marker.

Collections Credit department must evaluate how and when they will attempt to collect a gambling debt. Applicant can designate payment when application is completed. Statement may be sent requesting payment in 30 days, or pay at the conclusion of stay. Third-party collection service may be used. May offer special arrangements for guests who have difficulty paying debts. The “write-off” must be presented and approved by the executive level; at that time debt can be considered irretrievable, or written off.

Effective Player Rating Systems
The importance of Player Rating Systems Issuance of complimentaries Identify customers for marketing purposes Establishing Guidelines Ensure acceptable casino profit margin Maximize customer satisfaction Actual versus Theoretical Win Theoretical=best indicator of casino gain Avg. bet * hours played * decisions/hr * house edge $150*2.25 hours*60*5.26% = $1,065.15 Actual=may indicate future player revenues

Measurement (supervisory estimates) Game played e.g. Blackjack Player’s average bet e.g. $150 Player’s skill level Soft=1.00; Avg.=0.60; Hard=0.20 Speed of the game Slow=60; Medium=80; Fast=120

Measurement Example #1 Game House Player Multipliers Game Speed Adv. Soft Avg. Hard Slow Med Fast BJack % $150*2.5%*0.60*80*4(hours) = $720 (theoretical win)

Measurement Example #2 Game House Player Multipliers Game Speed Adv. Soft Avg. Hard Slow Med Fast Roul % n/a $150*5.26%*1.00*60*4(hours) = $1, (theoretical win)

Measurement Example #3 Game House Player Multipliers Game Speed Adv. Soft Avg. Hard Slow Med Fast Dice % $150*1.00%*1.68*80*4(hours) = $ (theoretical win)

BlackJack win = $720 Profit margin = 15-20% Net value = $144 Roulette win = $1,894 Net value = $331 Dice win = $806 Net value = $141 What comps would you give this player tonite?

Tier 1 = minimum $20,000 credit Premium players Tier 2 = $100,000 - $500,000 “Heavy Hitters” Tier 3 = $1,000,000 - $5,000,000 “Whales” Categories not all-inclusive

Slot Systems Track data on two levels
Machine usage (automated) Marketing module Player performance Demographics Visitation Gaming history Info gained through player enrollment Convince players to use tracking cards Reward systems offered

Table Game Hold Win/drop = hold Typical usage
Identify good or bad casino management Identify theft

Table Game Hold Table utilization Table 1 Table 2
Players per table Drop per player $100 $100 Total drop $100 $700 Bet per hand/player $ $10 Total bet per hand $ $70 House advantage % % Hands per hour Win per hour $ $36.40 Hold per hour % 5.2%

Players per Table & Decisions/Hour
No. of Players Hands per Hour

No. of Players Roulette Spins per Hour

No. of Players Dice Tosses per Hour

Labor Per Table Assume: Dealer: 80/60 x $50 x 1.30 = $86.67
dealer works 60 minutes on & 20 min off 1 floorperson per 4 games (0.25 per game); breaks/lunch Dealer paid $50 for 8-hour shift Floorperson paid $150 per shift Taxes and benefits, add 30% Dealer: 80/60 x $50 x 1.30 = $86.67 Floorperson: 480/380 x 0.25 x $150 x 1.30 = $61.58 Total labor per table per shift = $148.25 (or $18.53/hour)

Minimum Break-Even Bets
Labor Per Table Minimum Break-Even Bets # of Players 21 Hands/Hour Minimum Bet $9.46 $7.11 $6.27 $5.88 $5.65 $5.49 $5.43

Slot Systems Card Use Issue Las Vegas Strip usage rate: 30-35%
Estimate 1% increase = $20m gain in EBITDA Onus of remembering to use cards Do not believe length of stay is sufficient Random bonus plan addresses each Not frequent or extended stay-based Selects from active player set Allows instant public celebration of winner Provides visible evidence of winning Creates feeling of excitement and anticipation

Casino Marketing Match Plays and Non-negotiables
Problems and Solutions Gambler’s Spree (Junket) Slot Marketing and Consumer Choice Factors Rebates on Losses Table Game Rule Modifications as a Marketing Tool

Match Plays and Non-negotiables
Requires cash ‘match’ of bet May not be an even money amount e.g. $2 cash for $1 match play; $3 payout Non-negotiable Can be bet by itself Can be styled so that forfeited when: The player loses the bet When the player wins the bet by exchanging it for a live chip of equal value If coupons placed in drop box: with exchange Forfeited only on losing bets: without exchange

Match Plays and Non-negotiables
Value Example Ask: How much would the player have to bet in order to create the same effect? Betting $5 ‘with exchange’ match with $5 cash Leaves the game with $15 if bet is won $5 bet plus $10 payoff On an even money bet, player would have wagered $7.50 Thus coupon has a value of $2.50 Factor in house edge of 1.5%; coupon cost=$2.4625; + house earns $0.075 Accompanying bet of $164 needed to cover this cost Betting $5 ‘with exchange’ nonnegotiable Leaves game with $5 if bet is won No personal money bet On an even money bet, player would have wagered $2.50 Factor in house edge of 1.5%; house cost reduced to $2.3875 Accompanying bet of $ needed to cover this cost

Gambler’s Spree (Junket)
Attract players to casino Designed by independent casino representatives Negotiate with casino-hotel for discounted room rates, F&B credit and some form of match play or nonnegotiable chip bonus Adds transportation and transfers Sells package to players at a price to generate a profit of $60 - $100 per player

Example Package includes 2-night, 3-day hotel, airfare, free drinks and a 50% disc on coffee shop charges Given $50 in match play ‘with exchange’ coupons. If bets $5 for 8-hours, then receives add’l $100 cash & $150 match Player gives score card to table games so average bet and time played is recorded

Casino should ask: What is profit/loss if only minimum is met? What minimum is required for breakeven? Is it reasonable to expect add’l play? Are there others reasons to offer this plan even if it will not breakeven?

Example assumes: Casino edge of 1.5% Player stays for 2 nights Hotel could sold for $5/more/night House wins one average bet per hour Player will eat $60 in meals; $30 discount

Hours played Average bet $5 $25 $25 $25 $50 Match Play cost hours/bet $100 cash award Add’l $150 match play Discount on meals Loss on room discount Loss/gain before taxes Gaming tax (6.25%) Loss/gain before labor Operations 3.53/hr Net Loss/Gain

Casino should ask: What is profit/loss if only minimum is met? -$229.24 What minimum is required for breakeven? Average bet of $25; play for 12 hours Is it reasonable to expect add’l play? Average bet is 5 times program design Time is 50% longer than minimum Are there others reasons to offer this plan even if it will not breakeven? Subjective

Casino should ask (continued): Are there others reasons to offer this plan even if it will not breakeven? Yes: Initial introduction to the casino so players likely to return on their own at no casino cost No: Bargain hunters tend not to be brand loyal Yes: May be worth ‘taking a shot’ Yes: Competitors offering same or similar

Summary Don’t accept a program simply because a competitor is doing it Don’t accept a program unless the anticipated results can be quantified Separate the hyperbole from the facts Beware of any program for which doubts are put to rest only by saying :Trust me, you’ll make a profit.”

Slot Marketing & Consumer Choice Factors
Database driven Drive overall business volume Increase slot club enrollment Establish and build relationships Build loyalty Drawing based promotions with cash prizes Cash mail or direct mail programs Tiered offers in the form of cash incentives Based upon Average Daily Theoretical (ADT) Goal to generate additional visits May create sense of entitlement

Restaurants Can be used to generate slot play Evidence is mixed Food loss leaders Does restaurant volume drive casino volume?

Drawing-based Promotions Popular in repeater markets Multi-week time frame Chances of winning increase with amount of play during qualifying periods Infinite number of variations Example: Customers win drawing tickets for jackpots Selected days, drawings are held Incremental effect on casino cash flows?

Goal is to: Customer acquisition Mass mailings Appending databases Customer retention Targeted direct mail campaigns Randon bonus promotions; special events Customer recovery Customer interviews designed to discover Service delivery problems Lapses in patronage or other dissatisfaction

Choice factors (property attributes) Will vary by market and culture General convenience of location is only consistent factor Other top factors Favorite place to play You feel safe there Employees are friendly and courteous A good place to take out-of-town guests Availability of games

Rebates on Losses Rebates to premium players
Will receive a discount of x percent when incurring a loss Example: If 10% discount, player only needs to repay 90% of her losses while still receiving 100% of the amounts won Rumored that larger casinos offer up to 25% to a few of the biggest bettors Only when the theoretical casino win equals the player’s actual loss does a 10% loss rebate actually cost the casino 10%

Table Game Rule Modifications as a Marketing Tool
Marketing executives sometimes use rule modifications to win customers and increase profits A decrease in house advantage results in a decrease in hold To be successful Players must view rule variation as favorable (beneficial) Play volume must increase to compensate for the decrease in house advantage

The Premium Player Higher Acquisition Cost of the Premium Player
Players successful at negotiating more perks Hotel Food and Beverage Occasional airfare Increased use of discounts on losses Discounting Impact upon profits Requires longer time of play Prevent pooling losses across games Be aware of fixed and variable cost structure

Tier 1 = minimum $20,000 credit Premium players Tier 2 = $100,000 - $500,000 “Heavy Hitters” Tier 3 = $1,000,000 - $5,000,000 “Whales” Categories not all-inclusive

Chapter 11 PRICING: REVENUE CONTROL

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