Targeting Profit In Your Database
In the last installment, we discussed how primary player expenses of comps, free play, and gaming taxes represent the mission-critical components for marketing expenses and financial returns to be accurately measured. While ownership and stakeholders continue to apply pressure for return on investment, we pointed out the attitude of senior management (yes, that would be the CEO, COO and CFO) needs to view player-tracked expenses as an absolute MUST HAVE proposition.
In our experience, only a select few properties have shown the ability and willingness to invest the financial and intellectual capital necessary to accurately measure, analyze, and manage player costs. While free play credits represent the largest share or marketing expenses for a majority of properties, the fact remains that a majority of marketers and operators have not identified which guests are being reinvested in profitably and which guests are redeeming offers month after month and yielding zero or negative margins. In evidence of this argument, consider the following from Entrepreneur Magazine online (http://www.entrepreneur.com/ encyclopedia/target-market):
“Your target customers are those who are most likely to buy from you. Once upon a time, business owners thought it was enough to market their products or services to “18- to 49-year olds.” Those days are a thing of the past. Because the consumer marketplace has become so differentiated, it’s a misconception to talk about the marketplace in any kind of general way anymore. There’s no end to the number of different ways you can slice the pie. Today’s consumers are more marketing-savvy than ever before and don’t like to be “lumped” with others — so be sure you understand your target market. While pinpointing your market so narrowly takes a little extra effort, entrepreneurs who aim at a small target are far more likely to make a direct hit.”
Companies who track the timing of patron transactions along with the patron name, associated revenues, and offers redeemed can identify the profitable from unprofitable transactions and alter their market strategies accordingly. While many industries struggle to capture this type of information, those of us in casino gaming are fortunate for our patron management systems that capture all this information and provide an opportunity for us to mine and analyze any number of transaction variables.
The player tracking and slot monitoring systems in use today offer a marked advantage over the first-generation systems originally deployed. Based on the data collected by today’s systems, we can determine which customers should be rewarded for their purchasing behaviors, and at what levels. The flip-side of this coin is not leveraging your system as designed and can result in property operators “feeding the beast” – running thousands of patrons in and out of the casino, serving them drinks, giving them meals, cleaning up after them, and not having a dollar to show for the efforts.
In 2002, Harvard Business School published an article written by Werner Reinartz and V. Kumar called, “The Mismanagement of Customer Loyalty – Not All Customers Are Created Equal.” Their basic premise; “knowing that 60 percent of your loyal customers are profitable is useless if you don’t know which ones to court with what level of service.” They also went on to discuss the link between profit and successful loyalty club management by saying, “There is no one right way. But whatever the context, we believe that no company should ever take for granted the idea that managing customers for loyalty is the same as managing them for profits.
Fortunately, technology is making that task (make loyalty profitable) easier every day, allowing companies to record and analyze the often complex, and sometimes even perverse, behavior of their customers.” The question every property operator must ask is, “what level of service are we providing and at what cost to our profit?”
For casinos, answering this kind of question requires an analysis of many areas of operation. Evaluation of soft benefits such as line passes, valet parking, and private clubs for a few patrons must be balanced against food and beverage, hotel, entertainment, free play, and cash offers for the masses. Additionally, as previously discussed, how does your tax jurisdiction influence your opportunities to incentivize trips from preferred patrons?
There is no doubt our industry has the technology to make educated decisions, but does the casino you are responsible for managing have the will?
Traditionally, capital budgets have been built to discern what investments will improve the financial performance of the enterprise. Finance departments are laden with highly skilled technicians making sure everything is accounted for and ratios and efficiencies are maintained. What we are suggesting here is marketing and promotions dollars must be treated with the same regard. When we are making decisions to spend millions of dollars on a player tracking and slot monitoring system, we must have the expectation these tools be leveraged to the fullest extent for the benefit of the enterprise. We have tested many variations of marketing ROI at a customer level. What we have found works best is a derivation of revenue versus captured costs. This has some degree of difference from property-to-property. Models like this can be built in a matter of weeks, provided the knowledge is available to speed the process. The time delay in deploying these models is necessary to attest that data collection and testing trials are valid, but the decisions made possible by the model construct justify the investment in the means to get there.
Figure 1 depicts an example of looking at individual patrons’ ROI. With this information, an accurate offer matrix can now be crafted. To accomplish this on a broad base that covers many thousand patrons, the model will need to be implemented as part of your database segmentation process. We have built a model to use the ROI and then figure a quotient that acts as multiplier for patron offer values.
Figure 2 depicts how a simple model will look like this when completed and authenticated.
Notice there are negatives within the matrix, this means you should be reducing offers to these patrons if not eliminating them entirely depending on the severity. Conversely, the higher the multiplier value, the more you should be reinvesting as these patrons have PROVEN they are superior to the majority of your database.
Once you have each patron, and your multiplier, you should distribute against your total patron database and when you do, you will roll-up the results and finish with a segmentation that you should track for progress as depicted in Figure 3.
As previously discussed, it has been our experience that very few properties are able or willing to invest the kind of resource necessary to make this happen. Now that you have read the argument, here is a question: Which of your patrons are profitable, which patrons are not profitable, and what are your marketing strategies against each? To fail to use individual customer profit analysis is to continue to spend unwisely. In the current era of finite marketing budgets, a capital budget allocation model has distinct applications down to individual player incentives. While technology makes it doable, the efforts are very challenging to collect all the requisite data and test then build the processes, but the efforts will be rewarded in a higher ROI.
Jay Sarno has 20+ years of experience in the Hospitality and Gaming Industry. Jay consults on casino marketing segmentation programs, software product development and technology solutions evaluations, selections and implementations. Jay has implemented over 20 data warehouse systems and currently also teaches courses in Hospitality Management for Richard Stockton (NJ) College. Jay can be reached at JSA2002@comcast.net