THE NEW 80/20 RULE AND HOW IT EFFECTS SLOT HOLD

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It is a common rule of

thumb in business: “80%

of your sales come from

20% of your clients.”

Mathematically, the 80/20

Rule is roughly followed by

a power law distribution

(also known as a Pareto distribution)

for a particular set of parameters,

and many natural phenomena have been

shown empirically to exhibit such a distribution.

1 This article is going to look at the

impacts of a newer version of the 80/20 Rule

based on Net Slot Win and how executing

good Net Win marketing may be affecting

your slot floor hold.

The new version of an old rule

The Pareto principle or derivative forms have

been used for years in retail marketing. When

casino database marketing ramped up in the

early 1990s, this baseline measurement was

followed by more than a few successful

marketers. The rule was generally applied to

player win contributions in order to identify

the subgroup providing the highest value to

the marketer.

As casino marketing evolved, so have the

methods to incentivize patrons through various

reward programs. Remember when cash

was king? However, there was a significant

drawback to using cash as a casino incentive.

The problem with cash incentives in casinos

lies in the redemption process or more to the

point, the ability of players to exit the building

after receiving a cash incentive. The percentage

of patrons walking out with cash or

“walk-rate” was well documented and often

exceeded 20% or more.2 The cure for the

industry challenge of high walk-rates was the

evolution of technology in the form of “cashless

gaming.” Cashless gaming is also used

interchangeably with promotional credits, eplay

or free-play, depending on the jurisdiction

and for the balance of this article we will

use the term promotional credits.

Introducing promotional credits was

appealing to operators as a way to better target

incentivized players while reducing the

walk-rate of cash leaving the building. The

walk-rate reduction was a result of players

who received promotional credits being

obliged to play the credits back into the

games. A subsequent benefit was the promotional

credit process allowed casinos to track

individual patrons. The process and systems

used for the issuance of promotional credits

readily identified players who received these

types of promotional credit benefits. The

associated data then allowed for subsequent

evaluation of player behaviors to identify

those players who were taking advantage of

the casino by playing only their promotional

credits and not giving the casino “a shot” at

their gaming wallet.

Fast forward to 2014

Promotional credit expense often represents the

large majority of casino marketing incentives at

most properties. This is especially true at properties

with fewer amenities such as hotel rooms

or a multiple food and beverage outlets.

So how does all this tie-back to the 80/20

Rule and the 2014 reality that it is this rule

that exacts significant influence on a casino’s

slot hold? In recent times, there has been significant

momentum towards marketing based

on “Net Win.” This momentum is enabled by

the quality of data collection offered by

today’s slot systems. The instances are rare

when we do not know the precise player revenue

and redemptions of promotional credits.This heightened tracking allows for analytics

to determine which players are playing more

promotional credits back into the system than

they are taking.

While the outdated style of the original

80/20 Rule offers value, casinos can now use

a Net Win 80/20 process to see which

patrons are truly the most valuable. As

Figure 1 shows, based on research with our

clients around the county, there is a 12% or

more increase in accuracy when using Net

Win versus Gross Win as the 80/20 Rule calculation.

When property management can identify

the breaking line for the value of the fewest

patrons generating the lion share of Net

Win, 87% in the case of Figure 1, they

focus on using promotional credits towards

these high value patrons. The alternative in

this case is to wastefully spend promotional

credits on patrons who, based on their

history, are expected to generate less than

13% of Net Win. When we engage in discussions

of marketing program expenses

with property management teams, we are

consistently communicating that efficient

promotional coin expense is the key to

incremental profitability. In short, focus

the promotional credit spending on player

sets that generate the most expected value.

This effort typically involves raising the

thresholds of reinvestment segmentation.

For most operators, there is significant positive

bottom line impact of focusing promotional

credit program reinvestment

efforts in this manner.

Impact of raising reinvestment

threshold of promotional credits

As is shown broadly in Figure 2, and more

detailed in Figure 3, there is an obvious decline

in slot hold as patrons are higher in value.

The decline in hold is not solely due to

more promotional credits going to better

patrons; however, it is one of the primary

considerations, especially if your total gaming

revenue is 70% rated or more. That said,

this also shows that marketing and operations

need to be ever more in-sync with each

other. In the end, if we incentivize our best

players accurately, the aggregate floor hold

SHOULD come down.

By understanding marketing’s plans and

tactics about promotional coin reinvestment,

slot operations can work to offset the lowerhold percentages by increasing the quantity of

lower denomination (generally higher hold)

games to floor.

To wrap up: In a sophisticated marketing

program, cash walk-rate should not be a concern.

Historically the walk-rate was a red

mark because of the antiquated methods used

to deploy the credits and who was receiving

them. If you think about it, 90 dollars of every

100 in promotional credit turns into cashable

credit after the initial play cycle (assuming a

10% hold). Based on our experience, the

walk-rate is reduced not so much because the

promotional credit issuance, but because we

are better targeted in the distribution of the

promotional credit.

Lastly, we should never forget that our

bills are not paid by hold percentage; they

are paid with real dollars. The goal of any

promotional credit program should always

be to increase the expected amount of Net

Win generated by the slot floor. Keeping in

mind higher value players typically play

lower hold games, it is reasonable to project

our gaming floors can generate additional

revenues through increased

wallet/market share from high worth players,

even if the aggregate floor hold

decreases slightly. This is the measured

outcome of successful marketing to higher

quality patrons.

1 Newman, MEJ. “Power laws, Pareto

Distributions, and Zipf’s law,” pg. 11

2 Based on personal experience of author in position

as Director of Strategic Planning/Marketing

Analysis for casino in Atlantic City 1993-1998

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 College of NJ. Jay can be

reached at JSA2002@comcast.net and welcomes

your comments and questions.

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