Casino Enterprise Management

Last month, I discussed cash back versus cash rewards and the need to better understand the math. That article drew more response from around the world than many other articles I had published. Therefore, I can see there is an industry need to try to explain the basics behind many of the marketing programs that are so arbitrarily adopted by casinos around the world.

People want to better understand these programs, but many do not know where to find the answers. In addition, the casino industry is often considered a “copycat” industry where one casino just copies another if they think they have a good idea. However, the problem magnifies itself when bad ideas are replicated.

I remember working for Caesars World International many years ago. Caesars Palace was viewed as the leader at that time in international marketing. We decided to change our airfare reimbursement guidelines to help boost the profitability of our Far East marketing program, so we changed the method of calculation in our comp guidelines. 

However, within three months, we realized that we made a huge mistake and were actually overcompensating players and reimbursing far too many international airfares, especially first-class and business-class tickets from Asia. 

Caesars corrected its program, but interestingly enough, I saw the exact same flawed program surface for many years afterward on various casino letterheads as an airfare reimbursement policy. Therefore, I always caution people to beware of the copycat syndrome before adopting any other casino’s program.

Do the math first, and make sure the program really makes good business sense, and more importantly, good business sense for your casino—which may have a different tax rate, or other variable factors.

During those years (early 1980s), Caesars World International was actually quite progressive in its marketing thought processes. We were not afraid to try new ideas, and in fact, we were encouraged by senior management to look for innovative concepts.

We developed one that we referred to as our “risk/reward strategy.” This was actually the precursor of “loss discounts” as we know them today.

The competition for the lucrative Far East business from Asia was increasing rapidly, so we knew that we had to develop something innovative to help increase market share and maintain customer loyalty.

We thereby decided to focus on the premium VIP player and offered anyone who would deposit at least $100,000 in the cage in cash or credit a new opportunity—if they lost $100,000 or more, they would only have to pay us $90,000 (the amount they lost less ten percent); but on the other hand, if they won $100,000 or more, we would also deduct five percent and alternatively only pay them a net of 95 percent of what they won. It sounded fair and creative to us. 

However, our customers hated the idea and it never worked. About the same time, I adopted one of my favorite expressions relating to the casino industry: “The operation was a success, but the patient still died.”

Our innovative idea died, but we were still left with damage control. Eventually, we gave in to a one-sided deal by discounting the player if they lost over $100,000. 

To the best of my recollection, this was the beginning of casino loss discount programs. I am not sure if the program was born out of innovation (or out of conciliation) to try to appease our VIP customers.

Loss discount programs are pretty straightforward today, but there are many factors that still need to be taken into consideration. Basically, the casino agrees to rebate a player a certain percentage of their loss on a gaming trip based upon certain minimum pre-established thresholds.

There are some variations, but normally the maximum rebate is capped at 20 percent. The rebates are normally applied to any outstanding credit balances first, before giving any cash to the player. In the event that the player’s check is returned by the bank to the casino, the amount owed to the casino normally reverts back to the gross amount owed before any loss discount. Normally a “trip” consists of up to seven consecutive days of play (as a maximum) to help average the variances due to volatility.

And finally, all loss discounts are strictly discretionary and subject to final approval by casino management, which will review them on a case-by-case basis. This allows casino management to reject loss discount requests from players that are on a winning streak who suddenly lose a large amount of money; specifically, those players who are also still substantially ahead of the casino (unprofitable).

Loss discounts are not, and should not be automatic for every customer.

If your casino is contemplating establishing a loss discount program, the very first thing your casino needs to assure is that your regulations will allow you to do so.

The second thing you need to do is establish approval procedures, and limit that approval to just individuals in senior management positions who understand gaming, the regulations, and how to deal with premium VIP players.

My recommendation is not to allow any sales people, such as casino hosts or casino player development executives, the ability to approve loss discounts. It is always difficult for salespeople to say no to their better customers.

The decision maker needs to be objective and have the ability to explain to VIP premium players why the casino did not to give them a loss discount for their trip in a manner that will still maintain the player as a customer.

It is not easy dealing with big players who are not used to hearing the word no. If the loss discount program is based on actual losses, then you will also face the challenge of rating discrepancies from the floor, and may have to ascertain whether your regulations will allow for such discrepancies.

Other issues that have surfaced recently are whether to pay loss discounts on slot losses or on theoretical losses versus actual losses. With slot losses, I always caution everyone to take a look at the gaming tax rate first.

For example, many Native American casinos may pay 25 percent tax to the state on slot wins and zero percent on table game wins, depending on how the compact was written.  Also, if a casino is paying zero percent state tax on table game wins, they can afford to be more generous and competitive than other casinos that may be paying a higher tax rate. 

Slot machines generally hold a smaller percentage than table games, and machines vary. It is far more difficult to calculate theoretical losses on slots due to jackpots and other variables by manufacturer, machine, game, etc.

As far as loss discounts on theoretical loss versus actual loss, I contacted my friend Andrew MacDonald again. MacDonald has exceptionally researched the mathematics related to discounts on loss.

I realize these concepts probably seem extremely complicated at first glance, but then again I am only giving you part of MacDonald’s complete analysis for demonstration purposes. 

Once again, he has agreed and I am happy to send anyone who wishes a complete copy of his paper on loss discounts. When you read it in its entirety, it is not so complicated. And anyone who wants to learn more about the math behind loss discounts, please send me an e-mail with all of your contact information, and I will be happy to send it to you.

Remember, do your homework ahead of time. Good luck.