May 4, 2000
Casino Chain Mines Data on Gamblers,
And Strikes Pay Dirt with Low-Rollers
By CHRISTINA BINKLEY
Staff Reporter of THE WALL STREET JOURNAL
TUNICA, Miss. -- She doesn't know it, but Linda Maranees is the subject
of a behavioral experiment that could change the odds of the gambling
business.
The Memphis, Tenn., retiree, her blouse bedecked with sequined cards
and dice, has just received invitations to two nearby slot tournaments,
along with vouchers for $200, all courtesy of Harrah's Entertainment Inc.
"Harrah's is savvy," says Ms. Maranees, who admits that once in the
casino door, she is bound to spend much more than what Harrah's has
given her.
That is exactly what the Las Vegas-based company is banking on. Over
the past two years, Harrah's has quietly conducted thousands of
clinical-style trials to determine what gets people to gamble more. Based
on its findings, Harrah's has developed closely guarded marketing
strategies tailored individually to the millions of low-rollers who make up its
bread-and-butter business.
The results are impressive enough that other casino companies are copying
some of Harrah's more discernible methods. Wall Street analysts are also
beginning to see Harrah's -- long a dowdy also-ran in the flashy casino
business -- as gaining an edge on its rivals. Harrah's stock price has risen
quickly in recent weeks as investors have received news of the marketing
results. And the company's earnings have more than doubled in the past
year.
At the center of Harrah's strategy is a former
Harvard professor named Gary Loveman and a
vast mathematical model much like the ones that
economists use to predict the gross national
product or that airlines use to fill seats with the
highest-paying fliers. But this one scores gamblers
on how profitable they can be to Harrah's. Richard
Mirman, the company senior vice president who
refined the model, boasts that it is Harrah's "secret
recipe" -- on a par with the famous unrevealed
formula of Kentucky Fried Chicken.
The model tells Harrah's marketers how to appeal
to gamblers such as Ms. Maranees, based on data tracking their previous
behavior in casinos. Spitting out "behavior modification reports," Harrah's
computers suggest that Ms. Maranees -- an avid slot-tournament player --
will respond best to a cash offer, while Tina Montgomery, a real-estate
agent from nearby Oxford, Miss., is better motivated by a free hotel room.
As Ms. Montgomery gambles downstairs, she explains, "my husband stays
in the room."
Drawing on data from electronic frequent-gambler cards that customers
present before they play, the model sets budgets and calendars for
gamblers, calculating their "predicted lifetime value" to Harrah's. When a
gambler wagers less than usual -- by skipping a monthly visit for instance
-- Harrah's "intervenes" with a letter or a phone call offering a free meal, a
show ticket or a cash voucher. Telemarketers are trained to get customers
to talk about their earlier casino experiences, and then to listen for trigger
phrases such as "hotel room" or "steak dinner" to come up with the most
alluring offer.
This "Pavlovian marketing," as Mr. Mirman calls it, is a far cry from the
traditional methods gambling companies have used to attract customers.
Casinos have long depended on the inherent sexiness of their product to
reach the low-rolling public. Until Harrah's, they have eschewed the kind
of quantitative analysis employed to great effect by other
consumer-oriented industries such as airlines and banks. Instead, they have
focused on high-rollers, doling out VIP perks such as free flights and fine
champagne. The masses have been courted with gimmicky contests and,
increasingly, with fantastical top-this-one resorts.
This has cost the gambling industry. Over the past decade, the billions of
dollars lavished on hotels, malls and marble bathrooms have cut casino
investment returns in half. So Harrah's, with its solidly proletarian
properties in places like Topeka, Kan. and Joliet, Ill., has had to think
differently.
The marketing push was born when Phil Satre, Harrah's chairman and
chief executive, was struggling to recover from what appeared to be a
gross strategic error in the early 1990s: After leading the way among
casinos into new jurisdictions as legalized gambling spread across the
country, Harrah's got creamed whenever competitors put up flashier
properties next door. "We were fed up with running our business as a
victim," says Colin Reed, Harrah's chief financial officer.
The only way out was to squeeze more business from existing customers.
But the first round of "loyalty" marketing and technology programs, with
names such as Marketing Workbench and WINNET -- which generally
relied on blanketing gamblers with freebies -- not only failed to keep them
coming, but also cut into the company's bottom line.
In 1994, Harrah's hired a chief marketing officer, Brad Morgan, with
experience at Visa and Procter & Gamble, to bring in some outside
consumer-marketing savvy. Mr. Morgan spoke of sizing up gamblers
"psychographically" -- rating them according to characteristics such as their
careers.
Mr. Morgan also identified a small group of Harrah's customers who
produced most of the company's profits. He says he found that people
who spent between $100 and $499 a trip accounted for about 30% of
gamblers but 80% of revenue and, startlingly, nearly 100% of profits.
Among themselves, Harrah's officials referred to these customers as
"grazers" for their steady casino habits. Publicly, the company settled on
another term for its core audience: "avid experienced players." "I felt like
I'd discovered the Rosetta stone of casinos," Mr. Morgan says.
"Avid experienced players" became Harrah's target customers.
The company began collecting intimate details on these players when it
launched its Total Gold frequent-gambler card in 1997. The electronic
cards, inserted in slot machines or handed to casino supervisors, gathered
minutiae on gamblers' habits in exchange for letting them know how to
attain the free drinks, hotel rooms, show tickets and other "comps."
The idea was that gamblers would bet more if they
knew the exact threshold they needed to cross to
get a freebie. But it didn't work out that way.
Freebie levels differed from one Harrah's casino to
the next, confusing customers. Casino managers
balked at sharing the data with their colleagues at
other properties. Getting them to cooperate "was
like herding cats," says Mr. Morgan, who left
Harrah's in 1997 and is now a business consultant
in Boulder, Colo.
Meanwhile, Harrah's executives were swimming in
information they didn't know how to use. "I went
through a period of frustration," says Mr. Satre. "I said, 'Why isn't any of
this stuff working?' "
Although he didn't fully grasp it at the time, the electronic card was
generating some key intelligence for Mr. Satre. It told Harrah's how fast
people pull a slot-machine lever and what their favorite games are. It told
them a gambler's age and gender. It helped the company to identify which
neighborhoods around the country produce the most lucrative customers.
A few weeks before Christmas 1997, Mr. Satre made a pilgrimage to
Atlanta to see Sergio Zyman, Coca-Cola Co.'s marketing guru at the time.
In a two-hour conversation in an executive lounge at the airport, Mr.
Zyman talked while Mr. Satre scribbled notes. Mr. Zyman recommended
that Mr. Satre hire a chief operating officer with a marketing background.
With authority over all of Harrah's properties -- which now number 21 --
and over the company's operating vice presidents, the executive could
make marketing the driving force at Harrah's.
In what he calls a "Eureka moment," Mr. Satre thought of Mr. Loveman,
the Harvard Business School professor, who had consulted for Harrah's
about marketing and training. A year from becoming eligible for tenure at
Harvard, the affable and rumpled Mr. Loveman says he was "dumbstruck"
by the offer. Mr. Satre presented the hiring to his board as a fait accompli
because, as he puts it, "if I said I was looking for permission, they'd have
said I was crazy."
Approaching his $1.3 million-a-year job as one of Harvard's classic case
studies, Mr. Loveman decided that a lack of customer loyalty was
Harrah's biggest weakness. Noting that clients spent only 36 cents of every
wagering dollar at Harrah's, he realized that if the company could raise that
by a penny, annual earnings would jump by more than $1 a share. "I'm in
the business of fostering customer monogamy," Mr. Loveman says, "like
the Ladies' Temperance Movement."
Mr. Loveman began his push by recruiting outside help. That's a rarity in
the insular gambling industry, which tends to promote from within. One of
his early hires was Mr. Mirman, a former University of Chicago math whiz
who favors conservative blue suits over the kind of wide ties and pinky
rings often found in casino executive suites. When he left his
management-consulting job at Booz Allen & Hamilton to join Harrah's in
1998, Mr. Mirman says, he shrugged off the reactions of colleagues, as
when a senior partner asked if he was "comfortable with the morals of
this."
Mr. Loveman and Mr. Mirman grouped together the 16 million gamblers in
Harrah's database according to characteristics such as age, how much
money they are likely to lose and how frequently they gamble. Then
Harrah's started testing hypotheses against control groups.
One example: Harrah's chose two similar groups of frequent slot players
from Jackson, Miss. Members of the control group were offered a typical
casino-marketing package worth $125 -- a free room, two steak meals
and $30 of free chips at the Tunica casino. Members of the test group
were offered $60 in chips. The more modest offer generated far more
gambling, suggesting that Harrah's had been wasting money giving
customers free rooms. Thereafter, profits from the revamped promotion
nearly doubled to $60 per person per trip.
In another test, Harrah's focused on a group of
monthly gamblers whom the company suspected
could be induced to play more frequently because
they lived nearby and displayed avid-gambler traits
such as hitting slot buttons quickly (playing at "high
velocity" in Harrah's parlance). To entice them to
make two back-to-back visits, Harrah's sent cash
and food offers that expired in consecutive
two-week periods. The group's average number of
trips per month quickly rose to 1.4 from 1.1.
Harrah's has dropped some old casino standards,
such as giving customers bonus points that can be
spent in Harrah's gift shops and restaurants. Research showed that most
gamblers weren't motivated by the bonus points, which cost Harrah's $14
million a year.
In its trials, the company is also studying the widely held belief that
gamblers notice slight changes in slot-machine odds. If that's wrong, as Mr.
Loveman suspects, casinos could slightly lower the odds of winning and
reap even bigger profits. "I believe there's a lot of money to be made for
the person who has the answer to that," says Mr. Loveman.
This experimentation is helping Harrah's gain market share around the
country. Here in Tunica, chosen as a key test site because of the "average"
characteristics of its gamblers, Harrah's revenue has risen at nearly double
the rate of nearby casinos since the new targeted marketing was
introduced last June. Not only that, the higher volumes came cheap. Profits
at the Tunica casino rose sharply, according to Harrah's executives.
Rivals are trying to follow suit. "Harrah's has taken a different tack than
everyone else, and they've been really smart about it," says Marc
Grossman, head of investor relations for Hilton Hotels Corp., which spun
its casinos off into Park Place Entertainment Corp. a little more than a year
ago.
The approach is also winning some fans among Harrah's old-timers. Tom
Jenkins, who oversees Harrah's Las Vegas flagship, calls Mr. Loveman
and his crew "propeller heads." But he says they've helped to more than
double the rate at which people respond to offers that he mails to their
homes -- to 8% from 3%.
There are more pitches to come. Harrah's last month launched
frequent-gambler cards with gold, platinum and diamond thresholds, which
offer escalating rewards for gambling more. Ms. Maranees, the Memphis
retiree, is a proud diamond echelon player. That means Harrah's expects
she'll lose a minimum of $5,000 this year.
Ms. Maranees says she's not put off by Harrah's "Pavlovian" marketing. "A
gimmick to get me to spend more money?" she asks rhetorically. "Why of
course it is."
Write to Christina Binkley at christina.binkley@wsj.com |
