Crunching the VIP numbers

Mar 27, 2006 11:18 PM

At nearly two miles above sea-level, topographically everyone making any wager in Black Hawk or Central City is a high roller. Contrary to my moniker, I am truly not a high roller in the traditional casino sense of the term.

One would assume with the limited stakes milieu of Colorado casinos, nobody could play enough to be a high roller. Not true! There are some pretty serious players in Black Hawk, Central City and Cripple Creek.

Different properties measure player worth by different criteria; however, in general, the rule of RFM (Recency, Frequency, Monetary) is in force. In simple terms, the RFM formula allows a casino to see how recently a patron visited during an evaluation period, how often the patron visited and how much was spent. Computing the "spend" or monetary variable of the equation is the tricky part.

Frequency of play should correlate with distance traveled. The historic mining town gaming markets may be considered to be local and regional (pulling from two concentric zones of 50 miles or less for an inner ring and approximately 50 to 100 miles for an outer "regional" ring).

Unlike a destination/tourist oriented market such as Las Vegas, the proximity of Black Hawk and Central City to Denver and Cripple Creek to the feeder market of Colorado Springs should allow for an overall approximate average of four trips per active evaluation period of three months.

Those who are stronger players as measured by greater coin in or higher theoretical taken as a whole provide more visits or game days to a property than more casual and lower KPI (ADT, ADCO, ADWL) players.

Some casinos measure by cumulative (for an established evaluation period; e.g., three months) coin-in, daily coin-in, cumulative theoretical, daily theoretical based on play days or visits, "actual" win/loss, and player value. Other properties incorporate the other two elements of frequency and recency.

Frequency is important to serve as a proxy. That is, if a person visits 22 times in a three-month period, a property may estimate that he also contributed to ancillary revenue streams through gift shop purchases or visits to an eatery.

While high rollers might play the most (i.e., having the most amount wagered and decisions — slot pulls — completed), they are not always the most profitable customers in terms of ROI due to their more shrewd playing and the higher re-investment provided by the casino in terms of soft costs (room, food & beverage) and hard costs (instant cash back, "bounce back" cash, and gifts).

Most casinos aim for the Pareto Principle of 80/20 (defined as 80% of revenue is derived from 20% of the customer base). This 20% of strong players becomes the default VIP grouping.

Casinos measure the worth of a value of a player in terms of what the house can expect to win from a player. Typically, there are estimations of house win that delineate VIP versus non-VIP players resulting in segmentation.

For example, if the cut-off is 200 Average Daily Theoretical (ADT), then anyone below that level of play might not be considered for special mailing offers or invitation to events. The casino wants to be able to expect approximately $200 earnings toward the gross gaming revenue per play day from the customer. This theoretical is based on gaming duration, house hold, and pace. For clarification, one may look at a simple consistent hold game such as American Roulette.

Roulette has a 5.26% house edge or hold. A well-paced game can allow for 45 "decisions" or spins, and the amount wagered and duration played are the independent variables. Assuming a player plays $100 on red for four hours, his theoretical will be ($100 X 1 hours X 45 X .0526): $236. In other words, the player can expect in the long run to lose to the house $5.26 on every decision. Of course in Colorado there are not games of chance (i.e., where an active decision does NOT need to be made such as with Roulette or Craps) and the maximum bet is $5.

Still, getting back to the high roller issue, a player could play for three hours on a stepper reel (e.g., IGT Double Diamond, Bally Blazing 7s) at $5 per "decision" at a spin rate of 360 decisions per hour (6 spins per minute). Assuming the hold for a $5 machine is 4.17% (the statewide average hold for Colorado on $5 stepper reel machines), this individual’s theoretical (for this gaming day’s session) would be ($5 X 3 hours X 360 X .0417): $225. If this player kept up the pace on each visit he would be considered a VIP based on having an ADT of $200.

The three progressive tiers are in order from lowest to highest: The Rail Pass, Gold Star, and Platinum Pioneer. By examining the benefits chart linked above, the different benefits clearly favor the higher tier members. To obtain the second tier level of "Gold Star", one must accumulate 40,000 points, the equivalent of $40,000 coin-in over a three-month evaluation period; the Platinum Pioneer requires a minimum cumulative coin-in of $50,000.

Assuming that the Platinum Pioneers are considered the top of the VIP totem pole, these customers on average can be expected to lose on average at least ($50,000 X .057) = $2850 . The 5.7% hold is the Colorado gaming market’s average hold derived from all slot machines in all limited stakes markets.

As will be seen, since VIP status and established re-investment is measured by cumulative coin-in, he will be receiving 627% on his investment — 18X industry standard re-investment rate (please see following equations).

With a cash back policy of $1,000 coin-in/1,000 points equaling $1 cash back (on both slot and video poker devices), the $50,000 player can expect $50 cash back (a 0.1% cash re-investment level). Using the rule of thumb for total re-investment including hard costs (cash back) and soft costs (hotel rooms, food and beverage, events, prizes), the $50,000 coin-in player over a three month period should expect 1/3 of house theoretical in re-investment ($940.50).

When one adds up the re-investment offered (assuming redemption of all offers during a three month evaluation period) one would get: 12 rooms at a face value of $89 + 36 meals at an approximate value of $20 + $50 Cash Back + $100 birthday gift + $1200 bounce back cash offers — based on industry standard direct mail cash back amount over a three-month period for this level of coin-in): $3138 or 110% re-investment, approximately 3X industry standard re-investment.

Of course, few players redeem all coupons and offers, but the liability does exist for the casino. However, if all benefits are collected by this top level player, the casino ends up paying out $1.10 for every theoretical $1 it collects.

Of course all players will not lose exactly 5.7% of their wager amount, but with enough coin-in and enough decisions, the "rule of large numbers" would statistically suggest that this over-all amount as a (theoretical) norm should be pretty close to actual house win and player loss.

Unfortunately, for the house, when a player includes all of the expected value from re-investment, the house is actually at the negative expectation; for each dollar lost, the casino on average "refunds" more than the $1.00 leading to a positive sum game for the VIP player. A VIP player who equitably takes advantage of the re-investment offerings in Colorado has, to phrase it mildly, a pretty sweet deal.