Authors’ Note: On this third article of our 12 part series on customer centric gaming floors, we tackle participation games and the way casinooperators can maximize potential returns. Please note these articles are supposed to stimulate thought and that we're using some deliberately provocative metaphors and examples which need to be fascinated about a grain of salt.

One of the most important challenges facing any slot manager is figuring out the correct level of participation or revenue sharing games to position at the floor.

This participation game conundrum is an issue of much debate and underpins a huge rift between manufacturers and operators. Manufactures might say that these games bring incremental revenue, while operators question if revenue sharing games are only reallocating monies that the casino would have otherwise collected.

We’ve decided to wade into this debate and description some real ways that, by measuring customer behavior, we will discover the real value of a participation game. To start, let’s introduce the 2 extremes of operator types in relation to revenue sharing: the two percent and 10 percent operators.

The “2 percenter” operator believes that participation games need to be lower than 2 percent of the entire gaming floor, and in lots of markets there are very successful operators where this low number is valuable. Of course, games comparable to Wheel of Fortune are still a must, however the performance benchmark needed for the two percenters to introduce a participation game is terribly high. If the games are 20 percent revenue share and perform at double house average, then the price of these games in manufacturer fees is 0.8 percent of the whole gaming revenue.

Meanwhile, the “10 percenter” operator has huge numbers of participation games that dominate the gaming floor and are a central a part of the whole gaming strategy. An operator with 10 percent of its gaming floor showing participation games is paying around 4 percent of its overall revenue in participation fees.

THE TRUE COST

As we will see from the wide disparity between 2 percenters and 10 percenters, there may be clearly much disagreement within the industry in regards to the value of participation games, including wide-area progressives. The disagreement arises from the price of operating this sort of games. Most games have a set purchase cost (which might be paid either abruptly or in daily increments), but wide-area progressive machines are priced according to a percentage of coin-in. A few of this percentage goes to increasing the progressive meter of the sport (that is often greater than $1 million) and a few goes back to the manufacturer, but none of it goes to the casino. To grasp how a lot more expensive a participation game can be, let’s take a look at an example.

First, let’s determine as a percentage of revenue. This cost is calculated as a percentage of coin-in, however the true cost to the operator must be calculated as a percent of revenue. To assist us calculate the actual overall cost of ownership for participation games in comparison to non-participation games, it helps to make use of some simplifying assumptions. For non-participation slots, we’ll assume that the associated fee to buy the sport is $20,000 and that over the process three years the sport theme must be converted once at a value of $3,000. We’ll also assume the sport is winning $150 per day. So the price to possess this nonparticipation game over 3 years is $23,000, and over this same three-year period the sport will produce for the casino $150 x 365 x 3 = $164,250 in gaming revenue.

Thus, if we then leave aside considerations like cannibalization or consolidation of play, the investment cost as a percentage of net revenues is $23,000 / ($164,250 - $23,000) = 16 percent for this non-participation game.

Moving directly to a participation game, we're still going to imagine that it wins $150 per day, but we'd like some different assumptions: that the participation cost is 4 percent of coin-in and that the casino hold percentage of the sport is 12 percent. Because the game does $150 per day in revenue, with a 12 percent hold it must do $150 / 12 percent = $1,250 per day in coin-in. Of this, the fee to possess is 4 percent or $50 per day. So, over our three-year period, the associated fee to possess the participation game is $54,750, with the similar gross revenues of $164,250.

Thus, for the participation game the investment cost as a percentage of net revenues climbs to $54,750 / ($164,250 - $54,750) = 50 percent!  Our investment cost as a percent of net revenues has increased threefold with the participation game, and our gross expense has increased $31,750 over three years. Clearly participation games are very expensive, so operators want to know they're getting value for this expense.

IS THE FEE DEFINITELY WORTH THE RETURN

Now we get to the talk. Participation games are inclined to have average or better than average win per unit—and they're highly regarded with customers. But are they definitely worth the increased cost to possess? Within the example above, the win per unit per day (or WPU) net lease fees for the non-participation game is $129 over the 3 year period, whereas the WPU net lease fees for the participation game is $100—a clear winner for the non-participation game.

The results are less clear when the participation game outperforms a non-participation game.  If instead the non-participation game is solely making $100 WPU, then the WPU net lease fee becomes $79 in comparison to the participation game’s WPU net lease fee of $100.  Traditionally, operators have a look at those results and judge that the participation game is the easier performing game and thus the simpler game to extend the casino’s final analysis results. 

Let’s dig deeper into this example, now bringing within the concept of cannibalization. Whenever a slot machine provides a revenue lift (for example, replacing a $100 win per day game with a $300 win per day game); a few of that lift is incremental and a few of it's play that shifted from other games. The play that shifted from other games is named cannibalization. To know if participation games are definitely worth the increased cost to own, we explore two simple examples, one where the sport has low cannibalization and one where the sport has high cannibalization. For either one of our examples, we will be able to compare the price of a participation game that does $150 win per day versus a nonparticipation game that does $100 win per day. Thus, there's a lift of $50 per day driven by the participation game. We’ll also assume that the participation game has a 12 percent hold and prices 4 percent of coin-in. As we calculated previously, the associated fee to possess a participation game is $50 per day. In comparison, the three-year cost of $23,000 to possess our example non-participation game is solely $21 per day.

In the examples below we wish to see if we will justify the incremental cost of $29 per day to possess the participation game.

The Low Cannibalization Game:First, let’s consider a participation game that may be highly regarded and whose customers have shown a propensity to not gamble a great deal on other non-participation games. On this case, the cannibalization of this game from other games is low. If customers of this game don’t play many other games, there can't be much play shifted from other games to this game. So let’s assume that the cannibalization factor is 20 percent—that is, of the $50 lifted from the participation game versus the non-participation game, only 20 percent (or $10) is taken from other slot machines on our floor. On this case, our truly incremental revenue from the participation game is $50 - $10 = $40, that's enough to hide the additional $29 in cost to-own expenses.

The High Cannibalization Game:In this example, let’s consider a participation game that also is very talked-about; however, the purchasers who like this game also love to play other non-participation games. On this case, the cannibalization of this game from other games is high. Let’s assume that the cannibalization factor is 70 percent—that is, of the $50 lifted from the participation game versus the non-participation game, 70 percent (or $35) is taken from our other slot machines. On this case, our truly incremental revenue from the participation game is $50 - $35 = $15, which not nearly enough to hide the additional $29 in cost to- own expenses. In other words, on this example, we really lose money on our participation game, even though it's winning an additional $50 per day over our hypothetical non-participation game.

MARKET CONSIDERATIONS

Notice that there are lots of factors fascinated about this calculation. Cannibalization is among the key factors, however the floor win per unit is another significant component. The fee to possess a non-participation game is fixed, whereas the associated fee to possess a participation game is variable. Thus, for low win per unit per day floors, the increased cost of a participation game is less relative to the non-participation game, making it much more likely that it's worth paying the participation fee. For higher win per unit per day floors, the fee to possess a nonparticipation game may be very small in comparison to a participation game, making it less likely that paying the increased expense could be profitable. Thus, market performance affects return on investment. For example, in a low-revenue market, say $100 per machine per day, the easy economics of revenue sharing games could make a large number of sense. Quite simply, the revenue share is also lower than a capital purchase. Daily fee games are a distinct matter, however, and in high-value markets, say $500 per machine per day, these games are cheaper as a percentage of total revenue (see Table 1).

Now let’s look closer at participation games’ cannibalization, because it is the key determining consider our calculations of worth today. Unfortunately, seeking to determine the results of a brand new product on existing products may also be daunting. Are we able to ever measure whether a particular customer’s $20 wager was meant for one more machine or was along with their normal gaming spend on a “typical” trip? First, let’s check out the player’s behavior using an unnamed but real customer database. After we try to determine the expansion of a player’s worth, one metric we use is their ADT (average daily theo). This metric works fine if you end up measuring trip worth over a period of time, for example, to look the consequences of your marketing efforts. But when we use ADT as a baseline to measure a player’s incremental spend on a single day, the effects might be disastrous. In a 3 month sampling of information for the core customer base, we found that only 14 percent of all trips made by players were within a +/- 10 percent in their ADT. Greater than 1/2 all trips made fell below the 90 percent mark in their ADT and 34 percent of all trips were above 110 percent of the player’s ADT. Nearly one-fifth of all trips didn’t even meet 25 percent of the player’s ADT. The variance in our player’s trip theo to his actual ADT is enormous, and lets easily miscalculate even if a $20 single session increased or decreased his trip’s theo win compared to his ADT.

This real world example highlights the complexity occupied with seeking to measure what a customer would have done on a removed game vs. what they did do on a brand new game that replaced the removed game.  If we won't expect a metric like ADT, which isn't only simple but could also be the bedrock of many casino marketing programs, what are we able to do?

BRINGING ALL OF IT TOGETHER

As long as there are participation games there'll be debate at the value of this business model. Clearly the important thing to unlocking the real cost of the games is to seek out the cannibalization numbers for every of the games. While it isn't a very easy calculation, you will see the impact of cannibalization to the slot results are startling and can shine a brand new light at the true cost of revenue sharing. 

View previous articles in series:

Big Data capabilities in casino employment

Theoretical win and other traditional outcome metrics miss the boat with regards to optimizing slot floor performance

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