Cash Back vs Cash Rewards: What are the real costs?
by Steve Karoul

Understanding the math is important.

Customer loyalty? Does it really exist in the casino industry today or are we just buying loyalty? The casino industry has changed dramatically over recent years as competition increased. As an independent casino marketing consultant I now find myself viewing the same situations that I previously reviewed as a casino marketing executive but now I look at them from a different perspective. Casino executives tend to view many programs with an eye towards developing customer loyalty and consultants tend to look at programs from the view point of loyalty versus profitability and how do you balance both. In the real world this is called "optimizing" the process for maximum profitability and maximum customer loyalty. Most of these loyalty programs now target Slot players due to the fact that it is easier for the casino to more accurately track the slot customers play via their Player's Club card in conjunction with the software used with their slot player tracking program.

However, this is not a simple, clear cut analysis and casino management needs to very carefully evaluate many different variable factors. In other words, you need to understand the math. Slot marketing programs are actually quite interesting because there are so many different motivators available to choose from. Never-the-less, they are all predicated upon rebating a pre-specified percentage of the slot handle or coin in back to the slot customer in one form of incentive or another. In some cases, the slot customer plays for casino comps such as free room, free food or free shows. In other cases, the player earns points based upon coin into the slot machine. The points can then be redeemed or used at the casino for purchasing services such as rooms, food, beverage, entertainment, spa and salon or in some instances even for retail purchases. These points (1 point normally equals $1.00) normally cannot be used for gaming. A second version of the program allows the points to be converted back into cash called "cash back" which is returned to the patron in the form of currency or cash. And a third version allows the points to be converted into cash in the form of "cash rewards" but with the restriction that the given amount must be played through the machine at least once before it can be cashed out for currency. Therefore, Cash Back does differ from Cash Rewards.

There are a number of other variables that also come into consideration such as the type of machine being played such as video poker versus video slots, the average slot hold percentage and the slot tax for that jurisdiction. There is also one additional common denominator that is very subtly masked under all of this and that factor is called customer loyalty. Why do casinos offer incentives? They offer them because they work and they do help to bring players back to their casino. These are not much different than the airline frequent flyer programs that also develop customer loyalty. Therefore, one must assume that more incentives will translate into more customers which will also translate into more profits for the casino. Casinos constantly try to massage all of the variables in an attempt to tweak the formula for success and develop the perfect balance or optimization for maximum customer loyalty and maximum profitability.

Unfortunately, there is one major risk or flaw in this thought process. If the formula used to initially calculate the incentive is incorrect, then it is possible for the incentive to very quickly turn from a player incentive into a casino liability because the more players that accept the flawed incentive would equal increased losses for the casino instead of increased profits. I have seen many strange slot marketing programs that just do not make good business sense to me. The only thought that occurred to me was that the casino must be using their slot loyalty program as a "loss leader" similar to what food chains or restaurants sometimes do to drive traffic to their location in order to help steal market share from a competitor similar to the casino $3.95 Prime Rib dinner special. However, when you see the program continue over long periods of time you really have to ask yourself if management ever really analyzed the actual true costs of their promotion or incentives. I would bet that they had not. Once again, understanding the math is important.

It is actually very important to understand the math and the cost of Cash Back as a percentage of theoretical win. As part of my research for this article I found some excellent analysis by Andrew MacDonald from Sky City Casino in New Zealand. Andrew also developed and maintains the gaming industry's leading educational portal www.urbino.net which contains a number of helpful analyzers. I also found some similar top quality research by Samson Tse who is a very talented gaming analyst with the MGM Grand. I also further verified their analysis with Eli Abramovich who is a highly regarded gaming analyst and statistician in Israel. Their analysis is fairly technical and involves a second order polynomial with a quadratic equation that considers the following variables:

= cash reward percentage of drop
= tax rate for that jurisdiction
= hold percentage (slot win / drop)
= 1/h (turn ratio to exhaust funds)
= percentage of slot theoretical win

Cash Back Formula: T% x C%/{H% x (1-C%R)}

By using this formula Samson was able to solve for C (Cash Reward as a percentage of handle) and Andrew was able to solve for potential growth in turnover and win as a function of introducing Cash Back. If no reinvestment occurs and players cash out their Cash Back incentive rather than use it for additional play then the growth factor will equal zero percent (0%). However, if re-investment occurs and players play until exhaustion of cash back funds, then growth =

1 / (1-P%)
= cash back percent of turnover
= return to player level
= R turn ratio to exhaust funds
= tax rate
=H% hold percentage

Potential growth in turnover and win as a function of introducing Cash Back, Formula:

  {C% x (1/(1-C%R))} / (1-P%)
                                           or {C% x (1/(1-C%R))} / H%

By inputting the correct numbers into the formula depending upon the jurisdictional tax rates will reveal some very interesting information. For example, Andrew's analysis was based upon information from Australia and he determined:

Cost of cash back as a percent of theoretical win:

  Range from: 1.96% (play until exhaustion)
Range to: 4.67% (no play

Date Posted: 26-Oct-2006

Steve Karoul is one of the top casino marketing consultants in the world today with almost 30 years of experience with the best casinos both within the U.S. and internationally. Steve has lived in numerous countries and has conducted casino marketing activities in over 80 countries around the world. He is a contributing writer to several different major casino publications often injecting his own hands on experiences. Steve can be reached at Tel. (1-860) 536-1828 or by E-mail: skaroul@comcast.net

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