by Sudhir H. Kale
Lifetime Value of a Casino Customer
By Sudhir H. Kale*
Casino executives have been prepped to assert that all their customers are important. All customers are never equally important in any business and the gaming business is no exception. Intuitively, we all deal with customers on the basis of their perceived value to the casino. But how does one objectively prioritise the importance of a particular customer or a customer group? The answer is simple: Look at the lifetime value of a customer.
Lifetime value is based on customer profitability to the organisation over the course of a relationship. Here are some hard facts:
Most companies find that between 20% and 40% of their customers are not profitable.
Often, most profitable customers are not the largest customers but mid-size customers.
The smallest customers pay full-price and receive less service but the costs of transacting with small customers reduces their profitability.
On March 18, 2001, Andrew MacDonald posted an article on the Urbino website called Dealing with High Rollers. This article addressed the severe risk casino operators subject themselves to when they cater to a select few (predominantly Asian) customers playing high-limit Baccarat. Andrew writes that 14,981,640 hands of Baccarat need to be dealt before the casino can obtain a certain win rate between 1.25% and 1.35%. This high win-rate volatility, combined with the customer credit risk and high incentives demanded, often make the so-called high rollers a less than attractive proposition for a casino. Thus, the lifetime value of a Baccarat junket may not be as high as most casino executives would have us believe.
Be it a particular customer segment or an individual customer, lifetime value analysis is indispensable for the marketing strategy of a casino. It provides invaluable insights in terms of who to target and what kinds of relationships to form with each targeted group.
What is Customer Lifetime Value?
Simply put, customer lifetime value is the amount by which revenues from a customer over time will exceed the company’s costs of attracting, selling, and servicing that customer. Tom Peters of In Search of Excellence fame provides a simple example to illustrate this concept. Peters estimated that his 20-person office had approximately $1,500 per month in business with Federal Express, the courier company. Assuming a ten-year average lifetime for a customer in the express mail industry, the value of his firm to Federal express becomes:
$1,500/month X 12 months/year X 10 years = $1,80,000.
Going even further, he estimated that in this industry, a happy customer will create at least one new customer of equal value via positive word-of-mouth:
$1,80,000 X 2 customers = $3,60,000.
Thus, the value of Peters’ business for Federal Express was about $3,60,000.
Casinos could factor in the costs and expenses associated with the various market segments (junket players, local high-rollers, interstate players, machine players, etc.) and arrive at lifetime value estimates of each segment. Based on the core competencies, risk tolerance, and growth objectives, they can then decide which segments they want to attract and in what priority. To be realistic, a more complex calculation would estimate the dollar value of all benefits associated with a loyal customer, not just the long-term revenue stream. The values associated with positive word-of-mouth communication, employee retention, and the declining account maintenance costs would then enter into the calculation.
Customer lifetime value analysis tells us not only which customers to aggressively pursue but also hints at the ones to let go. A casino should not target its services to all customers; some segments will be more appropriate than others.
There are qualitative considerations that also impact the overall profitability of a market segment. Numbers aside, a company may want to terminate its relationship with customers when:
Conditions specified in the contract are no longer being met.
Customers are abusive to the point that it lowers employee morale.
Customer demands are beyond reasonable, and fulfilling those demands would result in poor service for the remaining customer base.
The customers’ reputation is so poor that associating with that customer tarnishes your image.
Every gaming executive will readily recall examples in each of the above four categories. Quantitative lifetime value analysis combined with a qualitative customer base assessment will result in a win-win situation for both you and your customers.
Finally, a simple quiz for the Casino 101 class: What is the lifetime value of a customer who plays Blackjack according to the basic strategy at your casino? Make the following assumptions: The customer’s average bet is $100 and she gambles three times a week at your facility; the average playing time per session is three hours; also assume that the customer will be with you for fifteen years.
Date Posted: 25-Jul-2001
Sudhir Kale is Associate Professor of Marketing at Bond University in Australia. He is also a marketing trainer and consultant for several types of companies including gaming. His e-mail address is SudhirKale@Bigfoot.com.