Locust Marketing

by Andrew Klebanow

Virtually all segments of the leisure and hospitality industries utilize loyalty programs. Airlines, hotels, rental car companies and even restaurants employ methodologies to induce repeat visitation, foster loyalty and build long term relationships with their more frequent and most profitable customers. The airline industry first instituted these programs in the early 1980’s and was followed by hotel and rental car companies. Today, a wide variety of retail industries employ some form of reward programs. They have all come to understand the value of incentivizing and rewarding the frequent users of their products and services. While there are no hard and fast rules regarding the percentage of customer reinvestment, it is generally assumed that these industries return between 2% and 10% of the revenue derived from their loyal customers in the form of various incentives.

The casino industry also employs sophisticated player reward programs and a variety of inducements to foster loyalty. The most obvious rewards are bonus points redeemable for cash back allowances, system-generated comps and cash offers distributed through direct mail. It also includes discretionary meal comps issued outside of the casino management system, complimentary rooms, merchandise, special events such as themed parties and player dinners, 2X and 3X cash back offers to high frequency players, tiered clubs, invitations to events outside of the property and promotions that target those players who are members of the player rewards program. In exchange for these inducements casinos hope to increase the frequency of visits and the revenue derived from their customers. The ratio between these costs and the revenue derived from these customers is referred to as a reinvestment rate.

In establishing player reward programs, casino marketers go through a process that delineates the amount of money they intend to return to players. In the process of designing their reward programs, casinos place conservative values on the amount of money they intend to return to players. The most obvious and visible benefit to players are bonus points earned on coin handle or theoretical win. Bonus points in turn can be redeemed by players for cash back allowances, comps or some combination of the two. In establishing base redemptions levels, casino marketers try to strike a balance where there are sufficient publicly disclosed benefits to induce card usage, while keeping marketing costs reasonably low. Thus, bonus points redeemable for cash back tend to range from 2% to 4% of theoretical win. Casinos also allocate an additional amount to complimentaries. The total base reinvestment rate (points and comps) for most casinos usually ranges from 4% to 8%. On top of that base rate, casino marketers budget direct mail offers, promotions and other demand stimulation programs. At the outset, the total reinvestment rate ranges from 10% to 15%.

As gaming markets mature, gaming growth slows and competition increases, casinos vie for increased market share by gradually increasing the incentives and rewards they issue to their more frequent players. In mature markets, competitors gradually increase their reinvestment rates to levels that can easily exceed 30%. In such highly competitive markets, casinos frequently react to competitors’ offers by further increasing their own offers to players. Customers in turn, only visit those casinos that give them the most for their gaming dollars. Casinos can do nothing but continue to increase the size of their offers and wind up ravaging their markets. This is referred to as Locust Marketing, named after the locust plagues that can consume hundreds of acres of farmland at a time.

Locust Marketing is the systematic devaluation of gaming markets through ever increasing offers to a finite group of gaming customers. As marketing costs continue to spiral upward, cash flow, EBTIDA and net income gradually flatten, then decline. Casino customers begin to view casinos within a market as fungible products, identical in all manner and form. They visit the property that has the most compelling offer and gives them the most for their gaming dollar. Their loyalty diminishes as they divide their gaming activities to those properties that give them the most incentives. As soon as one casino scales back their overall reinvestment rate, customers immediately shift their loyalties to other properties with more generous offers.

The Causes of Locust Marketing
Locust Marketing is caused by a variety of factors. It starts by the pressure placed upon casino marketers to increase gaming revenue, particularly in flat, declining or highly competitive markets. Undisciplined marketers focus only on those tactics that increase top-line revenue without paying attention to the effects such tactics have on cash flow. The end results are ever increasing marketing costs along with a diminution of EBITDA.

Locust Marketing is also caused by the leaders of the gaming organization. By failing to create an environment in which people desire to go to because it is an exciting and entertaining place, operators rely on casino marketers to stimulate demand. In other words, in the absence of product marketing, marketers are forced to implement demand marketing programs in order to induce visitation.

Customers in turn become spoiled. They become used to the offers from competing casinos and only go to those properties that give them the best deal. Where at one time they would visit a casino for shear enjoyment, now they wait for the best offer before getting off the couch.

Ultimately, Locust Marketing is caused by a lack of market planning and the secondary role Casino Finance plays in the marketing plan process. In other words, the Finance Department reacts only when certain marketing and promotional costs rise far above budgeted levels. However, at that point the damage is already done. Customers are by then trained to react only to promotional offers and their loyalty goes to the casino that has the best deal. Ultimately, Locust Marketing is tempered by marketing discipline and the ability of a casino to keep its marketing spending within pre-defined player reinvestment rates.

Andrew Klebanow © 2008

Date Posted: 23-Aug-2008

Andrew M. Klebanow is a Principal in Gaming Market Advisors, a Las Vegas based
consulting company specializing in gaming market assessments, feasibility analysis,
operations analysis, marketing plan development and player reward program design
for both US and International gaming markets. Mr. Klebanow can be reached at
Andrew@gamingmarketadvisors.com or +1 (702) 547-2225