How casinos can bring back customers and increase revenue
2 Jun 2017
By Nicholas G. Colon
By Nicholas G. Colon
In 1962, Professor Ed Thorp published the first widely distributed, mathematically sound way to beat blackjack. His book Beat the Dealer terrified casinos so much that casino owners called a meeting and decided to all change the rules of blackjack concurrently. This did not have the effect they had hoped for. In fact, it nearly killed their business model. Player rates dried up because players decided that the casinos were not playing fair.
Several weeks after the change, the casinos were forced to reinstate the original rules to try to get their players back — and it worked well. Casino profits surpassed their levels before the release of Thorp's book, and revenues continued to increase over time. Casinos owe their initial revenue spikes to Ed Thorp and his first book, because just knowing the casino could be beaten was enough to bring in the masses. And with the declining revenues seen across the spectrum of gaming in today's environment, advantage players can once again save the casinos from themselves, if they only listen.
Many professional players have been playing for years and are intimately familiar with the operations of casinos and, more importantly, how specific changes will affect the playability of casino games over time. The most influential change in table games has been the introduction of the 6:5 payout on natural blackjacks. This increases the casino's edge to almost 2%. For slot games, the switch from the standard three-coin, three-reel machines to the multi-line, multi-credit slot machines with a variety of highly recognizable themes are the new norm; they now dominate the casino floor and online domain.
The functionality of the multi-line, multi-credit differs from the traditional three-coin variant. For example, Wink Slots is a famous online slots website where a player can play slots of both variants. Also, the functionality of the slot games is outlined, so a player can see exactly how they work. These are the two primary changes seen in casinos over the past 20 years. Other changes include the introduction of several side bets on casinos table games and reduced payout schedules. With these changes in place for almost two decades, the question remains: How have they worked out?
The short answer is: Not well, over the long term. Initially, the changes had the objective of bringing in legions of lower-denomination gamblers. Casinos saw an initial spike in revenue, but as the tech bubble burst in the early 2000s and the housing market collapsed in 2008, these lower-level gamblers did not have the disposable income they once had. By the time the 2008 financial crisis hit, the casinos had made massive investments into the new approach, and they were locked in.
The casino industry lost tens of billions of dollars from 2008 to 2016. The Las Vegas gaming industry just recently turned a profit after eight years of massive losses, sort of. To do this, casinos took on large amounts debt and restructured those debts. Also, the comps they were extending to players were cut dramatically, the casino resorts initiated resort fees on top of the hotel costs, casino executives took significant pay cuts, and lastly — in perhaps the most egregious act of profit scalping — casinos began charging for parking. Any experienced player will tell you that gamblers want value for their gambling dollars. Value is defined in a couple of ways. The first is the time of play. When the rules of a table game are good, the player loses money at a slower rate than if the game had bad rules. Think of a 3:2 blackjack game as opposed to a 6:5 blackjack game. The 3:2 game has approximately a 1.4% greater advantage for the player. Similarly, the traditional three-reel slot games have a 99.7% pay back, while the multi-line, multi-credit machines have a payback in area of 95-96%.
With these higher hold ratios, the casinos are burning out players at a faster rate than before. So the same $100 that would last an hour on a machine or at a table is now only lasting 35 minutes. The value has been reduced by almost half. This forces players to be transposed into customers. They search for value in other areas. That same $100 used for gambling is now competing with a shopping spree, a five-star dining experience or a 90-minute show, where the value is defined as opposed to estimated.
The objective of a casino is to keep a player happy and playing. Even when they were losing, casinos would do this with a variety of comps. Food, free rooms and free shows were among the freebies. This, along with games with good rules, would keep players gambling for extended periods of time. The turn-and-burn philosophy that the megaresorts and casinos have decided to adhere to focuses on getting as much from the player as quickly as possible, while giving up as little as possible.
A branch of mathematics that deals with trade-offs is game theory. The most successful approach is tit for tat. This means that you get something when you give up something. Time after time, it has yielded better results than the more complex theories. The casinos are trying a "nothing-for-something" strategy that leads to a non-returning customer base. This is discernible by the traditional customer base 80/20 rule — where 80% of revenue comes from 20% of your customer base — migrating to a 80/15 and sometimes 80/10 rule. Customers are not returning and the revenue is also not returning. Better games, better comps and more value will not only bring players back, but will also attract better players with disposable income for casino gaming. There must be a trade-off of value for the gambling dollars spent. Returning to previous proven methods of success is the best method of attack. It's the best way to make casinos great again.