You give us your money. We learn everything about you. And then you thank us and beg for more. How’s that for a business model?
If you ever want to witness, close up, the unheralded magic of the modern gaming business, just wander down any aisle full of chirping, chiming slot machines and watch the folks clutching the plastic buckets and pulling the levers. One afternoon last May at the Rio Resort in Las Vegas, I did just that — and plopped down in front of a 25-cent video poker machine to experience it all firsthand. For 10 minutes or so, I dolefully fed quarters into my Bally’s “Deuces Wild” until I’d dropped $20. Then I moved on to a handful of other machines — a “Monopoly” slot game, video blackjack, and several more varieties of video poker. After nearly two hours on the floor, I’d notched just one decent jackpot ($40), I was out $350, and I wanted to leave.
Not exactly a magical experience for me. But for Harrah’s Entertainment (HET), the parent company of the Rio and two dozen other casinos around the country, even brief slot binges like mine are worth far more today than their weight in quarters. As I moved from machine to machine, a tangle of computers in a Harrah’s office in Memphis, Tenn., was collecting the biggest prize of all — an astonishingly detailed account of each second I spent at the Rio. Harrah’s took note of how many different machines I had played on (nine), how many separate wagers I placed (637), my average bet (25 cents), and, of course, the total amount of money — called “coin-in” — I’d deposited in the machines. By the time I left the Rio, Harrah’s had compiled enough information about me to build a detailed profile of my gambling habits, a plan for luring me back to the casino, even an individual profit-and-loss projection by which the company would gauge its future marketing investment in me. If traditional slot machines are one-armed bandits, these things are one-armed diabolical geniuses in the Dr. No/Goldfinger class.
And for all that information, Harrah’s has an innocuous little piece of plastic to thank: a colorful card with a magnetic stripe that Harrah’s slot players insert into machines while they play. Twenty-five million Harrah’s customers, in fact, use these personalized frequent-gambler cards, called Total Rewards, to earn free trips, meals, hotel rooms, and other freebies while they test the decidedly long odds of slot playing. Harrah’s, in turn, uses that data to refine its customer database, which now includes 90 targeted demographic segments, each of which receives custom-tailored direct-mail incentives to visit any of Harrah’s 25 properties around the United States.
There’s a reason, of course, that Harrah’s Online Casino Singapore works so hard to glean all the data it can from the slot crowds. Slots and other electronic gaming machines account for the majority of Harrah’s $3.7 billion in revenue, and more than 80 percent of the company’s operating profit. Largely on the strength of its new tracking and data-mining system for slot players, Harrah’s — once an also-ran chain of casinos — has emerged in recent years as the second-largest operator in the United States (behind MGM Entertainment) with the highest three-year investment return in the industry.
If you believe the man who built that system for Harrah’s — former Harvard business professor Gary Loveman, now the company’s chief operating officer — the company’s recent prosperity has little or nothing to do with cultivating his customers’ impulses to gamble. It has everything to do, he says, with simply getting to know them so well through data profiling that he can give them the perfect reasons — a steak here, a free hotel room there — not to spend money at other casinos, where the odds, after all, aren’t any better. “This is a whole new world that we couldn’t get our hands around before,” Loveman says. “All we used to know was how much money we made on each machine, but we couldn’t connect what kind of customer used them. Now,” he says, “I can get on the system and say, ‘Where are all the 60-or-older females from North Carolina playing?’ Boom, I’ll know. This is the replacement of intuition and hunch with science.”
How Loveman’s system led to a turnaround of America’s biggest service industries has been in getting to know its customers. In the first slot-machine “players clubs” introduced in the 1980s, the best slot customers were given punch cards, which attendants notched whenever customers hit jackpots; once the cards had enough notches, customers redeemed them for meals or other incentives. Archaic as they might seem now, the clubs proliferated and triggered an important shift in the industry: By the end of the 1980s, machines surpassed table games as the major casinos’ biggest source of income.
Customer service, however, remained stuck in the 1970s. Casino managers who had long recognized the importance of building relationships with their most profitable clientele reserved star treatment for so-called whales, the big spenders that Las Vegas traditionally coveted, but only an occasional free drink for the folks toting plastic buckets.
All of that began to change in the early 1990s, when casinos began installing computerized systems that kept records on individual players. Using the magnetic strips on plastic cards, they allowed casinos to build records for an unlimited number of customers, and offer “comps” and other incentives based on the amount of money inserted into machines, not the amount won. At about the same time, state and federal laws changed to legalize gambling on riverboats and Indian reservations, and operators raced to open their doors in new markets. Between 1990 and 1997, Harrah’s alone tripled the number of casinos it operated.
But as new markets grew more competitive, the business reached the point of diminishing return: Harrah’s often found its early arrival usurped by grander, more extravagant casinos that opened next door. Making matters worse, each Harrah’s casino operated and marketed itself separately from the others — “a system of feudal fiefdoms,” says John Boushy, Harrah’s chief information officer. “While management at each of our properties had been thinking, ‘This is my customer,’ customers had been wondering why they didn’t get the same treatment at different Harrah’s properties,” Boushy says.
By 1997, Boushy and CEO Phil Satre understood that devising the means to keep their 25 million slot players loyal to Harrah’s was the key not only to capturing the biggest share of their wallets, but also to staying a step ahead of competing chains. They began to consider the idea of electronically linking all of Harrah’s players clubs — so that when Harrah’s riverboat gamblers in Mississippi flew to Vegas, they could redeem their reward points for free Harrah’s meals, rooms, or shows.
Enter Loveman, then a 37-year-old associate professor of business administration at Harvard who had never, he says, set foot in a casino. But occasionally he taught special classes on the service industry to Harrah’s executives. The classes, as well as Loveman’s research, focused on the profitability-through-customer-loyalty equation that intrigued Satre.
As he got to know the company and the gaming business, Loveman saw an opportunity to stress-test his theories. After trading notes with Satre, he outlined his idea to turn card data from each casino over to a central marketing brain for the company. Loveman soon found himself in Vegas, sitting in on executive strategy meetings and building support for his plan. In 1998, Satre gave Loveman the post of chief operating officer and a mandate to launch the system.
Today, Harrah’s network links more than 40,000 gaming machines in 12 states, and operates on the belief that customers will, given the right inducements, become “brand-loyal” to Harrah’s. In just the first two years of the Total Rewards program, the company saw a $100 million increase in revenue from customers who gambled at more than one Harrah’s casino. “We were getting 36 cents of every dollar that our customers spent in casinos,” Loveman says. “We realized that if we could just get to 40 cents, that would be monstrous.” Harrah’s current “wallet share” now stands at 42 percent. “If you increase that number ever so slightly,” he adds, “the benefit to income statement and shareholder value is astronomical.” He has a point: Since 1998, each percentage-point increase in Harrah’s share of its customers’ overall gambling budgets has coincided with an additional $125 million in shareholder value.
The central feature (and perhaps the greatest irony) of Loveman’s system is its ability to do what its 25 million customers cannot — that is, consistently make good bets. Before I even sat down for my round of video poker at the Rio, for example, Harrah’s had a pretty good hunch that I wouldn’t be financing its next round of employee bonuses. It suspected that from the moment I signed up for my Total Rewards card in the casino lobby and filled in my name, address, date of birth, and driver’s license number. Since I was a 32-year-old man from the distant state of Montana, Harrah’s predicted that my long-term potential was already low. I was at the Rio three nights, yet I spent a total of just four hours and 40 minutes gambling. As Loveman explains, “It’s important to know when to pull away from an investment in a customer [who] is not going to return.” He attributes $20 million in annual cost reductions to the Total Rewards program.
Starting with four key pieces of information — your gender, your age, where you live, and what you play — Harrah’s software predicts which customers are most likely to become big spenders. Then it designs appropriate marketing strategies — direct-mail offers are the most common — to lure those customers back. “Most companies look at it on a product-by-product basis: ‘I want to generate this much revenue on a particular product,'” says Rich Mirman, a veteran of consulting firm Booz Allen Hamilton, whom Loveman hired as Harrah’s marketing chief. “We flip that around: We want to maximize every relationship.”
To make his point, Mirman sketches out the example of a Las Vegas vacationer who spends a week at the Mirage, blowing $1,000 a day in the casino. If that person wanders into the Rio, she may spend only $300 in its casino — yet she is exactly the kind of customer the Rio wants to draw. If the Rio doesn’t match or beat the direct-marketing offers from the Mirage, “it doesn’t take a lot of brains to realize she’s not coming back,” he says.
That’s why Harrah’s decided early on to approach each new customer as a long-term acquaintance. The company began sifting through gigabytes of customer data collected by player-tracking systems at the various Harrah’s properties during the previous five years. Loveman and Mirman found that the 30 percent of their customers who spent between $100 and $500 per visit to a Harrah’s casino accounted for 80 percent of company revenues — and almost 100 percent of profits. That’s because those gamblers were typically locals who — unlike me — visited regional Harrah’s properties frequently.
Loveman eventually began to reverse-engineer profiles of the ideal Harrah’s customer. “Age and distance from the casino are critical predictors of frequency, coupled with the kind of game you play and how many coins you play per game,” Loveman explains. He paints a picture of the perfect player: a 62-year-old woman who lives within 30 minutes of Kansas City, Mo., and plays dollar video poker. Such customers typically have substantial disposable cash, plenty of time on their hands, and easy access to a Harrah’s riverboat casino (in this case, on the Missouri River in North Kansas City). “If we only observe her once in a quarter, it’s likely that’s because she’s playing three or four times a quarter at our competitors,” Loveman says. “So we’re going to make an educated guess and market to her as if she were a more frequent visitor, and we’ll let her confirm or disconfirm that. Then we’ll update the profile based on what she does.”
Once the Harrah’s system identifies high-value customers, it places them into corresponding demographic segments. (Harrah’s maintains 90 such segments.) Customers who live far away from Harrah’s properties typically receive direct-mail discounts or comps on hotel rooms or transportation, while drive-in customers get food, entertainment, or cash incentives. Most offers are time-sensitive, with tight expiration dates, in order to encourage visitors to either return sooner or switch a visit from a competitor to a Harrah’s property. For each direct-marketing pitch, the company tracks response rates and return on investment, and adjusts its future campaigns according to the results — all of which is recorded at the company’s central database in Memphis. “When I meet with our marketers,” Loveman says, “anything we’ve done new, I ask, did we test it first? And if I find out that we just whole-hogged, went after something without testing it, I’ll kill ’em. No matter how clever they think it is, we test it.”
As bulletproof as Harrah’s system appears to be, it’s utterly invisible to customers who, while they might understand the long odds of slot playing, know little or nothing about the betting Harrah’s does behind the scenes on every scrap of information they provide. Mirman brushes off suggestions that the program is deceptive. “If they don’t want their play tracked, they don’t have to use the card,” he says. He acknowledges that certain practices — such as using face-recognition cameras to identify customers — would likely backfire. But, Mirman says, customers needn’t worry about the most common privacy affront: Harrah’s, he says, will never sell its customer lists to anyone.
Nor would Harrah’s — God forbid — ever dream of getting people to actually increase their overall gambling. When asked about this, Loveman parries deftly with rhetoric worthy of a tobacco lobbyist. “It’s all about customers bringing their existing gaming business to us,” he says. “It’s rarely about more gambling. It’s a lady who lives in Philadelphia, comes to Atlantic City 10 times a year, visits Harrah’s three times, but now she’s got a reason to come to Harrah’s six times.” But it doesn’t take a cynic to realize that, by offering credits toward comps based on the amount of “coin-in” (the ratio is approximately one reward credit per $10 gambled), and by promoting tiered programs such as Total Platinum, Harrah’s and other casinos are giving customers more reason than ever to justify more gambling.
Ethical nuances aside, the cold logic behind Loveman’s tracking methods has proved to be good medicine for Harrah’s. The company’s record earnings of $3.7 billion in 2001 were up 11 percent from 2000. And more than half of the revenue at Harrah’s three Las Vegas casinos now comes from players the company already knows from its casinos outside Nevada.
As for me, well, I already knew I wasn’t coming back to Harrah’s as soon as I’d finished off that first roll of quarters. Somehow, Harrah’s knew that too, despite my having generously dropped $350 in one of its casinos in just a few hours. But as Mirman explained before I left, “You live in Montana, you’re relatively young, you’re playing in Las Vegas, and I would guess that your bankroll is not sufficient to push you into the high-value group.” He was right: Since my visit, I’ve received a single piece of mail from Harrah’s: a foldout flier offering discount admission to shows at the Rio, which I promptly tossed. “We would probably predict you’d be unresponsive to the kinds of offers you would qualify for,” Mirman said, “so you probably won’t hear much from us. But don’t worry,” he added. “It’s just a segmentation, not a personal evaluation.”