In my work and research into strategic positioning of casino resorts, I repeatedly hear the same message that casinos are not selling the opportunity to play a game or stay in a resort—they are selling “an experience” to the customer.
Las Vegas had 43 million visitors last year, with hundreds of millions of “experiences” sold. Not all of these were created or curated by the casino resort operators, but it is clear that aspects of “the Las Vegas experience” work very well.
The late management guru Peter Drucker once claimed that the aim of marketing is to know and understand the customer so well the product or service fits him and sells itself, and we are at a stage where casino operators understand who their customers are in a way that few other industries do.
At the core of strategic marketing is the customer. Our businesses must place customer centrality at the core of all that we do.
The proportion of first-time visitors to Las Vegas has ranged from 14 percent to 19 percent in recent years, thus implying over 80 percent of visitors each year are repeat visitors. I estimate that this imbalance between new and repeat customers will reflect casino visitation across the U.S.
Of the new visitors, most or all will have a perception of what Las Vegas is through external media or general consciousness; the brand of Las Vegas and what a casino is, is universal. Yet, with so many return customers and so many businesses selling what is effectively the same product, to the same customers, at the same price, the marketing strategies need to be more sophisticated.
There are drivers of differentiation, but fewer than in many industries. So, how can the operators achieve strategic competitive advantage?
Disregarding the Established Rules to Find Transactional Loyalty
Classical competitive strategy theory, advanced by the likes of Michael Porter, advocates price leadership and differentiation as key success drivers, but these are not valid in Las Vegas. Price leadership strategies have been used by a range of casinos that can now only be visited in the Neon Museum, home of signs of closed casinos.
The reality is that when the price of rooms is lowered to a level that is not economic and subsidized by other revenues, the value proposition diminishes entirely. After a period where resorts closed, there was a concerted drive to increase rates across Las Vegas, but today operators with excess inventory are continuing to discount room product. The net effect will be a diminution of the value of their brands and products.
The alternative is differentiation, which is much harder to achieve, as the core product is regulated and the periphery products, such as restaurants and amenities, are highly considered. The evolution of the casino resort has done so in the context where management is highly attuned to the needs of the customers and has sought to meet those needs by aligning the offering accordingly. Why differentiate when imitation is equally effective? Hence, the proliferation of lobby bars, steakhouses and buffets within the casino context.
Therefore, the only true drivers of competitive advantage are location (whether in proximity to a population center in relation to the competition, or in a high footfall area) or customer loyalty.
This maxim is not unique to casinos, but also in aspects of supermarkets and retail businesses, and was subject to extensive study in the U.K. over the past two decades. The case study used in business schools in the early 2000s is that of U.K. retailer Tesco, which sought to locate stores nearer to population centers than their competitors, supplementing this by launching a loyalty card that rewarded customers with points related to their individual shopping habits.
Industry observers will note the similarities with retail and casinos, and without offering a summary of the past 20 years of loyalty thinking, it is clear that the success of Harrah’s Entertainment was due to Total Gold, and successor Total Rewards, which in turn spawned competitors from MLife to Boarding Pass and a host of similar loyalty programs which seek to reward customer play on a transactional basis.
This, of course, has benefits. As nearly everything done by the customer is tracked, the operators can profile and segment customers to understand behaviors and maximize marketing budgets, where information is harvested to develop an appropriate marketing offer based on theoretical value for that customer, and attract that customer back.
Transactional loyalty programs were a great success.
The Bridge of Insights
There is a bridge that crosses the Las Vegas Strip, which is the perfect crossroads of strategic marketing insights. On one side sits Planet Hollywood. The billboards display the offerings within; the buffet of buffets, Britney Spears in the showroom or Crazy Girls burlesque upstairs. To the right is the Harley-Davidson Café. Across the road is Aria, with the world’s largest high-resolution screen fizzing with details of the champagne brunch or the fine dining found within, and the Cosmopolitan of Las Vegas. From a marketing theory perspective, we see both emotional and functional loyalty evident, where customers can align with the offering that best represents their segment.
From a loyalty perspective, function and emotion are important. Customers stay in a resort because they desire the experiences within, whether that be the room product, the dining, service or general range of amenities. The operators, with knowledge of their customers, supply these, so the typical customer at Planet Hollywood is more likely to desire a Britney entertainment package than the Aria or Cosmopolitan customer, and conversely, the high-level food and beverage range is more aligned to the Aria or Cosmopolitan customer.
In fact, MGM has recently made great play of using food and beverage as one of the great strategic differentiators within their portfolio, so where once a successful offering was rolled out across the portfolio, this is now more selectively placed for each resort’s specific customer segment.
However, marketing theorists have declared that the use of brands as tribal (or emotional) identifiers also encourages loyalty within segments. Harley-Davidson or Britney Spears clearly reach out to customer segments to encourage alignment.
Both these brands are more than simple differentiators, as they illicit an emotional response and foster a sense of tribal belonging—as does the Cosmopolitan’s more cerebral declarations to the sophisticated customer, who is primed to be curious about the content, targeting along psychographic if not demographic segmentation. Loyalty to a brand, or a perception of a brand, is emotional loyalty. It is much more powerful than a transaction.
We must understand that in the world of modern marketing segmentation and orientation, brands are of vital importance to the uninitiated, as they do much of the heavy lifting in customer identification—as in providing both a sign and a symbol of that product. Therefore, we pose the question that will no doubt cause shudders among CMOs across the industry: If brands do the segmenting work for us, and with detailed market research available on customers, is the industry wasting money on players clubs?
Driving loyalty via transactional methods has always had limitations, and in today’s world of internet discounters, these have diminished further.
First, in a competitive environment, where the use of this platform is ubiquitous, the customer is left with a range of players clubs to join, and the competitive advantage is diminished; over 75 percent of Total Rewards customers also hold MLife membership.
Second, we have to assume that the rewards given are of value to the customer. Data suggests that while older customers value these methods, younger customers do not value transactional loyalty; of the under-30s, 25 percent of Las Vegas visitors are not a member of any players clubs, compared to a sample average of 15.6 percent of other ages.
Third, to keep players clubs competitive in a crowded space, the incentives need to be greater, thus eroding margins.
Let’s revisit the U.K. supermarket study. Tesco, the market leader which once collected nearly 25 percent of all retail spend in the U.K., suffered in recent years as limited stock value offering from German retailers Aldi and Lidl and the big box of Wal-Mart’s Asda ate into the value customer share, while other premium and niche retailers such as Waitrose proved more adept of capturing premium customers.
On the other hand, the defenders of players clubs will argue that successful transactional loyalty schemes really do allow them a quantitative data set, which allows for good management decisions.
Players clubs also allow operators to target individual customer behaviors to promote particular behaviors, including incremental visitation while incentivizing players to meet revenue targets.
These are valid points, but hardly enough to warrant such reliance on these methods for competitive advantage. Moreover, the loyalty game has changed. Sustainable loyalty is not achieved by transaction. Rather, it is the byproduct of meeting customer needs.
Based on study of behaviors of the next generation of visitors, we note that players clubs, as a method of driving loyalty, are in decline in usefulness. If resorts are selling experiences as their primary business activity, incremental benefits via transaction are perhaps more reflective of a value-based offering and not aligned with the holistic strategy employed of increasing margins rather than driving incremental play.
In the U.K. and within gaming, this form of transactional loyalty has proved to be fragile under competitive pressure, and today we find functional loyalty and emotional loyalty highly successful, especially when seeking to attract the next generation of customers.
A Pragmatic Solution: Merger and Exit
For decades, Harrah’s/Caesars, followed by every other operator, invested in their players clubs and schemes for the dual benefit of promoting loyalty and gaining customer insight.
Today the loyalty is to the experience and not the transaction, while Facebook can offer a plurality of insights to the customer that the players club cannot.
Yet the data collected and contact information does have value, especially for marketing purposes. My proposal is that Caesars and MGM create a new independent joint venture based on customer insights and contacts.
The resulting independent enterprise will be accessible across all properties (and even with other subscribing casinos, such as tribal and regional competitors), truly offering a competitive advantage to those that subscribe. The two market leaders (by rooms) can offer packages to customers based on the customer needs across the network and bill internally, providing all subscribing parties with customer insights from a wider base.
On the basis that there are needs for this type of transactional loyalty outside casinos (and there is), there is a case that as an independent company, there are considerable opportunities for other revenues to be gained by the shareholders.
The longer play is that while many of the physical assets are now held in REIT form and there is no need for operators to hold all their assets in a single entity, there is no argument that a combined customer loyalty, discount and insight business has real commercial value, with the potential to IPO should there be sufficient growth or investor demand.
So that’s the blueprint. Mr. Murren, pick up the phone and call Mr. Frissora, and sort this out. It is a win for your owners who can benefit from increased value, a win for the customer with more choice and a win for your management, who can focus on creating experiences that create real customer loyalty.