In the first installment of “Making a Mark,” published in the April 2013 issue of GGB, Dean Macomber explained how modern casino marketing encompasses many theories, terms, principles and approaches. He talks about product marketing, demand stimulation marketing, business growth phases and more. Reviewing that article will help readers grasp the concepts in this final installment.
Managing marketing, like many aspects of casino gaming, is part science, part art and part voodoo. All is not lost, however: proactive, predictable and effective marketing management tools do exist to complement and leverage the more intuitive, creative and impulsive side of marketing.
One of the best marketing tools in the quiver is monitoring, evaluating and making marketing decisions based upon what happens “at the margin.” In this context, “at the margin” refers to the results, and the forces at work that caused those results at the last consumer purchase. In gaming, this would be the last day trip or multi-day visit to a casino. Marginal return is rich in information useful to marketers. The discussion below describes how to extract this value.
Part 1 of this two-part article established the foundation upon which to develop, understand and use the marketing management tools described in this Part 2, i.e., marketing theory and terms which introduced such concepts as target market segments, product marketing, demand stimulation marketing, demand cycle, business growth phases, and the business growth curve.
Setting The Scene: A Case Study
To set up a hypothetical case study useful to understanding the application of marginal return, let’s say a company has been focusing on developing a particular target market segment (TMS) designated and labeled internally as TMS 5.10.3. TMS 5.10.3 was identified and added to the company’s optimal TMS mix by the marketing team 12 months ago. Their optimal TMS mix is the list of segments upon which the marketing team has chosen to focus among all of the TMSs that exist in the marketplace in which it competes.
Currently, the TMS includes an estimated 100,000 potential players. Each player in this TMS is estimated to make eight casino trips per year averaging 1.5 days per trip, with an average per-trip gaming budget of $500, a per-trip non-gaming budget of $250, a gaming servicing cost (expense ratio) of 60 percent of theoretical win, and 75 percent non-gaming cost of non-gaming revenue leading to an average profit margin of 40 percent and 25 percent, respectively. These assumptions lead to a forecast market potential for TMS 5.10.3 of $400 million annual gaming revenue, $200 million in annual non-gaming revenue, and a total of $600 million annual total revenue.
See the chart below for a summary of this and other market data points used in this case study.
The marketing team has forecast it can realistically expect to capture a maximum 110 percent of its fair market share of TMS 5.10.3. or 17.5 percent market share. This results in a forecast of $105 million maximum potential annual total revenue and approximately $37 million in annual EBITDA, using cost accounting to allocate overhead expenses to TMS 5.10.3. Using cost accounting again to allocate $185 million of the company’s total investment to this TMS leads to a 19.9 percent return on invested capital (ROIC).
See the following chart for a summary of this and other property data points used in this case study.
The marketing team conducted a risk analysis of TMS 5.10.3 that resulted in a forecast low and high maximum potential revenue, profit and ROIC indicating the upside was greater than the downside, i.e., annual profits could be greater than the expected forecast by $20 million-plus but less by $10 million.
Currently the company markets to 50 different TMSs. They analyzed each TMS in addition to TMS 5.10.3 and relative to the other 50, TMS 5.10.3 was ranked TMS as the 6th most important TMS in their optimal TMS mix.
Shakespeare And Marketing: ‘How Much To Market Or Not To Market. That Is The Question.’
A vocal minority in the marketing team feel TMS 5.10.3 is still in the growth phase, and deserves continued full-force effort, where others feel it is approaching or has entered the maturity phase, making other TMSs more worthy.
The marketing team has been watching TMS 5.10.3 closely, following a fairly strict process established by the executive vice president of casino marketing prior to opening. At launch, TMS 5.10.3 was generating triple-digit month-to-month growth rates. That was followed by a classical post-launch reverse power curve decline to double-digit growth that was still high at 12 percent at the end of the eighth month. However, in the most recent reporting period, the 12th month since launch, growth dipped below the magic 10 percent threshold to 7.5 percent, causing some concern.
Still, the marketing team tracked the market growth in parallel with property growth and determined that the overall annualized market growth for TMS 5.10.3 was 6 percent. This meant that with a 7.5 percent growth rate, TMS 5.10.3 was still growing at the property level 25 percent faster than the market.
The marketing team also noted that their estimated fair market share is only 65 percent of their maximum potential target, suggesting there is still significant room to grow TMS 5.10.3.
Turning back the clock, during what became a rather active discussion about the pros and cons of TMS 5.10.3, the supporters of TMS 5.10.3 recalled that toward the end of the launch phase the EVP of casino marketing asked the marketing team to conduct a series of primary market research efforts to determine if the players in TMS 5.10.3 were satisfied with the product, or target guest experience (TGE), the company delivered to them. Despite a few concerns that were immediately addressed, the response was 85 percent positive that the needs, wants and expectations of the players in TMS 5.10.3 were being met or exceeded. The product or TGE of TMS 5.10.3 was not then or currently the issue.
As triple-digit launch growth expectedly fell, on cue the EVP of marketing asked the marketing team to begin the earliest stages of experimenting with demand stimulation programs to determine what resonated with these players. By the time the growth rate fell below 20 percent month over month, the EVP “took off the brakes” to eke out remaining demand.
At the earliest point in introducing demand simulation marketing programs, the marketing team added no- or low-cost options—e.g., perquisites such as free valet parking and various other forms of preferential treatment such as “first in line” status at restaurants, lounges and entertainment venues and automatic upgrades in the hotel (space available). Hosts were added and asked to pay particular attention to players in TMS 5.10.3.
The better players in TMS 5.10.3 were assigned a host/hostess to become a one-on-one personal contact with the company supported by the entire host/hostess team in their absence. These and other efforts caused a slight “bounce” in the demand generated by TMS 5.10.3, but the growth began to level out again and even show signs of decreasing growth, although the data were admittedly uneven and “bumpy.”
The EVP of casino marketing did not want to wait too long before using price/cost motivators, however, as this was one of the company’s top 10 TMSs. The EVP of casino marketing also knew that competitors were making moves to claw back their market share of this important TMS.
And so, price/cost motivators were soon put into motion. For example, promotions (two-for-ones, bring-a-friend, celebrate your birthday, and off-peak period-only incentives), a continuous trial of multiple entertainment events to see “what worked,” and most recently, some aggressive aspirational marketing comp rates with available dollars allocated more and more to toward the upper tiers.
The addition of a fourth tier for the über-players was being discussed. The EVP of marketing, however, made it clear that they should not just throw money at TMS 5.10.3; rather, they should throw a continual array of options—monetary and non-monetary, with monetary at varying levels—to determine what motivators worked, rather than the amount/cost of the motivator.
Advanced Marketing Evaluation: Marginal Results
The marketing team continued to analyze TMS 5.10.3.
They already tracked the cost-benefit of every marketing initiative for TMS 5.10.3 and every other TMS. This cost-benefit of any and every marketing initiative could be analyzed by player, type of offer, period (day of week, week of month/year, season), and any number of a myriad of other attributes.
The historical and current analysis revealed that as the results from the “no-cost” to “low-cost” initiatives took hold, they precipitated growth, but this growth seemed to plateau. Time was given to the marketing team to experiment with the aforementioned variety of price- and non-price-driven motivators of different types and amounts. As expected, during this experimentation period, early results were mixed, and it was unclear what was working and not working, and why for both. But, as the number of initiatives increased over time, a pattern emerged.
The non-monetary efforts were showing only slight marginal improvement (i.e., net increase in player-trips, player revenue per trip, and player profit per trip). And, the limit was being reached to what the marketing team could keep offering without beginning to spill over into the perquisite entitlements TMSs with higher theoretical win and profit were receiving.
As emphasis shifted to price-cost-driven programs, small to medium batches of trial incentives were offered—for example, discounted or free food, beverage, admission, gifts, overnight accommodations and transportation. Such incentives were offered mid-week and on weekends at different levels, and at peak and off-peak periods of the day to determine what worked to elicit demand during different periods, and at what profit margin. As what worked became more clear, the marketing effort—time, resources and cost—focused on those trial programs that worked, and they were then offered to the entire TMS.
But, for the remainder, in the 12th month from the start of the launch of TMS 5.10.3, a discernible trend was evolving. By the ninth month of the growth phase, it was clear that increasing cost was still working. At the start of the process, the percent increase in cost was generating a greater increase in additional revenue, profit and ROIC. Shown below is what the trend looked like:
The table at left shows that “at the margin” each of the 14 marketing initiatives offered TMS 5.10.3 from Month 9 through Month 12 yielded greater increases in profit than the increase in cost. The ratio of increased profit over increased cost ranges from a low of 1.05-to-1.00 to a high of 1.40-to-1.00. In Month 9 and into Month 10, Initiatives 56 through 62 were deliberately held in the 5 percent range. While the two first initiatives worked well—yielding ratios of 1.40 and 1.25 to 1.00—and later Initiative 59 turned in ratios of 1.30 to 1.00 respectively, the trend for the next three initiatives lowered to 1.10, 1.10, and 1.05 respectively.
At this point the marketing team felt they had to increase the cost to the 10 percent range as the initial benefit of providing discounts and additional comps wore off among the players in TMS 5.10.3. The higher dollars seemed to be a threshold for players in TMS 5.10.3 because increases of 9 percent to 15 percent resulted in increases in profit of 10.35 percent to 16.5 percent or ratios of 1.10 to 1.35 to 1.00.
When the marketing team met early in month 13, the overall trend was still showing positive responses of greater than 1.00 to 1.00, and so the marketing team almost unanimously decided they were still in the growth phase, albeit probably somewhere in the late-middle, early-late phase of it.
In fact, on this performance metric, TMS 5.10.3 had moved up in marginal contribution from seventh to sixth. Because of the continued accretive results and performance relative to other TMSs, the marketing team decided that TMS 5.10.3 deserved continued support for the next quarter, Month 13 through Month 15. In fact, additional dollars were allocated to TMS 5.10.3.
Had the ratio dropped below 1.10 to 1.00, the marketing team probably would have kept spending levels the same for months 13 through 15 unless there was business intelligence or “gut feel” otherwise. Depending upon the status of the other TMSs, access to operating expenses and risk tolerance, another marketing team may have advocated for increased spending levels in Month 13 under the same conditions arguing that TMS 5.10.3 was worth the risk given its importance, and still “bumps” of greater than 1.10-to-1.00 performance.
Had the ratio dropped into the 1.05-to-1.00 range, the marketing team would probably continue the levels of expenditure in Month 12 but place TMS 5.10.3 on a “watch list.” If performance in other TMSs warranted, the marketing team probably would have taken resources away from TMS 5.10.3 and given them to the better-performing TMSs, particularly if the percentage of fair share for TMS 5.10.3 was reaching its forecast maximum limit.
Squeezing More Value Out Of Marginal Return
The marketing team was applying the same process used in evaluating TMS 5.10.3 to the other 49 TMSs. The marketing team maintained a constant rank order list of the marginal revenue, marginal profit, marginal profit-to-cost ratio and marginal ROIC of each TMS in the optimal TMS mix.
To smooth out variances of outlier initiatives, a moving average was employed. The length of the period covered by a moving average depended upon how many initiatives the marketing team was undertaking each period, and the volatility of the results. All markets are different, and markets change over time. Consequently, the oversight process needs to change as well. But, a moving average of two- to four-month periods and/or, say, the last six to 12 initiatives should smooth out outliers under most conditions.
Where performance sagged, the marketing team became adept at identifying cause-and-effect. In other words, a drop in marginal performance was perhaps explainable by non-business, temporary reasons, unexpected “hits” that could be overcome, and/or recognition there may be a new normal. For example, bad weather in the TMS’s point of origin prevented travel one month, causing performance to drop for those TMSs affected.
In another instance, a competitor initiated an aggressive cost-driven demand stimulation program aimed at several of the company’s TMSs. The marketing team chose to immediately match the competitor to remove the competitive advantage, and to let the competitor know that anytime they try to “buy the business,” the company will match them immediately so there is no benefit doing so.
In yet another situation, a new casino opened that changed the ballgame because there were only five casinos in the market. The marketing team had to reset metrics, standards and expectations for what was now a six-casino environment.
All attempts to eke out the final potential of a TMS need not be via demand stimulation marketing programs. Indeed, a tweak or reset of a casino’s product or TGE may generate as good if not better results than operating cost-driven demand stimulation programs.
If, for example, a restaurant concept has been in the marketplace for more than two years, refreshing the restaurant with a new menu or new “lipstick” (e.g., new paint, carpet and wall coverings) might reinvigorate the TMSs that respond to restaurant offerings. Closing the restaurant and starting with a completely new idea can work as well. This same approach applies to bars, lounges, entertainment, special events, retail, recreation and relaxation activities, not to mention overnight accommodations.
Finally, a marketing team should not ignore the soft approach to marketing. There are times where deference must be given to a creative new idea for which there is no history or experience. Your players may not have even thought about it to determine whether they would like it or not. Better sometimes to try an idea, measure results, fine-tune it if necessary, and then reject it if it fails than to lose a potential marketing idea that just might work
Marketing requires the input of more different types of personalities, skills, experience, creativity and innovation than perhaps any other casino activity. This potential must be assembled and then harvested, however, using a management process and tools that do not stifle but rather unleash, stimulate and nurture the marketing effort.
Despite the seemingly relentless pressure and insatiable nature of marketing, the theory and approach outlined in this article provide the means to do just that. Conducted correctly, there is perhaps no better place to work in a casino than in marketing. Marketing can, should be, and is business fun.