The Wall Street Journal, Thursday, May 4, 2000

Lucky Numbers
Casino Chain Mines Data on Its Gamblers, And Strikes Pay Dirt
'Secret Recipe' Lets Harrah's Target Its Low-Rollers At the Individual Level
A Free-Meal 'Intervention'


TUNICA, Miss. - She doesn't know it, but Linda Maranees is the subject of a behavioral experiment that could change the odds of the gambling business.

The Memphis, Tenn., retiree, her blouse bedecked with sequined cards and dice, has just received invitations to two nearby slot tournaments, along with vouchers for $200, all courtesy of Harrah's Entertainment Inc.

"Harrah's is savvy," says Ms. Maranees, who admits that once in the casino door, she is bound to spend much more than what Harrah's has given her.

That is exactly what the Las Vegas-based company is banking on. Over the past two years, Harrah's has quietly conducted thousands of clinical-style trials to determine what gets people to gamble more. Based on its findings, Harrah's has developed closely guarded marketing strategies tailored individually to the millions of low-rollers who make up its bread-and-butter business.

The results are impressive enough that other casino companies are copying some of Harrah's more discernible methods. Wall Street analysts are also beginning to see Harrah's-long a dowdy also-ran in the flashy casino business-as gaining an edge on its rivals. Harrah's stock price has risen quickly in recent weeks as investors have received news of the marketing results. And the company's earnings have more than doubled in the past year.

At the center of Harrah's strategy is a former Harvard professor named Gary Loveman and a vast mathematical model much like the ones that economists use to predict the gross national product or that airlines use to fill seats with the highest paying fliers. But this one scores gamblers on how profitable they can be to Harrah's. Richard Mirman, the company senior vice-president who refined the model, boasts that it is Harrah's "secret recipe" – on a par with the famous unrevealed formula of Kentucky Fried Chicken.

The model tells Harrah's marketers how to appeal to gamblers such as Ms. Maranees, based on data tracking their previous behavior in casinos. Spitting out "behavior modification reports," Harrah's computers suggest that Ms. Maranees-an avid slot-tournament player-will respond best to a cash offer, while Tina Montgomery, a real-estate agent from nearby Oxford, Miss., is better motivated by a free hotel room. As Ms. Montgomery gambles downstairs, she explains, "My husband stays in the room."

Drawing on data from electronic frequent-gambler cards that customers present before they play, the model sets budgets and calendars for gamblers, calculating their "predicted lifetime value" to Harrah's. When a gambler wagers less than usual-by skipping a monthly visit for instance-Harrah's "intervenes" with a letter or a phone call offering a free meal, a show ticket or a cash voucher. Telemarketers are trained to get customers to talk about their earlier casino experiences, and then to listen for trigger phrases such as "hotel room" or "steak dinner" to come up with the most alluring offer.

This "Pavlovian marketing," as Mr. Mirman calls it, is a far cry from the traditional methods gambling companies have used to attract customers. Casinos have long depended on the inherent sexiness of their product to reach the low-rolling public. Until Harrah's, they have eschewed the kind of quantitative analysis employed to great effect by other consumer-oriented industries such as airlines and banks. Instead, they have focused on high-rollers, doling out VIP perks such as free flights and fine champagne. The masses have been courted with gimmicky contests and, increasingly, with fantastical top-this-one resorts.

This has cost the gambling industry. Over the past decade, the billions of dollars lavished on hotels, malls and marble bathrooms have cut casino investment returns in half. So Harrah's, with its solidly proletarian properties in places like Topeka, Kan. and Joliet, Ill., has had to think differently.

The marketing push was born when Phil Satre, Harrah's chairman and chief executive, was struggling to recover from what appeared to be a gross strategic error in the early 1990s: After leading the way among casinos into new jurisdictions as legalized gambling spread across the country, Harrah's got creamed whenever competitors put up flashier properties next door. "We were fed up with running our business as a victim," says Colin Reed, Harrah's chief financial officer.

The only way out was to squeeze more business from existing customers. But the first round of "loyalty" marketing and technology programs, with names such as Marketing Workbench and WINNET-which generally relied on blanketing gamblers with freebies-not only failed to keep them coming, but also cut into the company's bottom line.

In 1994, Harrah's hired a chief marketing officer, Brad Morgan, with experience at Visa and Procter & Gamble, to bring in some outside consumer-marketing savvy. Mr. Morgan spoke of sizing up gamblers "psychographically"-rating them according to characteristics such as their careers. Mr. Morgan also identified a small group of Harrah's customers who produced most of the company's profits. He says he found that people who spent between $100 and $499 a trip accounted for about 30% of gamblers but 80% of revenue and, startlingly, nearly 100% of profits. Among themselves, Harrah's officials referred to these customers as "grazers" for their steady casino habits. Publicly, the company settled on another term for its core audience: "avid experienced players." "I felt like I'd discovered the Rosetta stone of casinos," Mr. Morgan says. "Avid experienced players" became Harrah's target customers.

The company began collecting intimate details on these players when it launched its Total Gold frequent-gambler card in 1997. The electronic cards, inserted in slot machines or handed to casino supervisors, gathered minutiae on gamblers' habits in exchange for letting them know how to attain the free drinks, hotel rooms, show tickets and other "comps."

The idea was that gamblers would bet more if they knew the exact threshold they needed to cross to get a freebie. But it didn't work out that way. Freebie levels differed from one Harrah's casino to the next, confusing customers. Casino managers balked at sharing the data with their colleagues at other properties. Getting them to cooperate "was like herding cats," says Mr. Morgan, who left Harrah's in 1997 and is now a business consultant in Boulder, Colo.

Meanwhile, Harrah's executives were swimming in information they didn't know how to use. "I went through a period of frustration," says Mr. Satre. "I said, 'Why isn't any of this stuff working?' "

Although he didn't fully grasp it at the time, the electronic card was generating some key intelligence for Mr. Satre. It told Harrah's how fast people pull a slot-machine lever and what their favorite games are. It told them a gambler's age and gender. It helped the company to identify which neighborhoods around the country produce the most lucrative customers.

A few weeks before Christmas 1997, Mr. Satre made a pilgrimage to Atlanta to see Sergio Zyman, Coca-Cola Co.'s marketing guru at the time. In a two-hour conversation in an executive lounge at the airport, Mr. Zyman talked while Mr. Satre scribbled notes. Mr. Zyman recommended that Mr. Satre hire a chief operating officer with a marketing background. With authority over all of Harrah's properties-which now number 21-and over the company's operating vice presidents, the executive could make marketing the driving force at Harrah's.

In what he calls a "Eureka moment," Mr. Satre thought of Mr. Loveman, the Harvard Business School professor, who had consulted for Harrah's about marketing and training. A year from becoming eligible for tenure at Harvard, the affable and rumpled Mr. Loveman says he was "dumbstruck" by the offer. Mr. Satre presented the hiring to his board as a fait accompli because, as he puts it, "if I said I was looking for permission, they'd have said I was crazy." Approaching his $1.3 million-a-year job as one of Harvard's classic case studies, Mr. Loveman decided that a lack of customer loyalty was Harrah's biggest weakness. Noting that clients spent only 36 cents of every wagering dollar at Harrah's, he realized that if the company could raise that by a penny, annual earnings would jump by more than $1 a share. "I'm in the business of fostering customer monogamy," Mr. Loveman says, "like the Ladies' Temperance Movement."

Mr. Loveman began his push by recruiting outside help. That's a rarity in the insular gambling industry, which tends to promote from within. One of his early hires was Mr. Mirman, a former University of Chicago math whiz who favors conservative blue suits over the kind of wide ties and pinky rings often found in casino executive suites. When he left his management-consulting job at Booz Allen & Hamilton to join Harrah's in 1998, Mr. Mirman says, he shrugged off the reactions of colleagues, as when a senior partner asked if he was "Comfortable with the morals of this."

Mr. Loveman and Mr. Mirman grouped together the 16 million gamblers in Harrah's database according to characteristics such as age, how much money they are likely to lose and how frequently they gamble. Then Harrah's started testing hypotheses against control groups.

One example: Harrah's chose two similar groups of frequent slot players from Jackson, Miss. Members of the control group were offered a typical casino-marketing package worth $125-a free room, two steak meals and $30 of free chips at the Tunica casino. Members of the test group were offered $60 in chips. The more modest offer generated far more gambling, suggesting that Harrah's had been wasting money giving customers free rooms. Thereafter, profits from the revamped promotion nearly doubled to $60 per person per trip.

In another test, Harrah's focused on a group of monthly gamblers whom the company suspected could be induced to play more frequently because they lived nearby and displayed avid-gambler traits such as hitting slot buttons quickly (playing at "high velocity" in Harrah's parlance). To entice them to make two back-to-back visits, Harrah's sent cash and food offers that expired in consecutive two-week periods. The group's average number of trips per month quickly rose to 1.4 from 1.1.

Harrah's has dropped some old casino standards, such as giving customers bonus points that can be spent in Harrah's gift shops and restaurants. Research showed that most gamblers weren't motivated by the bonus points, which cost Harrah's $14 million a year.

In its trials, the company is also studying the widely held belief that gamblers notice slight changes in slot-machine odds. If that's wrong, as Mr. Loveman suspects, casinos could slightly lower the odds of winning and reap even bigger profits. "I believe there's a lot of money to be made for the person who has the answer to that," says Mr. Loveman.

This experimentation is helping Harrah's gain market share around the country. Here in Tunica, chosen as a key test site because of the "average" characteristics of its gamblers, Harrah's revenue has risen at nearly double the rate of nearby casinos since the new targeted marketing was introduced last June. Not only that, the higher volumes came cheap. Profits at the Tunica casino rose sharply, according to Harrah's executives.

Rivals are trying to follow suit. Harrah's has taken a different tack than everyone else, and they've been really smart about it," says Marc Grossman, head of investor relations for Hilton Hotels Corp., which spun its casinos off into Park Place Entertainment Corp. a little more than a year ago.

The approach is also winning some fans among Harrah's old-timers. Tom Jenkins, who oversees Harrah's Las Vegas flagship, calls Mr. Loveman and his crew propeller heads." But he says they've belled to more than double the rate at which people respond to offers that he mails to their homes - to 8% from 3%.

There are more pitches to come. Harrah's last month launched frequent-gambler cards with gold, platinum and diamond thresholds, which offer escalating rewards for gambling more. Ms. Maranees, a Memphis retiree, is a proud diamond echelon player. That means Harrah's expects she'll lose a minimum of $5,000 this year.

Ms. Maranees says she's not put off by Harrah's "Pavlovian" marketing. "A gimmick to get me to spend more money?" she asks rhetorically. "Why of course it is."

And 30 Months Later ...

LAS VEGAS, Sept 4 (Reuters) - Harrah's Entertainment Inc. (nyse: HET - news - people), one of the top U.S. casino operators, said on Wednesday it Chairman and Chief Executive Philip Satre will turn over his CEO post to Gary Loveman, Harrah's president and chief operating officer effective Jan. 1.

Satre, 53, who has led the company through its expansion across Nevada and throughout the country, will remain chairman of the board, Harrah's said.

With Loveman, 42, serving as the company's CEO and president, Harrah's Eastern Division President Timothy Wilmott, 44, will assume Loveman's COO duties, the company said.