What can hotels learn from casinos? Focus on non-rooms pricing.

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This week I’m going to “fill in” for Natalie to complete our series on “What can Hotels learn from Casinos”?  (Look for parts 1 and 2 here and here, respectively) Today I’m going to address pricing. We all know that great entertainment comes at a price, and we also know that casinos need to manage demand and supply just like any other business. But when we are managing revenue in a casino, there are a lot of interrelated factors at play. The denomination or price of a slot machine can impact demand for that machine. The price and availability of hotel rooms need to be balanced with the ability to offer comp rooms to the casino’s most valuable players, as well as with the overall goal to drive revenue throughout the estate.  After all, the modern casino resort produces revenue across many fronts (rooms, entertainment, gaming, food and beverage, and more), so any decision that impacts room rates and availability has to consider the broader effect on estate-wide revenues.

Predictive analytics, like forecasting and optimization, have been used in revenue management applications in travel, hospitality AND gaming companies for some time. But the traditional revenue management approach is revenue-focused, not customer focused.  Furthermore, typical revenue management applications in hotels (and most hospitality and travel segments) have a notoriously short-term focus: that is, optimization focuses on optimizing revenues for a given date or date range – the longer-term impact of those pricing decisions is not considered.  As a business built for entertainment, casinos have focused their use of predictive analytics in revenue management not only on their patrons, but on a variety of other factors that impact pricing.

Let’s look at a few examples. First let’s consider the pricing of hotel rooms. In Natalie’s first entry in this series, she talked about the use of analytics to derive the customer lifetime value.  This is an important element for a casino when they decide to make a room available for a patron.  Casino patrons tend to play where they stay, and high-roller customers can make several trips to a casino each year. Traditional revenue management would optimize the best mix of business and prices for the hotel for any given day and length of stay. When you consider that the more you play at a casino, the more valuable you are and the less you may pay for a room (because discounting for “high rollers” is a common practice at most casino resorts), a typical rooms-revenue-focused optimization would likely recommend closing out the rates for the casinos’ most valuable, frequent patrons – and cost the casino valuable gaming and entertainment revenue.  Furthermore, if a casino doesn’t have room for its most valuable patrons to stay when they are here in Vegas, those patrons will likely stay and play at another hotel and casino– and this can cause valuable repeat customers’ business to be lost.

Today, the modern casino is factoring customer lifetime value into its revenue management and price optimization processes.  By segmenting their forecasts into patron value buckets that consider both estate-wide spending and frequency of visitation, versus by business types, casinos can ensure that the optimization process leaves rooms available for their most valuable patrons.

Our second example is with the pricing of tickets for shows. As noted earlier, most casino resorts have morphed into multi-facetted entertainment destinations.  Nowhere is this truer than in Las Vegas, where we continue to see an array of entertainment options whose goal is to attract guests to the vicinity and keep them entertained – the longer you stay, the more you play (and pay).  The expanding options in Las Vegas include the recently-constructed High Roller (billed as the world’s tallest observation wheel), and the recent announcement by MGM of a new 20,000-seat arena to be built just off the strip. And of course, when not gaming, watching a show, or going to a concert, you can also eat in a world-class restaurant run by a celebrity chef.

Of course, Las Vegas shows are significant revenue-generators.  With multiple shows per day, often seven days per week, with hundreds of seats available per show, and operating practically year-round, these shows can generate a lot of revenue.  But if casinos try to optimize ticket prices, without considering the impact on the rest of the estate, they may miss an important input into the decision making process; specifically, how do they fill the gaming floor with patrons? As a result, casinos must balance the need to drive ticket revenues with the need to drive patrons onto the property that will use the gaming floor, bars and restaurants. So, when making ticket pricing decisions, they use show occupancy as a goal in their optimization process and end up with a price that meets the twin goals of occupancy AND revenue while factoring in the constraint of the number of seats available in the theatre.

Finally, because casinos have a high transient quotient, casinos are frequently running campaigns to fill rooms during expected low periods – far more frequently than a typical hotel.  Many (though certainly not all) of these campaigns are oriented towards attracting known customers back to the property.  Because such campaigns are so frequent, marketing and revenue management teams in a typical casino environment work hard to:

  • Ensure that campaigns are properly aligned with “need” periods and pricing strategies
  • Estimate the “lift” from each campaign, so that revenue management can properly manage demand and pricing during campaign-affected arrival periods

Does managing all of these disparate revenue streams make casino pricing more difficult?  Certainly!  But I was not surprised when a panel of revenue managers at the G2E conference this year said that they felt that managing revenue for a 200-room hotel was in fact far more difficult than managing revenue for a 2,000 room casino property.  Why?  Because the variability of behavior on the smaller number of rooms makes predictions and revenue management so much more difficult!  The large number of rooms at many casinos leads to much more predictable behaviors across the estate – making most day-to-day pricing decisions much easier.

Casino properties are different from typical hotels – and it isn’t necessary to follow their every practice – but we should consider what can be learned from these practices in managing pricing for hotels, and apply them when and where they make sense.

How much revenue does your property generate from non-rooms revenue sources?  Do you consider the impacts on these sources when determining your rooms pricing decisions?  What about the long-term value of your guests?  Is this also considered in your decisions?

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About Author

Alex Dietz

Principal Industry Consultant, Hospitality & Travel Global Practice

Alex Dietz is a Principal Industry Consultant for SAS Institute’s Hospitality and Travel practice, and a 25- year veteran of pricing and revenue management solutions development and consulting in hospitality, travel, and retail. Prior to joining SAS, Alex was the Vice President of Revenue Management and Marketing for Raleigh-Durham based Midway Airlines from 1998 to 2002, reporting directly to CEO Robert Ferguson. Alex began his career with American Airlines and SABRE where he managed the development of industry-leading revenue management systems for the airline industry.

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