Slots, Tables, and All That Jazz: Managing Customer Profitability

at the MGM Grand Hotel

A Q&A Case Presented to

the Accountancy Department
of De La Salle University

In Partial Fulfillment
of the Course Requirements
of the Course MODMGT2

Submitted to:
Mr. Aaron C. Escartin

Submitted by:
Dichaves, Rochelle
Gabriel, Francis Mikhael
Guinto, Jahm Mae
Hwang Charles Reginald
Ilagan, Ma. Gillene

K33

April 11, 2014

 I. Keeping in mind the description of MGM’s profitability measurement
systems, which of the following two customers appears more
attractive for MGM? Why?
Customer A Customer B
Total theoretical win Total folio
$2,000 $1,500
Tables theo $ 1,300 Hotel $750
Slots theo 700 Restaurant 250
_
Total Comps Shows 500
$800
Hotel $500
Restaurants 100
Tickets KA 200 ______________
_
Profitability Profitability
$1,200 $1,500
Number of trips Number of trips
2 1

Closely examining the profitability profile from both customers, Customer A

appears to be more attractive than Customer B. At first glance, the higher profit

($1,500 compared to $1,200) contributed by Customer B may lead us to believe

that he must be focused; however, examining the profile more thoroughly,

Customer B contributes profits to the non-gaming lines of MGM. Although these non-

gaming lines are also considered profit centers by the company, contributing

approximately 60% to total revenues and 50% to total profit of the company, it has

to be noted that its customers are yet to be fully understood at the moment.

Customer behavior in the non-gaming lines are not monitored real time as it is in

the gaming lines, which makes the patterns and actions of these customers very

uncertain and unpredictable. Furthermore, Customer A, although only contributing

$1,200 to company profit, goes to MGM in two trips; thus, the $1,200 profit

compounds to $2,400 - significantly higher than the $1,500 one-time visit of

Customer B. The comps availed of by Customer A also suggests that he is a regular

and not simply an impulse-gamer. Enhancing more Customer A’s loyalty makes him

one of the target of the company.

II. Using the information in the MGM Players Club data set, discuss the
differences in the various segments of players at the MGM Grand.
Some hints for potential analyses:
A. Begin by classifying customers according to their
attractiveness from a static point of view (current
profitability). Measure the concentration of profits.
B. Look at some aspects of behavior of the different groups
(please use as cut-off points total theoretical win of $500,
$10,000 and $100,000):
1. Number of trips
2. Trip length
3. Whether they play in tables or slots
4. Loyalty to a certain property
5. Expand your study by measuring attractiveness from a
dynamic point of view (current and future profitability).
The three-year span of the databases is insufficient for a
rigorous lifetime value analysis but adequate for a
discussion of basic concepts and tools used to assess
customer attractiveness. For instance, what player
characteristics in 2002 increase the likelihood that a
player will come back in 2004?

Table 1. Summary of Customer Segment Analysis

Whales High Rollers Low-stake but Frequent

Cust. Platinum + Gold + Green + Not

Segment to to Black to Red White Ranked
Platinum Black + Red +

Number 0-1 0-3 2-5 4-9 6-12 1-10 NA

of Trips

Trip Long Mid to Mid to Mid Short to Short NA

Length Long Long Mid

Tables or High High Mod Mod High Low NA

Slots Tables/ Table/ Table/ Table/ Table/ Table/
High Slots High Mod Low Low Low
 Slots Slots Slots Slots Slots

Loyalty High High Mod to Mod to Mod Low to NA

High High Mod

A summary is prepared for a better view of the comparability of the different

customer segments. The customer segments used in the preceding table is based

on the case’s Exhibit 5, which divides customers based on their theoretical win and

the type of comps they will receive in order to properly manage customer

profitability.

On a static standpoint, focus may shift interchangeably from the red to black

(partly low end to high rollers) customers. These types of customers may not give

as high stakes as those belonging to the Black + to the Platinum +, but having

larger volumes of gamblers with more frequent visits make these types very

attractive to build up the current profitability of the company. The higher-end

customers (Black + to the Platinum + or the whales), on the other hand, usually go

“big time,” so they speak. They usually go on just one visit per year but then, they

give very high stakes when they gamble, thus pitching in higher revenues for MGM.

Static-wise, whales are less attractive than the more frequent and lower-stake

gamblers since whales just go to MGM Grand very seldom a year or even not at all

in a few circumstances, which may cause a breakdown in financial health of the

company if too much attention is placed towards the whales and very minimal on

the others. On a daily basis, frequent gamblers must be taken care of because they

mainly address the short run needs (though will also eventually accrue to the long

run plus other factors) of the company. Furthermore, current concentration of profits

will come from the previously stated bracket (i.e. Black to Red), which may

approximately make up above the majority of total profits.

 On the other hand, at a dynamic standpoint, long-term customer relationship

must be considered. As previously stated, the whales pitch in huge bulk of revenues

as per individual level, hence they are very attractive in considering future

profitability. They may not come as frequently as the high rollers or the low-stake

gamblers; but when they do, they could bet as high as a large group of low-end

gamblers. Whales are also practically the most profitable customers. Their means

makes them more stable customers who could, assuming they have the time,

almost always freely come, go, and then come again to MGM Grand. In order to

attract them more, good customer relationships, aggressive promotions and high-

value comps must be offered to customers. This will increase the likelihood of them

coming back year after year. Furthermore, profit contribution must be the driver of

the value of the comps offered to customers. Doing so would make them feel more

special, thus also increasing good customer relationship and ultimately loyalty from

different classes of customers.

III. How does the MGM Grand derive value from its Players Club
program and its player information systems?

The Player’s Program introduced “The Players Club Card” which is not a debit

card or a credit card but it did represent value. The card is actually a loyalty card,

the same as to our local malls’ loyalty cards like the SM Advantage Card or Petron’s

Value Card. The cards did not contain currency so it was not transferable like a debit

or credit card however it did contain points which represented value that are

derived on a real time basis on the accumulated spending made by the customer.

The more the customer wagered, the more points he earned.

 Hosts are in charge with the management of the information derived from the

players’ cards. They reflected each player’s spending habit because they can

observe that from the points accumulated by the player. The more the player spent,

the more winnings the casino gets, the more benefits the player will receive

because they in turn exchange or redeem the points with “comps” which is usually

up to 35% of casino’s theoretical win. The percentage of theoretical winnings that

the casino has on the total wages made by the player can be derived by multiplying

the total amount the player has waged into the machine by the theoretical hold

percentage of the specified machine. The comps are complimentary gifts such as an

abatement of the customer’s hotel and entertainment costs, coupons for free meals

or tickets for a show.

The card created built customer loyalty because less conspicuous players

may find the benefits overwhelming and unexpected and at the same time gave

management the ability gather information on the customer’s gaming behaviour.

This strategy spans not only with the MGM grand but with other seven premiere

MGM MIRAGE properties. The cards only accumulated points from the customer’s

gaming activities and were a valuable tool in separating profits. The card aided

management in tracing 65% of the total slot earnings to individual customers.

IV. Do you think it is appropriate for hosts from any property to have
access to the entire profile of a specific customer, regardless of
where that customer plays or stays? Why? If you think that hosts
from a certain property should have access only to the information
on customers’ play in their property, do you think there is anybody
who should have a comprehensive view of the customer?

Yes, it is appropriate for the host from any property to access to the entire

profile of a specific customer regardless of where that customer plays or stays

wince this will help the host manage the customers’ profitability, which is a primary

concern of the management. Their profile will help hosts to decide on specific

comps and deals that is applicable and suitable for a customer depending on their

gambling behavior.

Along with this concurrence, there should still be a management control as to

the management of the relationship of host-customer to avoid conflict of interest.

And lastly, there should be in charge on the comprehensive view of the customer to

give a better service, provide enticing benefits and assistance on customers’

profitability.

V. Do you think treating each property (MGM Grand, Bellagio, Treasure

Island, etc.) as an independent profit center is the right approach to
manage the MGM MIRAGE group? Why?

Yes, it is appropriate to treat each property as an individual profit center for

hotel and this allows top management to evaluate the individual performance of

each property. It will also pave way for the managers of profitable properties to

receive necessary bonus or incentive pay. Assessing each property individually will

also help the company identify high and low performing properties. It will also help

identify properties having ineffective cost management and unstabilized revenue

earnings. Together with the implementation, consolidation of the earnings of

different properties is also recommended to see the impact of hotels and properties

of the company as a whole.

VI. How should MGM view the entertainment business? Is it simply a
mechanism for bringing gaming customers to the property? Is there
a distinct entertainment segment of customers? (Hint: look at the
overlap between the Players Club and the Hotel folio database.)

Hotel Folio and Player Club data indicate a big overlap between gamers and

hotel customers, demonstrating how the entertainment segment serves as an

attraction for gaming customers.While there may be a few occasional significant

non-gaming customers, the entertainment segment is intended to be a supplement

to the gaming business, which is the bread and butter of MGM Grand. The target

segment of the gaming business are the gamers especially the ‘Whales’ and the

‘High Rollers’. This has been the strategy since the construction of the new MGM

Grand in 1993. Complimentary gifts and subsidies were still offered but only to

gamblers whose gaming behavior justified the cost of the reward. Other gamers still

needed to pay the full price of the consumables. Nevertheless, these other gamers

pay for these facilities because of the company’s emphasis on high quality. New and

upgraded facilities often spring up to support this emphasis. Popular boxing

matches are also held there, which attracts a wide variety of clientele to gamble.

This provides an avenue to derive revenue from small-time gamblers who do not

gamble significantly as to economically justify comps. Hence, there seems to be

little of a dichotomy between customers of the gaming segment and the

entertainment segment since the relentless focus of these segment is to make

money from both big-time and small-time gamblers.

VII. How would you strategically manage the entertainment business?

What action plan would you design to implement your vision?

The focus of the entertainment business should be on expanding business in

emerging markets that will stimulate growth and profitability into the future and
engaging in rigorous training and development programs leading to a remarkably

high level of customer service quality. Moreover, mere focus on the gaming business

in Nevada can subject MGM to the risk of single point of loss because both depend

on attracting gamblers. Value must also be created for non-gamers that abstain

from gambling which may be a point of diversification. A strategic action plan may

be implemented through (1) acquiring properties in emerging markets such as

China, Indonesia, and South Korea, (2) providing a distinct line of entertainment to

non-gamers, and (3) implementing rigorous training and development programs

among key business groups that will enable the profusion of competencies and

increase the quality of customer service.

VIII. Would your responses to questions 4 and 5 change as a function of
your responses to questions 6 and 7?

By virtue of questions 6 and 7, responses to question 4 and 5 will vary

slightly. In pursuit of the strategic action plan of expanding business in emerging

markets, hosts from properties should only have access to the profile of a specific

customer relating to that region rather than the entire profile since such additional

information is rather unnecessary for the conduct of their work. Gaming customers

are unlikely to gamble in multiple locations unless their gambling propensities are

equivalent to ‘Whales’. While the use of information pertaining to a region by

another is not encouraged, its need may be justified. Such may be provided on a

case-to-case basis subject to higher management approval. Furthermore, treating

each property as individual profit centers should not change since the services

provided by one independent of others save for the redemption of comps, which

may be resolved by instituting transfer prices.