Case 4
Harrah’s Big Database Gamble
Harrah’s, with around 25 million customers in 2001, is headquartered in Memphis,
Tennessee, and operates 25 casinos with 40,000 gambling machines in 12 states. For
years it had been a fairly small gambling company but, by 2001, had emerged as the
second largest in the industry. It is flourishing at a time when competition is more
intense than ever.
By the mid-1990s, the gambling expansion appeared to reach the point of
diminishing returns. The number of casinos in the United States swelled, thanks to
changes in federal and state laws permitting gambling on riverboats and Indian
reservations. There are only so many gamblers in the population, and so for the
casinos to continue to grow they had to move some gamblers from competitors’
casinos to their own. How could Harrah’s succeed in this environment?
While other gambling companies have spent their investment dollars trying to
lure customers by building flashy casinos with extravagant rooms and entertainment,
Harrah’s has focused on technology that allows it to identify, track, and cultivate its
most profitable customers.Harrah’sCOOGary Loveman explained the strategy this
way: “The prevailing wisdom in this business is that the attractiveness of a property
drives customers. Our approach is different.We stimulate demand by knowing our
customers.”
By the early 1990s, casino operators had found that the slots and other
machines surpassed the table games (such as dice and blackjack) as their biggest
source of income. About the same time, the casinos began to use computers to keep
records on individual gamblers, and they began recognizing the most profitable
customers and giving them very special treatment while others would only get an
occasional drink or sandwich. But Harrah’s has focused on customer relationship
management much more intensively than its rivals. According to William Schmitt,
executive director of CIBC World Markets in New York City, “Everyone tracks their
customers’ play on a real time basis (using computers).” However, “Harrah’s matches
what its customers are worth (as gamblers) with what they might be worth and has a
90 percent hit ratio in turning customers who are presently worth $500 into customers
who are worth $5000.”
COO Loveman, a former Harvard business school professor, is the person
primarily responsible for Harrah’s change to a customer-centered strategy. He
recognized an opportunity in the gambling industry to apply what he taught about
customer loyalty in the classroom. Loveman believes in treating each person as a
long-range customer, whether or not that person is staying at a Harrah’s hotel, and
whether or not that person is a big spender. He pointed out that Harrah’s got 36 cents
out of every dollar their customers spent in casinos, and a rise to 40 cents “would be
monstrous.”
After presenting his ideas to Harrah’s management, Loveman was
immediately hired as COO. In fact, by applying Loveman’s strategy, Harrah’s “wallet
share” had risen to 42 cents in 2001, and for each percentage point gained, Harrah’s
had shown a profit increase of $125 million. Since then, by carefully analyzing its
customer data, Harrah’s has learned that 80 percent of its casino revenues comes from
customers who only spend between $100 and $500 per visit. The data showed that
many Harrah’s customers are relatively local and can come more often without
expensive plane fares.
The centerpiece of the Harrah’s strategy is its Total Rewards program. When
gamblers arrive at a Harrah’s hotel or casino, they are asked to apply for a Total
Rewards card, although its use is voluntary. Total Rewards applicants must provide
information on their gender, age, home location, and the games they like to play. If
gamblers choose to insert their card into the slot machine they are playing (or other
machines such as poker), the machine will record on the card the amount of money
put into the machine, the total number of bets the customer placed, the average size of
the bet, and the total amount of money deposited (“coin-in”). Gamblers are rewarded
points based on the amount of time a customer spends gambling. Points are not given
based on winning or losing or the amount of money deposited in the machine. The
points are saved on each customer’s record, and the gamblers can exchange their
points for rewards or cash. Each time a Total Rewards customer returns to a Harrah’s
hotel or casino, his or her record will be updated.
These data are stored in a data warehouse. Harrah’s combines its gambling
transaction data with data from other sources such as its hotel reservation system. The
company then analyzes these data using customer relationship management (CRM)
software, which views customers as long-term assets. A CRM system coordinates all
business processes for dealing with customers, which in Harrah’s case includes both
gambling and hotel customers. The company uses Cognos Impromptu, a CRM query
tool from the Cognos Corp. of Burlington, Massachusetts, running over its data
warehouse. For marketing managers to analyze the data, the company uses modeling
tools from SAS Institute Inc., located in Cary, N.C. The overall system Harrah’s
developed has been named WINet (Winner’s Information Network).
Using these tools, Harrah’s marketing department builds a detailed gambling
profile on each customer. It then will create a personalized marketing program,
including a plan to entice the gambler back. “We wanted to track what our customers
are spending with us in a retail environment so that we can reward loyal ones with
complimentary perks such as hotel discounts,” explains Tracy Austin, Harrah’s vice
president of IT development. Loveman points out that “Age and distance from the
casino are critical predictors of frequency (of visits to the nearest Harrah’s casino),
coupled with the kind of game you play and how many coins you play per game.”
Thus, using this information, the computer estimates how much money the company
can earn from the individual person over time, viewing the cost of this information
and the rewards from Total Rewards as an investment.
Harrah’s has established 90 targeted demographic segments to identify the
customer’s value to the company. According to its profile studies, the “perfect” player
is a 62-year-old woman who lives within 30 minutes of a casino and plays the dollar
video poker. Harrah’s analysts say such customers have time on their hands, ample
disposable cash, and easy access to a casino. The more likely a customer will return
often and the more that customer is predicted to spend, the higher the demographic
segment assigned to that customer. The Harrah’s rewards depend upon which segment
the customer is in, although just by returning everyone will get some extra treatment.
Those who return regularly will receive an enticing promotional mailing a month or
two before the customer is expected to return, giving that person something that can
be used when the customer arrives. When a repeat customer calls Harrah’s to make a
reservation, information from the customer’s record comes up on the reservation
computer screen. If the customer has received an offer in the mail, that information
will be displayed on the screen. Possible rewards can include cash, complimentary
trips, meals, hotel room upgrades, free hotel weekends, welcome gifts such as flowers
or candy in the hotel room, tickets to sporting and entertainment events, and possibly
even being met at the airport and transported to the hotel.
As Harrah’s expanded, each casino was being operated independently. John
Boushy, Harrah’s CIO, said “While management at each of our properties had been
thinking, ‘This is my customer,’ customers had been wondering why they didn’t get
the same treatment at different Harrah’s properties.” Management decided that all
Harrah’s sites had to be on WINet so that when a customer at one casino (or hotel)
goes to another Harrah’s, he or she will receive the same treatment. Moreover, that
person’s record will show the same segment and the same number of points the
individual has collected at the other site or sites. Another problem management faced
was that the company also had to change Harrah’s corporate culture, and do so at all
25 locations. Their staff had to switch from a focus only on their own casino and that
casino’s profit to a customer-focused corporation regardless of which Harrah’s casino
they are working in. One result of this change was that more than half of Harrah’s
three Las Vegas casinos’ revenue comes from gamblers already known to the
company because they had previously gambled in one or more of its non-Las Vegas
casinos.
Harrah’s CRM-based strategy appears to be a great success. The company
showed a 13 percent profit gain in the first year it was used, even though it gave out
$251 million in Total Rewards that year.Harrah’s same location 1999 sales increased
by 14 percent over 1998. Harrah’s has seen a 23 percent gain in customers who
gambled in more than one location. Moreover, customers spend more on each visit
than in previous years. In 2001, it achieved $3.7 billion in revenue, an 11 percent gain
from 2000. Slots and other gaming machines, which are linked to the Total Rewards
program, account for 80 percent of Harrah’s operating profit.
Harrah’s insists that it keeps the customer information it collects confidential,
that it will never sell its customer list to other organizations, and that it is not out to
exploit gamblers. However, opponents of the gambling industry have criticized
Harrah’s use of customer data. Richard Thomas Grey, director of the National
Coalition Against Legalized Gambling, said that Harrah’s goal is to separate people
from their money. The Council on Compulsive Gambling of New Jersey, an advocacy
organization, also opposes Harrah’s approach.
Harrah’s CEO Philip G. Satre defends his company by pointing out that the
company does not pursue those who are poor. Instead, it reaches out to people who
will spend $1,000 to $2,000 per trip gambling. He also claims the Total Rewards
program actually gives these people rewards instead of encouraging them to gamble
more. Harrah’s just encourages them to do whatever gambling they choose to do at
Harrah’s rather than at another casino. Harrah’s claims it would never push a
customer to do more gambling. “It’s all about customers bringing their existing
gaming business to us,” says Loveman. He further points out that the purpose is to get
to know those who already want to gamble and give them reasons to spend their
money at Harrah’s. His explanation is “All we used to know was how much money
we made on each machine, but we couldn’t connect what kind of customer used them.
Now, I can get on the system and say, ‘Where are all the 60-or-older females from
North Carolina playing?’ This is the replacement of intuition and hunch with
science.” If customers don’t want their play tracked, they don’t have to use the card.
Sources: Joe Ashbrook Nickell, “Welcome to Harrah’s,” Business 2.0, April 2002; Meridith Levinson,
“How It Works,” Darwin Magazine, May 2001; Meridith Levinson, “Harrah’s Knows What You Did
Last Night,” Darwin Magazine, May 2001; Meridith Levinson, “Technology’s Potential Dark Side,”
Darwin Magazine, May 2001; Anne Chen, “Harrah’s Places Its CRM Bet,” eWEEK.com, April 2,
2001.
Case Study Questions:
1. Analyze Harrah’s using the competitive forces and value chain models.
2. Describe Harrah’s business model and business strategy.How do they differ
from those of other gambling companies?
3. What role has database technology played in Harrah’s strategy? How critical
is it to the success of the company?
4. How did Harrah’s use CRM software and modeling tools to address the
company’s problem?
5. Are there any ethical problems raised by Harrah’s use of customer data?
Explain your answer.
6. What problems can database technology and customer relationship
management software solve for Harrah’s? What problems can’t they address?