Case inp o i n t
Reaping
Rewards
Customer relationship management efforts and tough management decisions
transformed Harrah’s from a struggling casino operator into a very profitable one.
By Sudhir H. Kale and Peter Klugsberger
A F T E R I N V E S T I N G billions of dollars
in iconic architecture and must-see
attractions, many casino companies are
now turning their attention to smart customer relationship management (CRM)
practices. They are taking the lead from
Harrah’s Entertainment Inc., a company
that was struggling for its very survival
just 10 years ago. Harrah’s has set new
benchmarks for customer segmentation,
revenue optimization, and maximizing
customer lifetime value. Indeed, few
companies in the business-to-consumer
(B2C) sector can match the CRM accomplishments of Harrah’s.
These achievements over the last
seven years have certainly not gone
unnoticed. Harrah’s has won several
awards for the innovative ways in
which it creates customer intimacy.
From the coveted Best Practices Award
from The Data Warehousing Institute to
the Partners in Alignment Award from
CIO Insight magazine, the company has
claimed almost every accolade in the
CRM space.
“Perfect CRM implementation” is
an oxymoron for most businesses.
Although success stories are now beginning to surface about B2B CRM practices, outstanding CRM triumphs in
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consumer services are still relatively
rare. Hotels, casinos, airlines, and most
B2C service companies stand to gain a
lot from following the Harrah’s CRM
journey.
The Playing Field
Erupting volcanoes, sinking
pirate ships, dancing fountains soaring
250 feet in the air, and replicas of
the Eiffel Tower have for some time
embodied the external façade of casinos. However, when it comes to operations, the contemporary casino scene
is nothing like it was 10 years ago.
Additionally, expectations and
demands of casino customers have
risen considerably amidst everincreasing global competition. Unlike
most entertainment services, in which
product differentiation is a given, the
core product or revenue generators
of a casino (i.e. table games, slot
machines) are basically commodities—
easily replicated by any new entrant
or competitor. One area of differentiation was pioneered by Harrah’s
and subsequently emulated by all
major casinos. Here, investments are
made to thoroughly understand the
client base and design marketing cam-
paigns on the basis of the knowledge
generated.
The North American casino market
over the past decade had been dominated by four major competitors: MGM
Grand, the Mandalay Resort Group,
Park Place Entertainment (subsequently
renamed Caesars), and Harrah’s. For several years, competitors of Harrah’s were
following the must-see or iconic-property
strategy as a means to draw customers
and grow revenues. Harrah’s did not
have the financial capital needed for
constructing such grandiose properties.
When Phil Satre became the CEO in 1984,
he decided to pursue growth by configuring the company’s core competencies
around customer loyalty. This decision
would set the company on a path of
gathering, analyzing, and retrieving voluminous amounts of customer data to be
used in filling hotel rooms, designing
marketing campaigns, and maximizing
the lifetime value of its customers.
Satre’s entire approach revolved
around people. Under his reign,
Harrah’s developed a customer rewards
program based on tracking player cards
(akin to a frequent flyer program) at each
of the Harrah’s properties. However, the
program was run independently at each
property—and therefore lacked uniformity in structure and incentives provided to players. In the mid-1990s, Harrah’s
experienced sizeable losses in market
share thanks to the construction of
additional must-see properties by its
competitors. The company was at the
crossroads deciding whether it should
follow the lead of its competitors or discover new ways of competing. Harrah’s
decided against imitating its competitors’ approach of investing in lavish
buildings and instead chose to focus on
improving its customer relationships.
For the customer intimacy approach to
succeed, Satre had to discard the functional approach of organization that had
so far preempted any meaningful relationship building. Radical changes were
required on many fronts—the most
drastic being leadership.
The Leadership
With Wall Street analysts questioning
the company’s viability, Satre realized
that the old strategic picture had to be
erased to make way for the new. To
spearhead the new approach, he needed
someone at the C-level who had a clear
vision of where to take Harrah’s—while
possessing the necessary competence
and determination to do so. Getting to
the root causes of the poor performance
of Harrah’s required a person who could
shake up the current organizational
structure and decimate the prevailing
inward-looking mentality of the
Harrah’s people.
It was decided that for the transformation process to have credibility, the
person to lead Harrah’s turnaround
should be a new chief operating officer
(COO). Only someone at the COO’s
level can say this with authority: “From
now on, this is the way we are going to
engage our customers.” Satre’s choice
for COO was so unconventional that he
didn’t tell his board about it until it was
a done deal. Gary Loveman, a Harvard
professor specializing in relationship
marketing, was chosen for the position.
Loveman had conducted executive
training programs and some consulting
for Harrah’s. Taking on an outsider—
who could see the problems of the company without having the mental preconception that “I am the industry expert
and I know what needs to be fixed”—
was indispensable to the success of
the much-needed strategic overhaul.
Having no prior experience in the
gaming industry, Loveman neither had
to unlearn established mental models
nor feel the compulsion to follow
unwritten industry rules. He could be
whatsoever. Getting people to see a
problem from new angles is probably
the only way to rid an organization of
the embedded groupthink mentality.
The new ethos was to identify the most
profitable customers and to focus on
their wants and needs.
Loveman personally involved himself in the programs that he felt were
critical for accomplishing this vision.
He chaired the newly created marketing
council, which brought together field
marketing people as well as outside
agencies, PR agencies, and senior tech-
Radical changes were required on many fronts—
the most drastic being leadership.
objective and unencumbered in assessing the company’s options.
As would be expected at the start,
most of the Harrah’s employees were
reluctant to trust their new boss. To
them, Loveman simply did not have
what it would take to succeed as the
Harrah’s COO. Indeed, they could not
be faulted for such thinking. Loveman—
who had until then managed only one
secretary and a research assistant—was
now in charge of 26 casinos, 15,000 hotel
rooms, more than 100 restaurants, and
40,000 employees.
The Culture
At the outset, Loveman embarked
on making tough and drastic cultural
changes. Creating a national brand that
inspired customer loyalty would be
difficult in an environment where the
employees’ existing mental attitudes
and patterns of behavior were stubbornly geared toward managing individual
properties. Loveman decided to fire
practically the entire corporate marketing department. Changing the incumbent people’s ossified attitudes was a
battle he could not win. In pursuit of
capable people with fresh perspectives,
Loveman hired several CRM “rocket
scientists” with no gaming experience
nology people. The creation of this
heavyweight cross-functional team was
vital in communicating the significance
of the new CRM program to all employees. Including information technology
(IT) people in the marketing council
made perfect sense; much of marketing
was running through technology systems. Members of this council understood that henceforth, marketing was a
collaboration between the corporate
office and the field; everyone owned his
decisions and would be held accountable for them. The council set in place a
revolutionary marketing strategy based
on leveraging customer insight.
Analytics and
Experimentation
Loveman and his marketing team
began experimenting with quantitative
mathematical models that would accurately predict the future worth of customers. Based on slot customers’ actual
wins and losses, visit frequency, play
denominations, and velocity (rate at
which they put coins in the machine and
pulled the handle), Harrah’s could identify the profitability of various classes of
customers. The company then decided
to consolidate its strategy around “avid
experience players.” Avid experience
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Case inp o i n t
players are not high rollers. Rather, these
could be middle-aged folks or retired
teachers, bankers, or doctors with time
and discretionary income. They gamble
between $100 and $500 a trip and visit
the Harrah’s properties several times a
year, each providing annual gaming revenue of around $5,000 to the company.
Harrah’s also harnessed its newly
acquired decision science capabilities
to zero in on successful promotions. To
identify the most effective promotions,
the company began experiments using
groups of “observationally equivalent”
consumers—sharing the same age
bracket, living in the same area, and
having a similar history. One group,
for example, would receive a $50 cash
voucher for the next visit while the
other would receive $25 in cash plus a
free room and a buffet. Response rates
to the offer and resulting level of play
were then tallied to see the merits of
various offers.
Today, Harrah’s collects information
from more than 40 million customers
enrolled in a program called “Total
Rewards.” New data are constantly
added to refine the profiles and descriptions of around 90 customer segments in
the database. Each segment receives custom direct-mail incentives to visit any of
the 40 Harrah’s properties. An astonishing 80% of gaming revenues can be
traced back to specific customers.
Updated customer preferences are
recorded and used in future campaigns.
In its 2000 annual report, the company
bragged: “We know what our customers
like … Tom likes NASCAR, Clint
Holmes, thick steaks. Joyce and Ted like
oceanfront views, barbershop quartets,
Elvis slots.”
Loveman made the use of IT tools
mandatory across all properties.
Executives not using the right tools
effectively would find themselves in a
lot of trouble. Breaking people’s old
habits and altering the ways they look at
problems are prerequisites for maneuvering a successful strategic inflection.
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In the case of Harrah’s, Loveman had
the authority to demand compliance
and he used this authority forcefully. In
many foiled CRM undertakings, those
in charge of change management try to
change people without enforcing the
authority granted to them.
Finely Tuned Strategy
The marketing strategy paralleled
that of a retail establishment seeking
to grow revenues through increases in
same-store sales. Loveman explains,
“The goal (was) to get a customer to
visit your store regularly, just as she
might routinely visit her hairdresser
and mechanic. The hairdresser and the
mechanic envelop the client in reasons
to be loyal, primarily by developing a
relationship. We decided to develop just
this kind of close relationship with people who visit the Harrah’s casinos.”
Key to developing close customer relationships is the Total Rewards program.
Total Rewards is a four-tiered program that begins with Gold at the
entry level and progresses to Platinum,
Diamond, and Seven Stars based on a
customer’s level of play. Less than 1%
of all Total Rewards Players are at the
Seven Stars tier, but they contribute
a lot to the total revenue. Platinum,
Diamond, and Seven Stars cardholders
receive progressively greater levels of
service, which adds an aspirational
element to the program. “As it turns
out, marketing that appeals to customer
aspiration works wonderfully,” quips
Loveman.
The four tiers of customers are segmented further into 90 or so customer
groups based on their geodemographics,
psychographics, and play patterns.
Player data are constantly upgraded and
fine-tuned to stay abreast of any changes
in the marketplace. The company uses
direct mail, the Internet, and the telephone to communicate with its various
segments. But with about 50,000 slot
machines on its properties, the company
is looking for new and innovative ways
to use these revenue-generating devices
as channels of communication. Harrah’s
is investing in technology to use them to
communicate with customers in real
time about things such as “comps” or to
inform them when they have been
upgraded between tiers.
The constant scanning for business
environment changes—through analysis
of customer data—gives Harrah’s a
clear advantage over its competitors.
Any deviations or changes in predominant customer taste or behavior will be
immediately picked up by the system,
and the company can then rapidly
adapt its strategy to match the changed
circumstances. This closeness to the customer and the use of positive and negative feedback loops enable Harrah’s to
ensure that everything goes according to
plan—meaning that the strategy either
works or is tweaked. With each passing
day, Harrah’s IT systems are growing in
content and sophistication.
Interestingly, Harrah’s also uses its
database to decide when to pull back
from a customer relationship. Company
research indicated that a significant part
of a company’s regular customer base
was simply too expensive to service, so
Harrah’s promptly decided to discontinue further communications with the
nonlucrative customers. Company officials report more than $20 million in
annual savings by doing this.
Sustaining competitive advantage
through IT is one of its main priorities. It
achieves this by protecting its innovative
processes and knowledge through proprietary patents. The company has been
awarded several patents for various
parts of its customer tracking systems,
which gives its business the necessary
edge. Copying of any patented systems
by competitors is closely monitored. The
company may, under the right circumstances, actually license its intellectual
property to another casino.
The effectiveness of the Harrah’s
CRM program is assessed with key metrics. The board receives regular reports
on four metrics: share of its customers’
gaming dollars, percent of revenues
from customers who frequent more than
one Harrah’s property, percent of Total
Rewards members advancing to a higher tier, and customer satisfaction scores
across the properties.
Organizational Design
Loveman counts the “creation of a
climate of meritocracy” at Harrah’s
among his biggest achievements as
COO. Before his arrival, people were
considered adequate if they were meeting the minimum required standards of
the job. To challenge this complacency,
Loveman personally conducted talent
reviews with all of his operating and
corporate people and used these meetings to instill in them the mantra of
meritocracy. His argument was: “Why
would you spend time trying to make a
barely OK person successful? Wouldn’t
you rather have a case where employees
are so good that they are putting some
heat on you and teaching you some
things and pushing you around a little
bit?” Being in the people business,
Loveman knew he needed a competent
and motivated work force to retain cus-
tomers and stay ahead of competition.
The Harrah’s survey data revealed that
in addition to fast service, customers
wanted friendly and helpful attention.
Accordingly, the company decided to
link employee rewards to customer satisfaction. Employee performance was
measured on the matrices of speed and
friendliness. To this end, all employees
were required to take part in a certification program that trained them to deliver excellent service. At the end of the
program, everybody had to pass a test
or risked termination. This harsh policy
demonstrated the company’s strong
commitment to the service initiative.
To reinforce its service commitment,
improve cross-functional coordination,
Loveman revamped the company’s
incentive system. Beginning in 1999, he
started paying out a bonus to all nonmanagement employees if their property
improved its customer service scores
by 3% over the same period a year earlier. By the fourth year of the program,
the company had paid out more than
$43 million in bonuses. Findings from
customer satisfaction surveys were regularly published in employee areas for
people to check how they were doing.
One positive aspect of this feedback
mechanism is its self-reinforcing character. Because the reward depends on
everyone’s performance, employees
Breaking people’s old habits and altering the ways
they look at problems are prerequisites for
maneuvering a successful strategic inflection.
the company paid people their tipped
wages while they were in training. At its
Rio Casino in Las Vegas, the training
program was run 24 hours a day over
four months to get through all 4,000
employees.
The importance of customer satisfaction is drilled into employees on a daily
basis. Loveman elaborates, “From
housekeepers to slot attendants, from
valets to stewards, from receptionists
to chefs, all employees are told daily as
they arrive at work: If your service can
persuade one customer to make one
more visit with us, you’ve had a good
shift. If you can persuade three, you’ve
had a great shift.”
Loveman saw a huge opportunity in
harnessing the power of internal marketing to improve employee performance and reduce turnover. Supervisors
were constantly encouraged to support
new employees by checking in with
them regularly to see whether they were
happy with their working environment.
Much of CRM payoff depends on
interdepartmental collaboration. To
are naturally motivated to monitor service delivery in all departments, not just
their own. For example, if people
noticed that customers were not happy
with the performance of the valet staff,
other departments would use peer
pressure to improve that department’s
service delivery. Such a reward system is
a strong antidote to the “silo mentality”
that plagues most service establishments.
The Postscript
The Harrah’s CRM strategy has paid
handsome dividends. The company’s
share of customer wallet has increased
to more than 43% from 36% in 1998
(when Loveman came on board).
Loveman was named the company’s
CEO in January 2003 and became chairman of the board in 2005. Harrah’s is
today the world’s largest and most profitable gaming-entertainment company,
with more than 80,000 employees and
with 2005 revenues in excess of $7 billion. The company’s $9.4 billion acquisition of Caesars Entertainment in 2005
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Case inp o i n t
was the largest in the industry’s history.
Loveman’s consistent track record for
returning exceptional value to shareholders led Institutional Investor magazine to name him the gaming and lodging industry’s best CEO in 2004, 2005,
and 2006. In late 2006, the company
received a $15.05 billion buyout offer
from private equity firms Apollo
Management and Texas Pacific Group.
On consummation of the deal, Loveman
will receive about $94 million in stock
options and other rights.
Harrah’s achieved its CRM milestones through strong leadership,
extensive use of it, and high standards
of customer service. Herein are the
kernels for successful CRM: Clear
vision and uncompromising leadership
enabled Harrah’s to create the culture,
the strategy, and the human resources
infrastructure required for effective
CRM. The Harrah’s case demonstrates
that boldness and determination in
carrying out change management initiatives can alter the persona of even
70-year-old companies.
Future stellar performance for
Harrah’s is far from certain. Revenue
growth and spectacular profits for gaming companies are now destined to come
mainly from Asian markets such as
Macau, Singapore, and South Korea. The
performance of Harrah’s in light of the
new global realities is still open to question, particularly because the company
has been lagging behind its competitors
in tapping international opportunities.
Even if the company commits itself to
new markets, will its slicing/dicing/
optimizing strategy work as effectively
in culturally diverse markets? It is too
early to place any bets. I
About the Authors
Sudhir H. Kale is associate professor
of marketing at Bond University in
Australia and the founder of GamePlan
Consultants, a company that consults
and trains casino management on the
marketing aspects of gaming. He may
be reached at skale@staff.bond.edu.au.
Peter Klugsberger has worked in the
gaming industry for nearly two
decades—with assignments in Australia,
Czech Republic, Denmark, Slovakia,
Switzerland, and Venezuela—and is currently director of table games for a casino
operation in Canada. He may be reached
at pklugs@yahoo.com.