The impact of free-play on casinos’ bottom line is as yet unknown, but it’s certainly a part of Tribal gaming. (Gilaxia via iStock by Getty Images)
From free-play points to discounts at casino restaurants to comped reservations at luxury hotel suites, players know that loyalty pays. What’s unclear is whether it’s a good investment for casinos.
According to Kate Spilde and Anthony Lucas, two academics who study the impact of free-play on casinos’ bottom lines, the answer to that question is, as yet, unresolved.
“In spite of the industry-wide popularity and considerable cost of these offers, little is known about their effect on customer behavior,” they state in their 2017 article Estimating the Effect of Casino Loyalty Program Offers on Slot Machine Play.
And they both should know, as experts on the subject. Katherine Spilde holds a doctorate in cultural anthropology, and serves as Chair of the Sycuan Institute on Tribal Gaming, as well as Professor of Hospitality and Tourism Management at San Diego State University. Anthony Lucas’ doctoral degree is in Hotel Administration from the University of Nevada, Las Vegas, where he serves as professor of its William F. Harrah College of Hotel Administration.
While they acknowledge that little is known about the effects of free-play on consumer behavior, they can help Tribal casinos better consider the complex factors that casino executives can then use to determine what kind of free-play, and how much free-play (“FP” for short), to offer to influence player behavior.
Let’s back up a step and define free-play. According to Lucas and Spilde, “There are essentially two kinds of FP awards in casino loyalty programs (LPs): discretionary FP (DFP) and earned FP (EFP). DFP offers are electronic currency awarded to slot players by casino management. The dollar amount of these awards is determined by management, but it is usually a function of each customer’s historical tracked play over a defined qualification period (e.g., the preceding 30-day period). These offers are most often communicated via direct mail materials sent to club members by way of the postal service.”
Bottom line: Players obtain DFP loyalty points at the rewards desk by playing slots — not table games — while they receive EFP offers in the mail.
On the player’s end, it’s free money that can be used to place wagers or to purchase casino amenities — oftentimes food and beverages. For casinos, it may seem like somewhat of a risky investment with an unknown amount of uncertainty built into it, especially with regard to DFP. This is because, “EFP is only one of several point redemption options, which greatly limits the associated cost of such offers. The point liability is already established by the customer’s play, so management is already committed to these costs…,” state Lucas and Spilde.
In other words, management can build this incentive cost into its revenue model. Conversely, the casino never knows how many people are going to walk through its doors, how many DFP points they are going to earn, and when they are going to use them.
In essence, DFP is the proverbial wild card for casinos since they never know how much of it will be claimed. Per Lucas and Spilde, “As a critical first step, it would be helpful to know the extent to which players access their own bankroll after losing the DFP credits.” And that, of course, is the objective: getting players to spend their own money.
Determining whether players are doing just that is something of a math modeling nightmare given the quantitative and qualitative conditions that must be considered to draw any valid conclusions. Since “Tribal governments rely upon casino revenues for economic development, nation-building and critical community prerogatives…,” especially slot profits, it’s a question worth answering.
What is known is that “loss leaders” — just like your favorite cereal at “buy one, get one free” prices at your local grocery store — do generate or increase business revenue. Extrapolating from that, the same should be true for casino free-play. What is not known for the casino industry is how big the incentives need to be in order for them to have a positive impact on the casino’s bottom line.
Moreover, what is also known is that, like grocery stores, clients come to expect incentives to play, and $5 in free-play just doesn’t cut it at most casinos anymore. Finding that magic number is critical for Tribal casino profitability. But that’s not the only solution.
Spilde, a non-Native who grew up on the White Earth Indian Reservation in Minnesota, started studying the problem when she was fishing around for a topic for graduate school research. White Earth was in the process of opening a casino, and in her recounting, she would “go home and see the progress it was making — fascinated how it was changing the community.” In the mid-1990s when she began her studies, “…few people understood or appreciated how big Tribal gaming was going to become,” she recalled. But she would go home every holiday and summer to track the cultural impacts at White Earth, ultimately writing a paper titled “Negotiating Interdependence” on how Tribal and non-Tribal governments (city, county, state) negotiated agreements.
Her overall conclusion has been that gaming has been incredible for Tribal sovereignty. “Prior to 1988 with the Indian Gaming Act, Tribes didn’t have political or economic power, or at least it wasn’t recognized by local governments,” Spilde recounted. “Tribes actually became quite powerful over the years,” she observed.
Before gaming, economic development was driven top-down by federal programming, and the Tribe’s primary role involved saying yes or no as to whether it wanted to participate in a program. Then roles shifted as some Tribes “that knew how to work the interface between the governments and to use their civil regulatory authority to get into gaming did so,” Spilde recalled. This made economic development driven by Tribes rather than by the federal government – a real game changer for how Tribes viewed economic and business development.
Now, with the gaming market reaching saturation and free-play still an indeterminate factor in its fate, Spilde still believes that gaming is the best thing to ever happen to Indian Country.
“Gaming is ultimately a Tribal initiative. Unlike a federal initiative which is imposed, each Tribe has its own political process for opting into gaming. There’s no federal government pressure to doing it or not. While there are some disincentives — compacts, financial risks, etcetera — the big picture is that Tribes are absolutely winning and Tribal sovereignty is winning, because it’s based on Tribal choices,” Spilde concluded. It was a triumph of Tribal sovereign decision making.
“I think that most Tribal leaders would still say today that ‘we’re winning’ because they made the choice to get into the market,” Spilde believes.
More importantly, in spite of grappling with the challenges and benefits of free-play, she sees gaming as the foundation for future Tribal growth.
“We hear all the time that diversification is the mantra in terms of economic development, but what that means is different for each Tribe. If there had been other opportunities all along, they would’ve been doing them. Instead, a lot of economic diversification is subsidized by gaming money, especially Tribes venturing into ecommerce for financial services, banking, online business. This allows them to transcend reservation borders and to go beyond land-based ventures as addressed in our 2019 Wiring the Rez Conference,” Spilde stated.
Tribes have expanded casino operations into hotels and conference centers that have become destination vacation and convention spots. So, while the issue of free-play still needs further study, Tribes have moved past it to some degree by minimizing gambling revenue as the mainstay of their casinos. The issue now is how to leverage free-play to benefit from the potential gains of these related revenue streams without turning to free-stay — in an attempt to keep gaming revenues up and enhance job opportunities on the reservation.
“It’s unbelievable what Tribes have accomplished in such a short time, and this never could’ve been done if manufactured by a third-party government program,” Spilde said.
“From bingo halls to destination venues in 30 years. Our elders would be proud.”