I’ve been listening to a lot of old Planet Money podcasts. I like Planet Money. I think they do a good job of explaining global economics and I find their stories to be interesting.
One podcast from 15 Nov 2011 interviewed a casino CEO who was a Harvard economist. He talked about gifts that casinos give to customers to keep them happy.
You want the thing where the cost to you is low and the value to me is high, obviously. What is that thing? What is a thing where the cost to you is low and the value to me is high?
Well hotel rooms are a pretty good example because the incremental cost of putting you in a room that would not otherwise be used is very low, and the value to you might be very high. Privileged access—if I let you cut the line at Pure Nightclub on New Year’s Eve—that doesn’t cost me much, it’s enormously valuable to you. Exclusivity is very highly valued by our guests; it is not terribly difficult for us to provide.
Let me give you a counterexample. We have Guy Savoy’s French restaurant here at Caesar’s Palace, which is a spectacular culinary experience. Three star—Michelin, French chef. The meal costs us just about exactly what we charge for it. So if I give you and your wife a Guy Savoy dinner, that’s a, that’s real money, that’s $1,000 of real money to put you in that table. And you value it at roughly $1,000. So, while it’s exclusive and it’s important and we’re happy to do it, there’s not nearly as much arbitrage in that as there would be in some of the other examples.
We have an awful lot of people who visit us one time and never come back for a very long time. And there are lots of reasons for that. But one of them is that on their first visit, it’s not a good experience for them. And there’s lots of reasons why that might be, but certainly one of the reasons is that the gambling outcome is surprisingly bad for them. Everybody who gambles knows that the house has an advantage. They’re not unhappy that they lose anymore than one is unhappy that they paid $40 to walk into the Magic Kingdom at Disney. They recognize there is a fee to provide all this stuff. But they get very unhappy if the loss is surprisingly severe.
The casinos track new customers using loyalty cards. If a new customer does much worse than the average then the Casino sends someone to them, welcomes them, asks how they’re doing, asks if there is anything they can do to make the experience better, etc.
So we do these kinds of interventions and then we run test and control against it to see whether, of all the people having a bad first experience, those who have a visit from one of our staff are more inclined to come back for a second visit. And, not surprisingly, they are dramatically more likely.