Friday, March 18, 2011

Harrah's Entertainment

Once Harrah's realised that it could not match up to the Bellagios and Mirages of the world, it decided to forgo the capital-intensive expansion plan and instead, adopt IT to increase customer loyalty. The following questions answer some of the techniques they followed. Submitted as part of a class discussion on the HBR case.

Q.1 Discuss the factors that drove Harrah’s customer relationship strategy.

Ans: When Philip Satre joined Harrah’s as CEO, he was focused on people management as his main strategy. While this helped the company initially, Stare found that a lot of cross-visits were happening in the gambling industry, that is, customers who visited Harrah’s were not repeating their visits. With rising competition and flashier properties, Satre realized the need for a new customer relationship strategy. The company, being an old player, could not replicate the kind of themed properties that were sprucing up in Las Vegas and other parts of the US. Times were changing with new capital investments happening in a crowded market to attract new customers, and a limit on the jurisdictions that allowed gambling. Harrah’s knew it had to come up with a new strategy to survive.

Satre identified that while the company was performing well on operational parameters and technological brilliance, it was not able to retain customers largely because of a poor marketing strategy. A friend advised him to tie his marketing strategy with operations, in other words, connect all Harrah’s properties with a single database and use insights gleaned from there to implement customer retention strategies.

The aim was to implement marketing tools and programs across all Harrah's properties. Company COO Gary Loveman disbanded the existing marketing function and rebuilt it with experts who preferred quantitative methods to qualitative inputs. Customer Relationship Management (CRM) at Harrah's came to consist of two elements: Database Marketing (DBM) and the Total Gold program. While DBM allowed Harrah’s to segment customers and sell them offers based on analytical inputs, the Total Gold program motivated customers to consolidate their play. The data collected through the program allowed Harrah’s to execute direct marketing strategies that increased the efficiency and effectiveness of the company’s marketing spend.

Q.2 What are the Key Performance Indicators of the gaming industry. What are the objectives of the various database marketing programs and how are they working?

Ans: The case identifies the following three metrics (KPIs) for the gaming industry:

1. Customer acquisition: The first phase, “new business”, is focused on customers new to the brand or the property. The goal was to encourage customers to take a second and third trip after making an initial visit.

2. Building customer loyalty: This was focused on customers known for at least six months or three trips. The goal here was to continuously extend the relationship.

3. Customer retention: This was focused on customers who had broken their historical visitation pattern. The goal was to reinvigorate customers who had demonstrated signs of attrition.

The objective of the database marketing programs was to improve Harrah’s performance on each of the above-mentioned KPIs. The company hired Gary Loveman from HBS to bring quantitative muscle to its marketing strategy. What Loveman and his team did was development of quantitative models to accurately predict customer worth—the theoretical amount that the company expects to generate from a customer based on his past usage of Harrah’s properties. This was a transformational move for Harrah’s. From a historical model of operational CRM that focused on the customer’s past usage patterns, Loveman proposed an analytical CRM model that was predictive and therefore, radically different from how the company viewed profitable customers. Analytical CRM was implemented through the following programs:

New Business Program:

The New Business Program was designed to improve the effectiveness at converting new Total Gold members into loyal customers. The program used predicted customer worth (theoretical wins) to make more effective investment decisions at the customer level—thus allowing the particular offer to be more competitive with what the customer was currently receiving from their existing scenario of choice.

Loyalty Program—Frequency Upside

This program was designed to identify customers that, Harrah's predicted, were only giving Harrah's a small share of their total spending in a particular market. Harrah's capabilities enabled it to develop programs that offered incentives for these customers to visit Harrah's properties more frequently—i.e., switch a trip from a competitor to Harrah's. Harrah's calculated the profitability of these programs by comparing the incremental theoretical wins to the incremental cost of the program.

Loyalty Program—Budget Upside

Harrah's also identified customers with budget upside—customers who were only giving a small share of their gaming budget to Harrah's on each trip. In most cases, a customer's allocation of budget was directly related to the order in which they visited casinos on a particular trip—the first stop received the largest share, the second received the second largest and so on. Therefore, the objective of this program was to encourage the customer to visit Harrah's first and thereby capture the majority of the single casino trips.

Retention Program

The objective of Harrah's Retention Program was to reinvigorate customers who had broken their historical visitation pattern. Harrah's tested a variety of offers with customer segments to determine how much to reinvest in retaining loyal guests. Harrah’s recognized that the full potential of these ideas would be realized only if these capabilities could be used at the local property level. Therefore, they made significant efforts in educating the local property managers and their marketing teams about the potential and effective use of these Data Base Marketing capabilities.

Q.3 Explain how the concept of customer worth/ customer lifetime value has been applied at Harrah’s casino in the Database marketing efforts to gain a competitive edge in the industry w.r.t key performance indicators.

Ans Basing customer profitability on predictive worth (customer lifetime value) rather than historical data, Harrah’s came up with a new model to improve performance on each of the KPIs: customer acquisition, building loyalty, and customer retention.

Database marketing:

As an example the case mentions one Ms Maranees, who, under the new system, became a valuable customer who ought to be targeted with offers. This decision was made using decision science tools to predict customer worth rather than relying on observed worth from her first visit to the casino. While she would be considered a lousy customer based on her short visit to Harrah's, with the help of the information generated from one visit and one visit alone, Harrah's concluded otherwise by submitting her profile to the database. She was probably a great customer, but a great customer of Harrah's competitors. It, therefore, made sense to invest in converting her to a Harrah's customer. In the past, she would not have shown up on the radar screen.

Proactive marketing:

Also known as opportunity-based customer segmentation, this process allowed Harrah's to track customers’ play preferences, betting patterns, where they liked to eat in the casino and whether they stayed the night, how often they visited, how much and how long they played. Combined with the basic information contained on the application card, which included birth date and home address, Harrah's could begin to develop a sophisticated customer profile.

Harrah's estimated that 26% of players provided 82% of revenues, with avid players spending approximately $2,000 annually. These "avid experienced players" that tended to play in multiple markets became Harrah's target customers. Using this detailed information for every customer, Harrah's predicted potential customer playing behavior at its properties. Harrah's compared observed to predicted behavior and identified opportunity segments based on a disparity between predicted and observed values. Harrah's used customized marketing to achieve specific objectives such as driving incremental frequency, budget, or both.

Marketing Experiments:

Harrah's quantitative approach also made it possible to conduct "marketing experiments" and track customers over time. This helped Harrah's discover the right marketing instrument, for the right behavior modification, for the right customer. One example in the case relates to how tracking customer behavior let Harrah’s cut down on costs by learning that certain no-frills, less attractive promotions were actually more profitable than big packages.

Another example is the eradication of "same day cash" at most Harrah’s properties—the process by which casinos returned a portion of a customer's bet each day with the hope that the customer would play more with the cash. By using sophisticated decision tools, Harrah’s learnt that it could eliminate "same day cash" without adversely affecting the business. Thus, the company was able to eradicate practices that did not contribute to incremental revenues.

Q.4 Does Harrah’s have a sustainable competitive advantage? Can other companies duplicate what Harrah’s has done? Discuss.

Ans. Harrah’s realized early on that sustained competitive advantage will only come from a rigorous customer focus and nothing else. Any other tool could only be a facilitator of the process. High operational efficiency and implementation of IT are but ways to ensure that the customer keeps returning to Harrah’s properties. Harrah’s has had a successful history of reaching the customer on a personal level by trying to learn as much as possible about them. This knowledge in turn helps the company to serve its clients better and also significantly improve its operational effectiveness. For example, if a customer lives close to the casino he/she will rarely receive an offer for a free night at the hotel since the likelihood of that person accepting the offer is slim. Conversely, if the customer is a regular in the casino’s restaurant, the chances he will accept a free steak dinner invitation are relatively high.

Attention to customers at the service level also matters. Most customers, as mentioned in the case, lose money during gambling and often feel “shitty”, and they are disgruntled. Good customer service will take care of such disgruntled customers and ensure they have a good time.

Apart from the above, Harrah’s has the option of protecting is innovative processes and knowledge through proprietary means. This will give its business the necessary edge without having to worry about competition trying to reproduce its innovative processes. Further, Harrah’s may license its intellectual property and earn revenue from its proprietary software.

Q.5 Discuss the privacy, ethical and security issues associated with what Harrah’s is doing. Are there concerns and how can Harrah’s address them?

Ans. There are a number of business practices that Harrah’s follows which may not be deemed entirely ethical:

1. Given the nature of their business, they promote gambling. People go to the casino because they want to feel “exuberantly alive”. Harrah’s works at enticing customers to feel the adrenaline rush of gambling. Most of their offers are targeted towards this. This has definite ethical issues since gambling can become an addictive practice and Harrah’s offers encourage such behavior.

2. Harrah’s IT system relies on tracking customer behavior, right from their playing strategies to their personal information including address and birth date. This raises issues of privacy, particularly when Harrah’s can track customers’ spending patterns on gambling. However, in times of social media, this looks less like a security issue than earlier. With Facebook around, concerns over Harrah’s privacy invasion sound overrated.

3. The bigger debate around data mining is the problem of sharing Harrah’s internal data with credit card companies. This sort of data cartel can have far-reaching consequences for a customer’s credit profile and ability to secure credit. So far, however, Harrah’s has not been accused of breaching this line.

4. Harrah’s also runs the risk of too much profiling through its data. Forcing behavioral/psychographic patterns on users can backfire, when all customers are looking for is a good time. Customers’ behavior in Harrah’s may only be a reflection of their less guarded selves, and an incorrect pointer to their behavior metrics and/or psychographic positioning.