By Eliot Jacobson, Ph.D. Click the link for his Resume http://jacobsongaming.com/Eliot_Jacobson.pdf
I recently visited a number of casinos in Asia, where I had the opportunity to learn more about the cash-incentives they give to their baccarat high-rollers. Many casinos use some variation of a “rolling chip” program. These programs rebate a percentage of a player’s total action in cash. The trick to making this work is that the player makes his wagers with so-called “non-negotiable” (NN) chips. Every time the player wins using a NN chip, he is paid his winnings in cash (negotiable) chips. Every time a player loses using a NN chip, that chip is collected. At the end of his play, the player is given a cash-rebate that is a fixed percentage of the total value of the NN chips he lost. Because NN chips, on average, have an expected lifetime of about 2.2 wagers each, the math works out very neatly.
In the U.S. market, we do a fair job of giving comps to our low-rollers in proportion to the theoretical win these players generate for the casino. Estimates of player-value are determined through floor observations of “average bet” and “time played” together with formulas that take into account the average game pace and house edge for the game. Comps based on using four different estimations, each prone to significant errors, are far from perfect. But there is no easy fix and the situation isn’t likely to get better anytime soon.
The point at which the comp-reward system in the U.S. completely breaks down is in its application to high-rollers, especially, giving them loss rebates. A loss rebate is an incentive that returns cash directly back to the player when he loses. The amount the player receives is agreed upon in advance of starting play, based on the amount of the player’s credit line as well as a promise to maintain a certain minimum bet. The rebate amount is stated as a fixed percentage of losses, should they occur.
For example, a high-roller enrolled in a 10% loss rebate program, who subsequently loses $100,000 on a trip, will be given a cash rebate of $10,000. The flip side is that the player receives no rebate if he wins. There is usually a minimum play requirement to be eligible for a loss rebate, typically about 12 hours. However, many casinos have a quick-loss clause that awards the rebate to the player, regardless of the total amount of time he actually played.
Loss rebates have a fundamental flaw that exposes them to advantage play: the rebated amount is not proportional to the casino’s theoretical win from the player. It is possible for the amount of the rebate to exceed the total theoretical win the casino makes from the player, resulting in the casino being upside down to the player. Contrary to what many in marketing believe, giving a player more money back than the theoretical win he generates from his play loses money for the casino, period. The fallacy that marketing overlooks is in not properly accounting for the times the player beats the casino.
This fallacy played out in the now infamous case of the blackjack player Don Johnson, who won over $15 million against three casinos in Atlantic City back in 2011 by exploiting a 20% loss rebate incentive. Beating loss rebates has become a full time profession for some advantage players. There are casinos that are dealing with syndicates that funnel players through their loss rebate programs. Loss rebates continue to be among the most lucrative ongoing advantage play opportunities.
However, loss rebates have a more insidious flaw, namely: a player who has a winning trip gets nothing back from a loss rebate cash-incentive program. Conversely, sometimes the cash reward which a losing player gets is more than the theoretical win he generated for the casino. The share that should go to the winner is being given to the loser. Simply put, in the U.S. casino industry, we market to our high-rollers by punishing them if they win.
Loss rebates have created a sub-culture of advantage play abuse, while simultaneously rewarding losing players at the expense of winning players. Loss rebates have created whining losers and neglected winners. I cannot see how loss rebates could possibly be a good idea, yet here we are.
U.S. casinos are generating an increasing amount of their revenue from international baccarat play. For example, in May, 2012, Nevada generated 18.3% of its total table gaming win from baccarat. In May, 2013, this percentage increased to 33.1% and in May, 2014 it rose to 45.2%. International players are used to receiving cash for their play, win or lose. There has never been a better time to do a reset on the way we treat high-rollers in U.S. casinos. It’s time to give winners their fair share.
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