The finance and marketing dilemma: Do promotional allowances actually increase revenue and profits for Atlantic City casinos?

AbstractCasinos offer free items to attract new guests or to reward their loyal customers. Casino management and marketing personnel believe these promotional allowances are necessary to maintain customers and to increase revenue. Three regression models are run to determine if promotional allowances increase gross revenue, net revenue, and gross operating profit for Atlantic City casinos. Results show that with a $1 increase in promotional allowances there is a significant increase of $4.53 in gross revenue, $3.53 in net revenue, and $1.29 in gross operating profit. These results will help management better understand the effect of offering complimentaries to their customers.IntroductionPromotional allowances, also known as complimentaries, are casino management's answer to loyalty programs that many industries, such as airlines and grocery stores, have been doing for so long. Casino management gives promotional allowances for two main reasons: to increase revenues in the hopes that the guests that are receiving the free item will spend more money than they would without the complimentaries and to encourage customer trial within the casino. Casino promotional allowances have changed over time from casino logoed merchandise and inexpensive meals to the likes of high-end hotel rooms, concerts, expensive meals, free gaming play, and shopping sprees. Customers have historically earned complimentaries based on their amount of gaming play alone, but more casinos are starting to extend complimentaries beyond their casino players to their loyal hotel and food and beverage customers (Marfels, 2010). Caesars Entertainment, Hard Rock Hotel & Casino in Las Vegas, and MGM Resorts International have all recently revised their player loyalty programs to allow customers to earn rewards on all spend within their resorts (Dostal, 2012). The Cosmopolitan of Las Vegas, which also allows customers to earn rewards on all spend, is the only resort in Las Vegas though to have this policy since they opened in December 2010.Promotional allowances include the amounts given to each guest based on how much the guest gambles or spends and also on management's current marketing strategy which could include items such as discounts, "buy one, one get free", or free items when certain other items are purchased. Promotional allowances do not include advertising spend and only includes items that have a direct revenue contribution when redeemed. The American Institute of Certified Public Accountants' accounting standards suggest that promotional allowances be booked one of two ways, at retail and included in gross revenue and backed out to achieve net revenue or not booked at all (2007). Under both scenarios net revenue is the same and an increase in promotional allowances increases gross revenue under the first scenario only. Atlantic City casinos use the first scenario, as do most casinos since this is the prevailing industry practice (Las Vegas Sands Corp, 2012).Atlantic City casinos had a decrease in promotional allowances of $15.6 million or 1.3% from 2010 to 2011, yet gross revenue decreased $271.3 million, 5.7%, and net revenue decreased $255.7 million or 7.2% (New Jersey Department of Law and Public Safety, Division of Gaming Enforcement, 2012). This shows that promotional allowances may not be increasing or maintaining revenue like management would hope since revenues are decreasing faster than complimentaries.In 2010 management at Sands Las Vegas decided to drastically cuts complimentaries for many of their players expect for high-end gamblers (Stutz, 2011). They believe selling the rooms and food and beverage will be more profitable to the casino than giving them away and hoping to make additional gaming revenue off the customers who received the complimentaries (Stutz, 2011). Casino management has not stated if this is a successful decision or not. Las Vegas Sands is not the only company revising their promotional allowances although they are the most extreme. …