When Gary Loveman joined Harrahâ€™s Entertainment (now Caesars Entertainment) in 1998, the casino company priced its slot machines like everyone else in the gaming industry. Management presumed that decreasing payoutsâ€”essentially raising the priceâ€”would drive some customers to other casinos. A sensible assumption, perhaps, but Lovemanâ€”a quantitative type who left a professorship at Harvard Business School to join the companyâ€”wasnâ€™t one to assume. He commissioned a study to determine how sensitive slot-machine players would be to a change in payouts.
The company discovered it could make very small adjustments in the frequency of payoutsâ€”making them just one-tenth of 1 percent less frequentâ€”without customers even noticing. Harrahâ€™s shareholders, however, would notice. In fact, as Loveman later put it, single insights like this can â€œring the cash register literally thousands or millions of timesâ€ in a large business.
Just about every company has its slot machinesâ€”product areas in which it could get a major boost in profitability by optimizing its pricing strategy.
Source: The Allure of Pricing Predictively by Kenneth Dickman, Jeanne G. Harris and John G. Hanson | Accenture Outlook Journal