When Gary Loveman joined Harrah’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 payouts—essentially raising the price—would drive some customers to other casinos. A sensible assumption, perhaps, but Loveman—a quantitative type who left a professorship at Harvard Business School to join the company—wasn’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 payouts—making them just one-tenth of 1 percent less frequent—without customers even noticing. Harrah’s shareholders, however, would notice. In fact, as Loveman later put it, single insights like this can “ring the cash register literally thousands or millions of times” in a large business.
Just about every company has its slot machines—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
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