Decoding the Myth of Redemption Percentaging

By: Frank Seninsky

Of late, the AEM Team has been focusing heavily on our consulting business. That's good, because it's a sign of an improved economy and the fact that investment dollars are looking to get into the industry. Meanwhile, in our operations, we are still concentrating on the higher end revenue share location and working hard to keep our core operating discipline in place and with a positive cash flow each quarter.

On the management side, I have been developing a new way of tracking and grading employee (technicians) performance and location revenue enhancement by focusing on individual redemption game ticket payout percentages that fall within my established guidelines (See ChartA). What I did was opposite to the normal grading that we are all used to in school, where our grades were based on the percentage of correct answers. Grades are based on the fewest redemption and marchandise dispensing games that are out of the established guidelines, but are also depentdent on the overall average cost of sales (redemption percentage) being in the 25% range. Each location was graded from A - F, with the least number of demerits being an A and with each technician being able to compare his results with his fellow technicians on a weekly basis.

As you can see from the actual data (See Chart B), once the competition started, the grades of the locations all improved during a very short time period and the overall game revenues also increased. It all proves that if you can accurately and fairly track something, the results should improve as more people sincerely desire to see the direct feedback from their work.

We sent them a lot of direction on how to properly set the ticket and prizes payout for each machine and also took into account the skill level on the customers in the location. I have been teaching my "theory of redemption" for many years with great results, sometimes a revenue increase of up to 40% but realize that most redemption locations don't have the time or the knowledge base to implement the correct game settings.

This, of corse, brings me to the topic at hand, that being the conventional wisdom on ticket payouts (ie: percentaging). I look at the game charts in RePlay every month and see a range of payouts listed for each of the games (L, H M), but quite honestly don't understand what they mean or what they are based on. It would be much more practical to give payout percentage ranges because everyone's ticket value and token value is different. Moreover, considering that these values are polled from the same locations that rate the earnings. there is still a void of information needed to make this input meaningful.

That's why I have established an overall goal of 25% payout based on actual tickets redeemed, understanding that the number of tickets awarded with each individual game is inversely proportional to the game's intrinsic "entertainment value." My definition of entertainment value is the summation of a game's time of play and every sensory and physical interaction that a player encounters while playing a time (all the bells and whistles).

The RePlay chart tells you how many tickets are being paid out in a range of Low Minus through Medium to High Plus. Low is defined as four tickets or fewer per game. Medium is five to eight. High is nine tickets or more. But that doesn't mean anything unless you know the value of the ticket, the average value of a token and how many tokens per play each game is. What are the assumptions of the RePlay payout ratings? Most likely they are based on a ticket being valued at 1 cent and a 25 cent token value.

However, very few locations have a ticket value of one cent (they may think they do but don't) or have a token value of 25 cents. First off, if they provide discounted tokens for birthday parties and groups, their token value is always less than a quarter - ranging anywhere from 18-24 cents, depending on the number of discount tokens issued each week. And depending upon the prize point formula stating how the prize points are marked up, the ticket value can range one-fifth of a cent to nine-tenths of a cent. Ticket value is a direct function of how you mark up your items. Chart 2 shows the effect that the mark-up formula can have on the ticket payout percentage, changing it from 20% all the wat to 7.5% with a 25-cent token value, and changing it from 25% down to 9.4% with a 20-cent token value.

The formula that works best for my operation creating a ticket value of 3/4 cent by marking up the invoiced cost of and item by 50% (1.5 x invoice cost excluding tax and shipping costs). As you can see from Chart 1: Real Redemption Ticket Value, an item invoiced at $1 actually cost you $1.125. You will recover the 12.5% that accounts for your sales tax and shipping costs when you simply multiply 150 points times 3/4 cent ($0.0075) to convert tickets redeemed back to actual cash value of the prize(s) redeemed.

The other facility is that all locations can be run the same way with the same games. There is real fine-tuning that must be put into play based on that mix of games and the level of skill of the player base. In all instances, I can show you how overall redemption game revenues decrease if you don't put the proper payout guidelines and point mark up formula in place for a specific location.

The whole theory behind the way we operate is that each machine has a finite entertainment value, and if you level the playfield (entertainment value + number of tickets per play) for each game, you will not have players feeling that one or several games are worth playing and the others are all a "rip off." You will also have your players beleiving that you ticket is worth four or more times what it actually is, because their mind is calculating retail and you are buying whosale.

The games with the highest entertainment value are alley bowler-type games like Skee-Ball. It takes about 40 seconds to roll nine balls, with physical activity and direct player competition, and there are lots of bells and whistles. The entertainment value of this category is so high that people arewilling to pay a quarter to play without the tickets being part of the process. On the other end of the spectrum are the token action games that only take a second or so to play the game, with little competitive or player interaction.

What you have to do, for instance, is forego your Skee-Ball revenue (leaving some money on the table because you don't give out as many tickets) while boosting the amount of tickets you give on quick coin games as the other end of the spectrum. The goal is to have an average ticket payout percentage taht is higher than 25% (it can go as high as 30% even), balancing out the payout from a low of 15% to a high of 40%, so that there is perceived equity and an average cost of sales 25%.

The difference in the two different percentages is that up to 1/5th of the tickets in some game centers are never redeemed, so you can afford to offer higher tickets rewards to your customers and still maintain a cost of sales of 25%. That translates to giving out a quarter for every dollar you take in. Not a bad business model!

Its important to maintain this overall average, because one game out of whack in terms of paying out a lot more tickets makes everything else seem like a rip-off. People are always telling me, "Frank, you can make even more money on your Skee-Balls if you pay out more tickets." Every single manufacturer wants their game to pay out the most tickets because they want their game to cannibalize revenue, even though very few will admit that publicly. So they are the last people on earth to listen to when it comes to advice about ticket payout. The second to last person to lsten to is the distributor, he wants the lines that he carries to gross the most dollars. But in reality, manufacturers and distributors do want their customers to make enough money to pay the bills and servive, so perhaps in our hearts we want all three tiers of the industry to be successful.

Paying more on Skee-Ball will over-shadow everything else in the arcade, and that's all anybody willwant to play, because the entertainment value + tickets will be too high when compared to any other games. Everyone instinctively knows that the entertainment value of each games is in relation to other games in the location - whether they know it or not. People are instinctive computers/

What so many operators don't know is that if you have so much control over this formula that you can take old games for only a few hundred dollars and work them into this overall entertainment value formula, they can earm tons of money. That are older games, so they need a higher ticket value to get people interested. Based on this formula, we can have a few games in the mix that pay out as much as 40%, because a certain percentage of tickets are never redeemed and they and they will be in your top 10 earning games, generating a return of 1,000's of percent on investment.

To stay on top of this formula though, you have to keep tweaking. If switches get dirty, payout will go down because it's harder to play the games. If playfields on pushers aren't completely full of coins (like filling a glass over the rim with water), the payout percentage will go down as more tokens pile up on the field before any tokens can go over the edge. Also, in certain locations with a lot of repeat traffic, players are going to get better and better, and your job should be to keep making the games "slightly harder" as this occurs, or your cost of sales will shoot way abot 25% (each week you will see it rise).

In theory, an individual game's revenue should fall into a perfect ratio once all of the ticket payouts have been set properly and the game is maintained. At Alpha-Omega and Alpha-BET, we play a game each week; you tell me the earnings of two games that we working all week long and I will tell you the earnings of the other 98 games in the location and the total revenue and the total costs of sales. Most of the time I can hit all of the numbers right on the nose!

Now, here's the kicker. When you set a new game, it will have an affect on other games in the location. You may have to make an adjustment to not only the new game, but half a dozen other games in the location as well. You can't just set that new game in the right range. For example, we just added Benchmark's Big Rig to several locations, but didn't pull out our Big Hauls. Players are going to be drawn to the Big Rig, the flashy new game, even though the Big Haul has been one of the 'work horses' for years. To offset this, we tried two different approaches in different locations: 1) we slightly increased the percentage payout on the Big Haul so that players would notice it, and set Big Rig at the previous percentage that Big Haul had been; or 2) we set the ticket payout of Big Rig lower than Big Haul. Most of the customers will quickly catch in their first trip to the location - that's how fast this kind of knowledge circulates in a location. If most of your business is local, you have no idea that amount of communication that goes on between customers. You have to stay one step ahead of the local grapevine. Bottom line: either method is showing that the Big Rig is grossing almost double when the Big Rig was set lower than the Big Haul, as it had the least effect on other games.

It's important to make these kind of adjustments when you put in a new game on site. I don't need to make all the money on a new game. It might make a ton of money, but how much incremental money did I make by spending $5,000 on a new game? All the manufacturers will tell you it takes X number of weeks or months to get your money back, but if I don't make and incremental revenue, it might take 46 years to pay for a new game because it's now generating any additional location revenue. Revenue is location dependent, or maybe even route or company dependent. You must also take into account that by adding a new game to a location, you may be reducing the amount of revenue that the locatoin would have decreased (if revenues are declining in your area as opposed to remaining steady).

With all due respect to RePlay and the fine job they do compiling chart data from operators each and every month, I took a look at their most recent redemption chart and offer a few thoughts here on how to properly percentage each category. I must add there is often a difference though, even within categories because the entertainment value is different.

First, let's define what L, M, and H mean. L should range from 12%-18%, M should range from 19%-27%. H should range from 28%-36%.

So here are the Wizards Choice game chart values:

Alley Bowlers - I would switch Skee-Ball to L--. These games have the highest entertainment value and thus should have the lowest payout. In fact, everything in the whole category should be L- to L+. That all have slightly different entertainment values, but are all very high.

Kiddie Games - They should all be M--, and that's with a caveat. Each of those games should be set with a mercy ticket so no child goes away empty handed without a smile. All kiddie games should have a 100% hit frequency.

Instant Redemption - All of those games should be set on a higher payout percentage, but this is really different category than redemption games. A crane, for example, within a redemption game operation, should have an average win percentage or cost per sales of closer to 30%-33% and a high frequency of 1 in 12.

Novelties - H-- is probably not that far off for most of these games, although I would set Tower of Power at H+. This is one of the sleepers that will earn like crazy of percentaged properly and placed in a key place on the floor.

Pushers - I set all my pushers at 24-25%. The entertainment value is much higher on these games than many people think. To visualize the concept of achieving a full playfield that for every coin in, on average one coin will be pushed over the edge, think of filling a glass up with water. Because of surface tension, the water will actually go above the rim, and when you hit maximum capacity, just one drop will cause a waterfall. This is how a pusher is supposed to work, and the angled lip edges allow you to create the illusion that the next coin will cause an avalanche of coins over the edge. This creates a ton of excitement and suspense value, so you don't have to payout as high as you might think. When pushers have the same ticket payout percentage as other quick coin games that have less entertainment value, the other quick coin games generate far less revenue than they should, but the pushers can earn extremely high revenues. This is one of the reasons (among others) why revenues at Dave & Buster's are falling and stockholders are screaming for management to reverse this scary trend.

Roll Down Games - All of those should be set at H++. There is so little entertainment value in the games because even though the time is long to play, the pace is like watching a bridge rust. That's one of the secrets; knowing from 34 years of experience which games to really pay out higher on an which ones not to. For instance, Cyclones should not be set at the highest range, because there is a lot of intrinsic entertainment value in that game, even though it only takes a second or two to play. If you pay off really high on Cyclone, that's all people will want to play and you will lose out on some really great games that you may have rotated out of your location but in my operation are averaging between $500 to $1000 per week during the 16 peak weeks.

Shooting games - These games make a little money even without awarding tickets so the payout values don't need to be in the M or H categories. With out basketball games, we usually double the price per play and double the number of tickets. That really helps drive the revenue. Same with the sports games. I have seen great operator like Tim Sorge of Swings&Things put his Skee-Balls amd basketballs on 50-cent play with triple ticket payouts. Not a bad illusion, especially if triple tickets really means double tickets because the starting point was so low.

Quick Coin Games - That all should essentially be H-- on up. I don't think that any of them are intrinsically entertaining enough to be an M. By changing the ticket payout in this category, the order on the list of best earning games would change. Cyclone would still be on the list, but maybe not in the #1 position. But your overall location game revenue would increase.

Whackers - There should be no Ls on this category because they should all be around 20%, meaning somewhere between M and M--, based on the assumptions being used. There is always going to be some exceptions, depending upon the game, of corse.

As you can see, this is a very tricky subject, and that's why I get so much consulting work. I can't tell you how many times I have worked with a location, rebalancing their payout, and seen revenues jump 30 to 40%. (If you really want to get into the topic, I give whole-day seminars on this topic at Foundations Entertainment University. -www.FoundationsUniversity.com) Its a simple idea - keeping your average ticket payout at 30% (with cost of sales at 25%) - but it requires a lot of analysis and trial and error to get there. When you do, though, it works like a charm! Thank our lucky stars for redemption!