Supply and Demand and Slot Machines

The following paper was prepared by Mary Jurica and published in the March 1981 issue of Gaming Business (now IGWB). This was the beginning of the slot machine revolution that now dominates gambling and casinos.

By Mary E. Jurica

In 1976 it was rumored that a small casino operation in Las Vegas had dared to market its slot machines by lowering hold percentages and increasing substan­tially the number of dollar slot machines on the floor. Soon after, a resulting request was made to Kafoury, Armstrong & Co. for a reliable method of evaluating mix alter­natives. Out of that research came the development of supply and demand as it relates to slot machine mix.

          The casino industry has found that to op­timize the profitability of a particular mix of slot machines, a myriad of elements must be examined. These elements consist of at least five different coin denomina­tions, varying numbers of each, and an ar­ray of machine types and sizes — multiple coin, progressive, wide reel machines, etc. — each with a unique hold percentage. Changes in slot mix are extremely impor­tant to gross gaming revenue. Yet mix changes are often based purely on observa­tion or on adjustments which duplicate ex­isting slot mixes in the area. 

The community of slot managers rely heavily on each other and machine ven­dors to decide optimum slot mix, in­cluding decisions on denominations to of­fer, most popular types and hold percent­ages accepted. A comment by one slot manager that “50-cent machines are really taking off” can result in a rumor carried by machine vendors from one casino to another. Managers of expanding casinos are influenced by the rumors and increase the number of 50-cent machines they pur­chase. Vendors are selling more 50-cent machines, and the rumor is perpetuated until finally it is counteracted by an oppos­ing comment — “50-cent machines just can’t be marketed successfully.”

¹The words “supply” and “demand” are us­ed in a strictly vernacular sense, and not as they are used for the study of economics. 

There is no problem representing slot machines or slot mix quantitatively; the difficulty, in fact, is in the interpretation of the many measures available. For exam­ple, a casino with 120 slot machines has this information available for analysis (Refer to Table 1). 

Table 1.

The casino manager has the following facts to weigh in support of a decision to change (or increase without change) his current slot mix: 

·        Dollar machines have earned more for him — five times as much per machine — as the 5-cent denomination; see column (5).

·        A marketing decision is being considered to increase the number of dollar machines to 25 percent of the machine mix. That represents a large increase over the current 16.6 percent; see column (3).

·        In spite of their small numbers, the dollar machines contributed 42.7 percent of the total slot revenue last year; see column (7).

·        Yet, dollar machines hold only 5.8 percent of total play, thus requiring over three times the amount of dollar play as a 5-cent machine to win an equivalent amount; see column (4).

·        The largest increase in unit win on a machine occurred in the 50-cent machines; see column (8).

·        Ten 5-cent machines were added during the year. The unit win increase might otherwise have been higher; see column (8). 

         Can the logic trade-offs implied by these facts be identified?   Experience has shown the need to concentrate on three major areas:  1) the win per unit, in order to maximize (in numbers) those machines that win the most; 2) the desired marketing style, to keep mix changes consistent with that style; and 3) identification of and satisfaction of public desire as to the machines (denomination and type) that they want to play, thus maintaining and promoting increasing volumes. 

Supply and demand

            This article addresses the last element—the one normally missing in the information dilemmas presented above—public demand. The technique to be introduced in the following paragraphs will allow the casino owner to identify his customers’ desires, or demand, and the adequacy of his current mix, or supply, in satisfying that demand. 

            Supply and demand in an economic sense have always been used as reactor measurements to price changes, with the presumption that supply attempts to satisfy demand (at an acceptable price). Casinos, however, do not have the in­herent ability to raise the price of a slot machine.  A 25-cent machine has, since its inception, cost 25 cents to play.  Even though a multiple coin machine, of 25-cent denomination, allows a player to pay $1.25 for one handle pull, there is no necessity to do this. He can continue to play from one to five coins, as he elects. Therefore, even this machine type cannot be interpreted as an increase in price. Likewise, the current trend in Nevada is for the slot mix to con­tain a greater percentage of $1 machines; but this in no way forces a slot player to play that denomination in preference to a 5-cent or 25-cent machine.  

            The increased popularity of the multiple coin and dollar machines in a trend consis­tent with the existing inflationary cost/value situation in our economy; suc­cessive demand measurements will bear out such a trend.  

            Assume the ideal condition.  Each machine on the floor is equally as popular and played equally as much as every other machine—a condition that we call equivalent play. Slot win in dollars under these theoretical conditions is computed as follows; the result shown below is supply.

 Table 2 Supply

       By definition, these percentages repre­sent the relative contribution, which would be made by each denomination in the casino, if each slot machine were played equivalently (i.e., received an equal number of coins-in). Intuitively, the percentages represent the mix of denominations supplied to the public.        

      Actual demand, by the slot players in a casino, culminates in actual slot win in dollars. Taking the same casino with 120 machines and the latest win per machine in dollars, the actual demand for a par­ticular denomination machine results in the following:

Table 3 Demand

              Logically, then, for each of the three basic elements, which make up supply, there should be comparable elements in demand. Since dollar win is produced through the volume of play that the machines receive, multiplied by the actual percentage of the coins played which are held as win, the following comparison of the three basic elements is valid:

*For a more meaningful comparison of sup­ply and demand, the actual hold percentage being produced, by denomination, is used in this computation rather than theoretical—thus precluding any differences due to variations in the computation of theoretical hold percentages. 

            The one element isolated for comparison is the number of coins-in—the final impor­tant indication of public desire.  Obviously, the only machine denomina­tion being supplied in the quantity that the public wants is the 10-cent denomination. The 50-cent and 25-cent machines are oversupplied and the 5-cent dollar machines are undersupplied. 

            Demand should not be applied directly, but should be used to monitor the trend of the public by denominations and the suc­cess (or lack of) in “selling” the mix cur­rently offered. The message in the supply and demand graph, which promises the profitable results, is the evident demand for dollar machines. Since they earn, per machine, up to five times as much as other denominations, their numbers should definitely be increased, at least to demand levels. In this case, such an adjustment will raise annual slot revenue expectations $362,837, an increase of 29.6 percent. 

            The mix adjustments and earning in­creases presented below assume the same number of coins in per machine and ig­nore the positive marketing impact of of­fering slots the public wants to play.

Table 4 Slot Mix of Total Slot Machines

             Suggestions for further usage of supply and demand and ancillary factors to be considered are offered here.

These represent considerations discovered during continuing applications of this technique: 

1)    Evaluation can be made of the popularity of machine by types as well as denominations using this technique. The internal hold percentage by type of slot machine is not readily available in existing slot systems; this has prevented, to date, a supply and demand analysis by type.

2)    Comparison of slot win resulting from one month of play in two of the Atlantic City casinos in operation reveals a dramatic difference in demand for dollar machines. “... Caesars’ dollar-slot handle [coins-in] per machine was less than half that of Resorts’,” according to Dean Wit­ter’s report for August, 1979.

3)    A false demand can be created from the practice of giving out coupons to cer­tain customers-coupons, which result in free nickels or free dollars, for example. These factors must be considered in analyzing results and/or fluctuations.

4)    As the case study illustrates with the 1979 supply and demand relationship, it does not automatically follow that a client must match the measured demand with his supply. On the contrary, a decision to exceed supply in order to push up the win per machine on one denomination and cause potential growth in demand for large—unit win machines may increase overall profitability. Whether or not marketing decisions, such as this, work as anticipated can be monitored through periodic analysis of supply and demand.

5)    Deliberate trade-offs in machine mix can be made and by knowing the changes caused in demand, the amount of slippage in win per unit can be monitored to pre­vent any revenue loss.

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