Harrah's Entertainment, Inc. Case Study

Why is it important to use “theoretical win” instead of “observed win” in order to access the revenue generated by customers?
This question is in close relations to potential outcome and probability rather than actual figures generated by customers. First of all, the definition of “theoretical win” must be made clear from that of “observed win”. “Observed win” is the actual amount that is won physically over a certain period of time (e.g. per month) while “theoretical win” entails the potential amount to be won over a longer term period given that the player is consistent with his/her gambling habits.
By calculating revenues generated by customers using the “observed win” method, Harrah’s will be short sighted in its approach and the results for the revenues generated will be inaccurate. For example, new customers who are just starting out to play in Harrah’s casinos might initially generate low amount of “observed win” for the company as they have little or no loyalty to Harrah’s. However, these players might actually have huge potential to generate large amount of wins for the company in the future once they are successfully bought over by the company’s program. Under the “observed win” method, these players may not be detected by the radar and often neglected. Insufficient marketing efforts and rewards will be directed at them to develop their loyalty to Harrah’s. Furthermore, one more point to note is that past behavior is not always indicative of future behavior and thus by using “observed win”, we are missing out on opportunities that are not observed in the past. As a result, it may lead to the loss of potential revenues generated by this group of people and an undervaluation of the realizable revenue of the company.
On the other hand, if the “theoretical win” approach is used, the company would be able to predict the long term revenue generated from customers based on the assumption that they are loyal to the company using their average bids and bidding frequency at the casinos. This projection provides the company with a goal or rather unfulfilled yet achievable revenue in sight to strive for. By targeting these individuals with high potential and doing their best to induce loyalty in them, the company will be able to boost total revenues generated. In the long run, this method provides a more realistic extrapolation of the revenues achievable by the company if they target the right people.