Aiming for the Fat of the Redemption Prize Curve
Prizes are the centerpieces around which an amusement redemption operation orbits. In our operations, we are still very much involved in trying to pick the most popular prizes with the highest perceived value vs. wholesale cost ratio for our guests.
This is getting more difficult to accomplish, especially in 2014. We research the prize sector on a weekly basis, watch all of the children’s shows, and of course attend the New York City Toy Fair annually. This year the most popular toys are trending bigger in size with many having higher price tags. Examples are larger size inflatable toys, role playing play sets (like doll houses), and construction sets. This is a shift away from the popularity of the micro-sized toys of the past few years.
Another trend is the popularity of remote control animal-themed vehicles (including those that launch projectiles), which are also more expensive. A third trend we see is STEAM (Science, Technology. Engineering, Arts and Math) related educational toys that engage people of all ages. These are also larger in size and price.
This shift is important to our business because we have always taken a mathematical approach to redemption prize point ranges. The prize ticket point values fall within a “bell-shaped curve” when set up properly. It starts out with small value/small prizes (known as “slum”), increasing sharply to medium value prizes and then continuing downwards with higher medium value prizes and ending up with small numbers of very high-ticket value prizes. We have traditionally redeemed 2/3rds of the points in that very important “medium” range. With prizes getting larger, it not only means that there is less space to display them, but also that they are more expensive for us to purchase and require more tickets to redeem them. This is flattening out the back of the bell curve. That diminishes our over-all high perceive value ratio which does not work very well on the far right-end portion of the curve.
With high-end prizes, the magic of perceived value is lost. Let’s say a flat screen television costs $500 at retail, and we as an operator can only buy that item for $480. Conversely, with a mid-range item, we can buy an item for $2 that retails at $8. To make redemption work and have an average cost of sales of 25%, you don’t want the payer to have to spend much more in terms of the amount of money they spend playing the games than they would if they paid full retail for the prizes redeemed. To redeem the flat screen, in theory, an average player would need to spend $1,920 for this prize that they could go out and buy for $500. In reality, only a very small percentage of the most skilled players save their tickets for the very high-ticketed prizes. It should be obvious that the perceived value proposition comes into play in the low and medium prize ranges.
With the prizes getting larger in price and size, the players have to play longer and spend more to get the prizes. That’s not necessarily a good thing for our business. The player has to spend a lot more to win those prizes in order for our business to remain profitable for the operator, but that destroys the perceived value formula. The players know that they can go out and simply buy that item for a lot less than they would have to spend on the redemption games.
This trend toward high-end prizes is a real negative for our operations. You have to keep the low- and mid-range prize sectors healthy to maintain perceived value and profitability. Most players play for either low or mid range prizes and see the most value in the medium range prizes. You also can’t put that many large prizes in a redemption center. There is only so much space, and you really can’t display more than several of them.
I have noted several other trends in prizes.
Zombies, vampires and monsters are all over TV and there are lots of related gruesome merchandise available. Kids aren’t scared of this genre so that’s a trend that works for this industry. Most of those prizes are mid-range. They are not that expensive and not that large in size.
At the Toy Fair, we also saw a lot of retro items, the kinds of things that I grew up playing with. This is also a positive trend because it adds to that mid-range and provides good value. Old school family games are part of this retro comeback. These are great prizes that grandparents can enjoy with their grandchildren.
Custom-built toys are also now moving up the popularity chain. These include construction toys and games where a child builds a larger attraction, like some of the most recent Lego kits. However, these types of prizes are also more expensive and larger in size, making them a bad fit for our industry. We can’t really buy them at a large discount at wholesale and they are tough to display. You can only have a few of those items in a redemption center.
Of course, electronics remain a staple. We always have those items in stock. And we have to have them in the mid-range so you have to offer generic brands or buy in large quantities to get a good discount.
We have to work harder to keep that mid-range filled out; the low and the high ends are easy. The low end is still the basics: candy and rubber snakes, etc. It’s not as big as it used to be, but it’s still important as younger children want instant gratification and are not ready to save their tickets for future visits. Game machines are also getting bigger in size, and the price per play is increasing. Now you see dollar play and two dollar play with the award of many more tickets. That gives a lot more people the opportunity to earn enough tickets for a few mid-range prizes or a even a high-end prize if they hit a jackpot, but you can spend $2 in 30 seconds.
The faster the players spend their money, the less chance we have of getting them to come back and repeat the experience. That’s why we try to balance everything across the bell shaped curve. If somebody is going to spend $5, I want to make sure they are going to maximize their experience and walk away with something of value.
Hopefully, by balancing our game mix, the patrons are able to have an experience that involves play value and prize value. This is the kind of constant balancing that we are trying to strike with both prizes and game play.
If I could change something about the way we manage our prizes as an industry, I would encourage all operators to implement a strategy to get rid of items that don’t move out of their redemption counters. Most centers have items out there that are taking up shelf space because people aren’t picking them. My first reaction is to get rid of them. But I’m finding out that few operators are watching that aspect of their business.
As an industry, we do a good job ordering new hot items, but not as good a job in clearing out items that aren’t moving. No retail store would just hang on to merchandise that wasn’t selling. These are the prizes in the storeroom that have cobwebs on them. We need to lower the points for those undesirable items, just like having a sale…or package them with other popular items just to move them out of the inventory.
In summary, the trend toward bigger and pricier is where we are today. Hopefully it will not continue. This trend is not sustainable in our current redemption business format. We just won’t survive without a constant turnover of the mid-range and its high-perceived value prizes. We do not want to go much above an average 25% cost of sales for prizes. The other operating costs are high and increasing and we can be certain that these costs will continue to increase. We simply can’t afford to lose that wholesale to retail edge and capturing that sweet spot of the redemption prize curve.
Frank Seninsky is president of Alpha-Omega Group of companies, which includes a consulting agency, Amusement Entertainment Management (AEM), and a nationwide revenue sharing equipment provider, Alpha-BET Entertainment; all are headquartered in East Brunswick, New Jersey. Along with industry consultant Randy White, Seninsky also heads up Foundations Entertainment University. During his 41 years in coin-op, Seninsky has presented nearly 250 seminars and penned more than 1,000 articles. He has served as president of the Amusement and Music Operators Association from 1999-2000 and is a past chairman of the International Association for the Leisure & Entertainment Industry. Seninsky can be reached at 732/254-3773 or by email at firstname.lastname@example.org and www.AEMLLC.com.
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