The Cherokee

Article 1

Zachary Lepage

Quantitative Analysis

November 21, 2016

1. The Cherokee is in the Casino & Hotel business; they make business decisions provided by their revenue management (RM) system. The major reasons why the Cherokee is so successful are first, because they have implemented a state-of-the-art RM system into its business decision making since it became operational, alongside its integration with Cherokee’s customer-relationship management system. Second, it is jointly operated with Harrah; a multinational company with extensive experience with RM systems. Third, no direct competitors for hundreds of miles, giving it a natural monopoly.
2. Smith et al. (1992) have defined the purpose of Rm as selling the right capacity to the right customer at the right price. Casinos differ from RM in other industries since it requires different pricing and customer-segmentation approaches. Moreover, the customers in this industry differ in their willingness-to-pay. Other industries, a regular pricing strategy will generate less extra profit as they can only charge so much for their inventory, while at casinos customers decide how much they want to spend. RM is using a bid-price pricing strategy, setting differential prices for homogenous capacity. Their goal is to get those to pay more to do so with the available capacity. Therefore, consumer surplus is entirely ceded to the producer.
3. The airline industry segments its customers by how far in advance a customer books a flight and if the trip includes a Saturday stay-over. They also segment their customers by the types of traveller for example: business travel, budget conscious, urgent or last minute travelers, leisure travelers, and loyalty loyal travellers. Nevertheless, the Cherokee segments its customers based on their expected wagering profits per night. They have segmented their customers into 10 distinct groups. The downsides to segmenting by restriction are that some restrictions are illegal i.e. “ethnic pricing” in the United States. Another problem is in regards to the segment accuracy and lastly, negative customer perception and loss of goodwill. The opportunity cost of filling a room in Cherokee of filling a room with a low-paying customers rather than a high-paying customer is much higher for casinos such as Cherokee.
4. The Cherokee is located in rural western North Carolina, with no competitors for hundreds of miles, making it a natural monopoly. It draws most of its customer’s form Atlanta, Georgia metro area alongside metro areas throughout South Carolina, North Carolina and Tennessee. The casino prohibits alcohol and entry to patrons who notify the Cherokee that they have a gambling problem. Additionally, due to negotiations between the tribe and the state, there are no table games, dice, or physival playing cards; all games are electronic. The casino & hotel is jointly operated between the 13,000-member Eastern Band of Cherokee Indians and Harrah. Harrah’s involvement in the daily operations and profit decline are declining over time. Moreover, it returns 60% margin on revenue to the Cherokee tribe. The casino & hotel opened in November 1997 starting with 252 rooms. Moving forward, it now has 88,000 square feet of gaming space, 3,400 devices and several restaurants and meeting spaces. The casino & hotel operates with and average occupancy rate of 98.6% during January through November.
5. The Cherokee observes its customer’s behavior through the use of their “Total Rewards” card program. This card tracks customer’s wagers in real-time. Before customers play any electronic game, they are required to enter their card into the gambling device. For the electronic table games, the customer presents the card to an employee, who then notes the customers average wager and duration of play. The Cherokee’s method of observation of customers differs from other traditional casinos since traditionally casino staff would pamper its big spenders. Employees would track the big spenders on a personal level and on an informal basis, thus the precise customer spend was unknown. Additionally, special treatment of customers could be initiated by the employee, meaning special treatment suffers from selection and personal bias. On the other hand, at the Cherokee, special treatment is pursued only when the system indicates its necessary due to their ability to measure each customer’s true revenue. Traditionally casino’s truly tracked only their biggest spenders, yet Harrah has determined that “mid-tier” customers can be very profitable.
6. Customer segmentation is working well as the casino & hotels revenue is 15% above average, the firm does not segment them based on business of leisure but in terms of self-price by gambling. It allocates rooms to customers based on their gambling habits and will efficiently utilize the hotels capacity. Segmentation is hidden from customers to avoid the system to be taken advantage of, or to cause distress among customers leading to the hotel loosing goodwill. The Cherokee and Customers have aligned incentives with the RM system since customers do see a segmentation scheme; yet not the one demonstrate in table 1. Yet, they do see the different levels associated with the “Total rewards” cards. The customer receives a higher level the more they gamble alongside raising the casino’s profits.
7. Demand is forecasted starting with forecasting “unconstrained demand”. The firm tracks, by customer segment, customers who were denied reservations through the use of their “total rewards” cards. The majority of reservations derive through internal streams, yet a small percentage is booked using third-part channels. Since it cannot capture data from these sources, the firm must unconstrain the demand from the third parties. A forecast is created for every customer segment and every day in the booking curve. The method used for forecasting is by multiplying its “smoothed” coefficient with the original base and trend component, this is similar to the Holt-Winters smoothing model. The factors included are the seasonal month, base, trend, seasonal day, and event.
8. The Cherokee system must decide how many reservations to accept from each customer class. Overbooking and optimization models use the forecasts as inputs to recommend inventory controls i.e. the “constrained demand” in table 1. If a customer is below the bid-price threshold in their segment they will be denied a room. The objective is the sum of the average revenues per segment times the number of rooms allocated to that segment. The first constraint (demand override) ensures that the number of rooms allocated to a segment does not exceed the forecasted demand for that segment. The second constraint (rooms allocated) ensures against a negative allocation of rooms to a segment, and the third constraint (current sold) ensure that total allocation does not exceed the casino’s capacity. There is demand uncertainty present, yet the use of the bid-price model compensates for ignoring demand uncertainty by constantly updating the forecast for each customer segment and re-optimizing the capacity allocations accordingly. The demand is obtained from historical data of past seasons and events.
9. The shadow price provides an estimate for the opportunity cost of reducing capacity by one room. The shadow price is determined using a sensitivity report through the use of LP. The Cheroke uses the shadow price as a guiding tool. For example, a customer who request a room must generate more revenue that the shadow price to make economic sense of reducing the capacity of the firm by one room. They refer to the shadow price as bid price.