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Redemption Game Formulas
Playmeter Articles by Steve McCaul

Q: Is There a Formula for Successful Redemption Game Operations?

A: There still seems to be plenty of confusion regarding redemption formulas, ticket pricing, ticket payouts, token value, and perceived product value.

Recently, I have been visiting locations where I've found that product is being priced with no rhyme or reason. It is either being priced so high that customers could never obtain the point level being placed on that product, or the product is given away with very little or no value placed on it. Also, the redemption counter employees are spending too much time on low-end product which takes up too much of the employer's time and money.

I want to share a basic formula for marking your product (which has been in place for years) that should render your redemption business successful. This is the formula:

COST OF GOODS:

Product Cost (wholesale) plus 15 percent for shipping and handling = Point Value placed on product.

FORMULA COMPONENTS:

Average tickets to be paid out eight per coin dropped into each game Coin Value = 25 cents Tickets valued at one cent.

EXAMPLE:

Item Cost = \$2 plus 15 percent shipping and handling = Point Value placed on the product you purchased. The point value is 230 (\$2.30)

In order to know how much the customer is going to pay for that item marked 230 tickets, consider this: as we said earlier, the average ticket payout is eight tickets per coin played. Take 230 (ticket value assigned to the product) and divide that number by eight (tickets per coin) = 28 (amount of coins in the cash box) = 28 x 25 cents = \$7. Your customers will drop \$7 into your cash box for every item you have marked 230 tickets. Your cost on that item is \$2.30. On every item a customer has redeemed, you have a
profit of \$4.70 or 305 percent return!

With the above scenario, if your product is Beanie Babies or a current hot electronic gadget, you can do the math and change the numbers accordingly. Sometimes one or two hot items can make your redemption counter very profitable. However, a successful counter must have many appealing items and extra attention must be put into the display, as I have mentioned in past articles.

The above basic redemption formula has not changed in years. However, variations can affect the way your product is market or valued. In explaining some of these variations, I will try not to confuse the basic formula that should be used.

Remember, to use this formula correctly, you must know your Coin Value. Is it 25 cents, or are you on token play and giving away tokens for promotions or birthday parties?

Some FEC's token values are only 22 cents, or even as low as 18 cents (depending on the amount of promotion tokens given out). Adjustments must be made for this which will directly affect the profit shown in the redemption formula.

In order to keep your profit margin the same you must go up accordingly in the point value placed on the product. You must maintain the profit which has been set by the formula.

For example, a competitor's location could have its product marked up double. What you don't know is that maybe they are giving double the ticket award. They could be giving 16 tickets on average per coin (the above example only shows eight). The product has to be marked up accordingly.

As you can see, the formula has not changed and the same profit is being maintained, but the values have been changed. If you make any changes with token giveaways or you decide to give out more tickets, adjustments have to be made to maintain your profit margin.

Perceived Value is the value a customer presumes a product is worth. It plays a very important part in the value you place on your product.

When you look to purchase a product, use the above formula and calculate what you think your customer is willing to pay for that item. If the product is going to be perceived as too expensive, then you have to make adjustments. By using the formula, you know what your return is going to be.

ANOTHER EXAMPLE:

Item Cost (wholesale) = \$35 (plus 15 percent handling brings your cost up to \$40.25). In using the above formula, the ticket value placed on your item is 4,025 tickets (\$40.25).  If you divide that ticket value (4,025) by eight tickets per coin = 503 x 25 cents (Coin Value) = \$125.75. Your customer will have spent \$125.75 for the item that actually cost you a total of \$40.25!

There is a lot of room to mark this item down and your customer will perceive a better value. In that way, you will move more items and make more money due to the volume of items redeemed.

The kids won't figure out how much the item cost them, but you can bet their parents will quickly figure it out. The whole idea is to keep your customers happy. You want your customers leaving your location feeling they got their money's worth. Then they will continue to visit your location, returning again and again.

You can mark up your low-end product many times because your customer really has no idea of the actual cost. As long as it is perceived as a bargain, or priced reasonably, they will play your games over and over. The major mistake is that redemption operators get too greedy and mark up their prizes thinking they will make fantastic profits.

In reality, they are driving their customers away. Those customers will tell 30 other customers what a rip-off your location is. You wake up months later asking "Where did my customers go? I was doing so well!"

Redemption is a continuous balancing act. It can be very profitable if done at a slow, steady pace. You will have this business for many years.

To recap, if you stick to the formula, understand token value, perceived value, average ticket payout, and product cost, you will be successful. Always look at your product the way your customer perceives it. We are in the entertainment business and the retail business at the same time. As always, we have to keep our customers happy. A satisfied customer will return frequently and bring a friend.