Tuesday, January 18, 2011

What is Churn Anyway?

A common used term by any gambler or gambling establishment is “churn”. But what exactly is it and what does it mean?

Churn is simply the times you turn your bankroll over at any gambling game. If you bring $100 to a slot machine at 3% takeout, with a nickel minimum you will churn that hundred dollars many times, and play for a long time. If you bring that same $100 to a $5 machine it will last much less time – you will roll over that bankroll few times and probably leave the casino early.

It is easy to see that at a lower takeout slot machine the player plays much longer and has more fun. Las Vegas casinos try to maximize revenue by balancing the churn with profit. That is how they come up with their “optimal takeout” where they make the most money and keep the most customers happy and coming back.

In horse racing it is not really that different at all, and it is a big part of our enjoyment as players. 

Kenny Mayne in an ESPN piece spoke of the walk to the ATM at a racetrack as the “walk of shame”. We’d all love to be able to buy a $100 voucher or have $100 on a players card and play with it all day, like the nickel slot player, but we know that all too often our cash can disappear quickly. For a long time we were the only gambling game in town, and churn was not a huge factor to those in power to any large extent. If horseplayers got mad and left, or lost all their money quickly, where else were they going to gamble?

Now however, with competition for the betting dollar and as handles fall, we want players to churn as much as possible, because churn means more enjoyment for the player and more handle for the industry, just like the casinos have long ago figured out.  

So how is churn increased? 

1) Decrease the takeout
2) Increase cashable tickets
3) Eliminate hard to hit bets

If we have a takeout rate of 20% and $1 million bet on the first race, we return approximately 800,000 to the players. That means for race two there is $800,000 left in the players bankrolls to rebet. After race two the players bankrolls shrink to $640,000 and so on.  It takes about  18 races to bust bettors bankrolls.

If we have a takeout rate of 5%, the $1 million dollars bet in race one return $950,000 to the bettors after the race, $902,500 after race two and so on.  While at the 20% takeout level bettors are busted at 18 races, after 18 races at 5%, horseplayers still have almost $500,000 in their bankrolls and they are happily churning away.

For a look at how long it takes us to go bust at differing takeout rates please look at the spreadsheets here and here.

The second way to increase churn is cashable tickets. 

If horse racing had a “pick 8” on every eight race card, made the minimum $5 for a bet and paid off in the last race, churn would be very poor.  Customers would not have much fun, because they would rarely or never cash and have to spend $240 on an unhittable 48 horse combo.  This is why we have seen fractional wagers be added. If you play a 10 cent super in a nine horse field you are going to cash many more supers. If you play a 50 cent double, like Retama has, you are going to cash many more doubles. This adds to churn and it is a major reason this is one factor in the HANA track Ratings.

Lastly, we could eliminate hard to hit bets. 

At Betfair, where only win betting is allowed, there is a great deal of churn because with low take and win bets only, players cash frequently.  In press releases and their annual reviews they mention this is a huge part of their success as a gambling company – players think they can win. In the 1970’s that menu was similar in the US – there were very few exotics – and a lot of players thought they had a shot to beat the game. In fact, some tracks only had two or three exacta races a card, and sometimes a tri in the last race. Just like it is easy to churn at betfair, it was much easier for tracks to add handle in the 1970’s because of increased churn. Today, with hundreds of races a day to bet, with many hard to hit exotics, (some at a $2 minimum) we can lose the GDP of a small country in a half an hour.

Maximizing these three parts of churn is a like walking a tightrope for horse racing.  We know the takeout is too high, and every piece of literature backs that up, so lowering it will help, but the other two are very hard to decipher. Do we cut exotics and hurt short term handle to grow churn? Do we add very low fractions for every exotic wager which makes the payoffs less attractive for people who love the ability to make a big score? Do we stifle choice where choice can hurt handles, but it also up handles as more choice assures that?

There is a formula which maximizes the customer experience along with revenues for purses by maximizing churn.  It has to be found and all tracks have to follow it, or the system will break down. It takes some organization, which we seem to lack in our sport at the present time, but if we ever found the right spot, our sport will grow.


Cangamble said...

Back when the crowds were wall to wall in the 30's to 60's, takeout was relatively low (it jumped up in the 50's to around 15% from 10%). There was maybe one double and one exactor on the card, no triples etc.
The $2 minimum bet worked out well because there were only 8 races a card to churn against. Many customers left with money eager to be there at post time the next day they could.
And because takeout was low, and because of lack of competition, there was lots of dummy money in the pools as well, allowing for a few people to actually beat the game, and they were visible up to around the late 70's.
Nowadays, you can bet on 100 plus races a day, with a 20-31% high takeout triactor and or super in each race. Even if you bet the dime minimum, there is a good likelihood you won't be leaving with much money, if any at all.

The State was taking around half back when racing was flourishing too. 5% to the track and horsemen and 5% to the government. Put than in perspective of what California just did.

How did the game get to be like this, and can it be reversed?

Steve Zorn said...

all this is true, but how do we get the empoirical data to determine what the optiomal formula is? Perhaps the National Science Foundation will put up the purses and operating expense to subsidize a month-long experiment at some track? I don't think so.

Another factor surely is field size, which correlates quite directly with per-race handle. Fewer tracks, fewer racing days would help, as would better work by racing secretaries.

J-PA said...

I can certainly get on board with lower take-out. I've got no problem with fractional wagers. We're insane if we think we are going to "eliminate" hard to hit bets. I find it amusing that we are going to whine about take-out and reference "increased betting opportunities outside of racing" and in the same breath talk about the betting menu of the 1970's as if heading back there is "progress". I play this game, and I emphasize "game", on the weekends, in part, because there are exotics that are challenging, and present an opportunity to make a big score. Roll back the clock to where the only way to score is by unloading a grand on an 8/5 shot and I, for one, will be back to playing the NFL.

Cangamble said...

I would just like to roll back the clock when it comes to takeout rates, not when it comes to eliminating exotics.
The point is that high takeout exotics or high takeout anything is what is leading to the demise of horse racing.

Anonymous said...

Attention Horse Players, you are a bottom feeder when it comes to gambling! Only the state lottery is a worse bet! I love horse racing but for decades have been hounding race track managers that the takeout was too high, they ignored me. Now that they have competiton and handles are falling off the cliff, they continue to ignore us. Race track managers ARE NOT GAMBLERS. THEY DO NOT PAY FOR PARKING, THEY DO NOT PAY FOR ADMISSION, THEY EVEN GET A COMPLIMENTARY RACING FORM IF WANTED. THEY HAVE NO CLUE WHAT WE GO THROUGH. IF WE COLLECTIVELY TAKE A PAUSE UNTIL IT BECOMES SANE TO BET ON HORSES, MAYBE THEY WILL LISTEN.


That Blog Guy said...

I think we can roll back some exotics. Do we need rolling daily doubles and Pick-3s? I think we can go with three daily doubles and three Pick-3s each night.