Adding Redemption Games To Route Operations

I recently came across an article written and published by Vending Times eight years ago. It covered a seminar I presented during the 2008 AMOA International Expo: “A Shot at Redemption for Route Operators.” Today, the operation of redemption amusements in street locations, and even the use of POS systems to centralize payments and points in installations with only a dozen units is among the hottest topics in the industry. In this column, I’d like to update that VT article and retell it in my words.

Route operators have long dealt with a variety of equipment with different maintenance and service frequency requirements (i.e., jukeboxes, cranes, darts, pool tables and video games). But as the coin-op business has evolved, redemption and merchandising equipment — combining a game or challenge with skill-based potential or certain reward (play-till-win) — have presented operators with a new task: prize merchandise management.

Selecting prize merchandise, stocking machines or redemption prize counters with the most desired items and ensuring that tickets and prizes are distributed in what ultimately becomes a “profitable fashion” was, until recently, uncharted territory for many street operators. Those with experience in full-line or bulk vending often are familiar with at least some of the concepts and tactics. But the music and games operators who have shied away from this challenge are now finding themselves unable to avoid it.

Redemption games and merchandisers have proven capable of top earnings, and often without eventual “drop off” due to loss of interest, but only if managed properly. In my 47 years in the industry, I have not made much of a net profit from video games, but I have many redemption games and cranes that have averaged more than $300 a week for the past 20-plus years. I still run Cyclones, which I purchased new for $4,000 a decade ago; they still have an “as is working” value of $1,000 (fully reconditioned $2,000). So in the past eight years, the real depreciation of a Cyclone is ($4,000-$2,000)/8=$250/year.

Traditional bar crowds are shrinking, and more and more consumers are opting for facilities that offer both food and entertainment. This remains one of the most compelling reasons for operators to incorporate redemption into their portfolios.

The Basics

During my seminar in 2008, I asked the audience to raise their hands if they owned and operated redemption equipment. Most did not, though many said they operated at least a few cranes. Today, no doubt, I would see more hands raised if I polled the same audience.

For those whose hands would not be raised, here’s a redemption primer. Basic game categories include quick-coin, skill-stop, mallet, alley, token pusher, and kiddie, among “subcategories” of those. They dispense tickets, or an electronic equivalent, as points to be exchanged for prizes. A manned prize counter or automated prize-dispensing device where players can trade credits for prizes is a central feature of a redemption operation.

Maintaining 50 games grossing $10,000 a week ($500,000 per year) in one location can be a full-time job. But most route operators are not looking to open an arcade or family entertainment center; they already serve locations like pizza parlors, bowling centers, family-oriented restaurants, and hotels, which can potentially incorporate redemption equipment in game zone setups.

“Workhorse” games that provide consistent earnings and strong ROI should be the center of every route operator’s redemption equipment portfolio for these locations. Workhorses are that small group of 20% of the games that generate 80% of the game revenues. That’s the old 80/20 rule.

Ins & Outs Of The Prize Mix

Cranes and merchandisers are the bedrock of today’s on-street amusement business and should be a part any redemption installation. In 2008, I strongly encouraged operators to stock each machine with a single product mix, not a jumble of prizes known to the industry as a “prize kit.” The same holds true today. Customers are more likely to play if they know they can win what they want. All of our merchandisers focus on one main prize — they’re just like retail storefront display windows.

Also in 2008, I suggested stocking one or two cranes with bundles of tickets, if they’re in a location in which tickets can be redeemed for a prize or service. Today, it has become a widespread practice. Merchandisers with ticket bundles earn more than any other counterpart with hard goods or plush prizes. In 2016, the Knock it Off Rotary, a 4-player piece I helped Elaut USA develop, is the No. 3 highest-grossing game, when stocked with ticket rolls, in my accounts. Additionally, a “ticket candy crane,” a modification of the legacy concept, has ranked among the Top 10 games for the past four years.

For “non-crane” merchandisers, high-end prizes — Bluetooth speakers, headphones, video games, video cameras, etc. — continue to appeal to amusement players as they did a decade ago.

Payments, Rewards & Pricing

For merchandisers and redemption equipment (and top-earning video games like the latest Big Buck Hunter) operated in street locations, vendors should be eliminating coin mechanisms in favor of banknote acceptance. Street operators should also be evaluating cashless payment systems that accept credit cards and contactless mobile payments like Apple Pay. Cashless crediting enables multiple play discount pricing but must be permitted by law.

Pricing and payout percentaging remain the most critical decisions in operating redemption games and merchandisers. At my presentation eight years ago, I shared a copy of a collection summary for one account, which showed all redemption games paying out from a low of 15% to a high of 35%. Those that were 5% above or below the benchmarks established for each individual game were flagged as requiring adjustment. The golden rule of redemption then is the same today: a game’s ticket payout percentage is the inverse of its entertainment value. I set payouts between 15% and 35%, depending on the game, resulting in a weighted average ticket payout percentage of about 25%.

Alley games like Skeeball and Iceball are examples of redemption games that work well with low payout percentage. Most people play them for fun, regardless of the ticket payout. Skeeball’s have the highest entertainment value of any game in the history of our industry and therefore should have the lowest ticket payout percentage.

When it comes to redemption equipment, it is absolutely necessary to be aware of the two distinct fiscal values of your tokens and tickets (or the electronic equivalent). Without understanding this, an operator cannot gauge the performance of an account and make adjustments as necessary to establish and maintain profitability. The old phrase “garbage in garbage out” still applies to game revenue reports if the token and ticket values are not absolutely correct. You must calculate the average token value for each weekly report, as this changes based on how much discounting you do each week.

Regarding pricing, I urge operators to offer deals to all current and potential customers. Make it worthwhile to spend more. Any game, especially a merchandiser game, offering one play for $1 should also offer, for example, seven plays for $5, as this can only help the cashbox. And don’t do this without a bill validator or cashless payment system! There is a high probability that a person cannot insert, say 20 tokens, into a coin acceptor without causing a major jam.

For merchandisers, the prize must justify the play price: $1 for an attempt to win a popular licensed small stuffed teddy bear that the player perceives to be worth $9 is more enticing as paying the same for a toy perceived to be worth $3, unless the hit frequency of winning the small toy is more than three times as much.

Per-play pricing within a location should be consistent, too. Let’s look at the correlation between the play price and perceived reward, which involves “hit frequency.” In my seminar, I defined hit frequency as the number of times you win divided by the number of times you try. One win can be, for example, one ticket or 100 tickets. For most cranes and merchandisers, one out of 12 is a reasonable hit frequency, compared with one of 10 in 2008 (due to increased shipping costs and sales tax, etc.). The operator must experiment with these interrelated concepts every week. Not everything you try will work out the same, and you have to monitor prize displays, merchandise, payout/win percentages and hit frequency, and make sure your price per play is fair.

Working With Locations

If you plan to place redemption equipment and merchandisers and be successful long term, working closely with your accounts is crucial. Redemption requires prize disbursement, and there are many ways amusement operators can handle this component. Locations that have space to set up a prize counter and employees on hand to oversee it, such as bowling centers, are reasonably easy to work with. Proper inventory and cash reconciliation practices eliminate most potential for loss and theft. The savings in time and servicing costs make a notable difference. Be up front. A route collector or technician must handle several locations a day and they cannot stay at one for many hours. The most efficient way to handle a redemption location is for the location to handle basic daily service problems — currency and ticket jams, filling prizes in the merchandisers and running the redemption prize center. Then the route technician can spend time repairing the difficult malfunctions.

In locations where a redemption prize counter is not an option, automated prize redemption equipment such as Benchmark’s Tickets to Prizes, Smart Industries’ Prize Center and Bay-Tek’s Prize Hub are alternatives. Eight to 10 redemption games, each earning at least $200 a week, can justify the placement of a self-contained redemption prize center, especially when the location shares in the cost. If the redemption games are really doing well, say $3,000 a week, try to convince the location to set up a staffed redemption prize counter.

As for merchandisers, consider giving locations the keys to prize areas (known as bays) and arrange matters so that they handle at least some restocking. They can refresh a low-stocked machine as soon as they spot it, if given the ability to do so. Proper dual-party reconciliation practices increase trust between the parties and helps make them a team — you aren’t giving them the keys to the cashbox, just access to tickets, coin mechanisms and prizes. Locations should be able to take care of 90% of daily maintenance. Both parties should reconcile the cash, and fill out individual merchandise game reports on a weekly basis. Technicians are dispatched for emergencies, and should be scheduled to perform preventive maintenance prior to the heavy-trafficked weekends and holidays. It also works out well when a technician is onsite during busy weekends and holidays for several hours at a time, especially when it is in the budget for those game zones grossing $500,000 to $1 million in annual game revenue.

Collaborating with locations on promotions can be highly profitable, too, especially in venues where tokens or debit card system are used. Operating on quarters is like being in the Middle Ages — and it’s still done because some operators do not trust location owners and some location owners do not trust operators.

When proposing services and philosophy to a location, the street operator is essentially offering to bring more money and customers through the doors and providing an incentive for them to stay longer and keep spending money on “all” amenities that the location offers. Operators must consider what people use in any potential facility; for example, offer hockey tape as a prize in an ice skating center.

Equipment layout influences the success of redemption and merchandiser game rooms. Money isn’t made against walls, so use open layouts with centrally positioned machines and dynamic clusters to create “free-flow” milieu. Rooms, doors and even half-walls say “stay out.”

In summary, never cheat customers. Greed is one of the major reasons why most redemption locations never reach their full revenue potential.

Vending Times December 2016