For the past decade, the lotto category has been dominated by the two multi-jurisdiction games, Powerball and Mega Millions—and, to a lesser extent, the For Life annuity lottos, Cash4Life and Lucky for Life. In 2019, in-state lotto made up only 4.5% of the total U.S. sales, down from 4.7% in 2018. As this trend continues, more lotteries are wondering what to do with their worst performing draw games.
How do lotteries know when it’s time to end a struggling draw game? And what comes after?
The Reason Against Ending
It is rare for lotteries to remove draw games from their portfolio. The reason is simple. Draw games, once implemented, cost almost nothing to maintain. After all, there are no printing costs like with instant tickets and terminals have no real limit to the amount of games a lottery could sell.
Many of these draw games are earning three cents per capita a week or less, a pittance compared to instant games for the multi-national games. But over the course of a year, these games result in millions of dollars going to good causes.
The Connecticut Lottery Corp. is considering ending one of their draw games due to low sales, even though they have never ended one in the past. Lucky Links has been earning between 2 to 3 cents per capita a week, a third of what the next lowest performing game is generating. But the Connecticut Lottery team is still hesitant to end the game. “If you do cut a draw game and those players go away, it’s a lot of money to make up somewhere else,” Pete Donahue, Senior Director of Marketing, Connecticut Lottery said. “We deal with big numbers in this business. Even though this game is underperforming, it’s still five million bucks.”
Niche draw games are also believed to expand the player base. Usually, they have some sort of differentiator, a game mechanic or aesthetic, that is assumed to make it appealing to a different segment of players. For instance, Lucky Links is an extended play draw game.
The Reason For Ending
From a metrics standpoint, it is difficult to point to a definitive reason to remove a game—which is why so many lotteries never do it. After all, it is hard to argue that a game that costs little and earns millions is bad for the organization. Yet lower performing games may be cluttering the retail environment, confusing both lottery partners and players.
The Kentucky Lottery Corp. has been considering ending Five Card Cash, a niche draw game with both an instant and daily draw win component. The game also has a poker theme to it to hopefully intrigue non-players with an affinity to card games. However, like Lucky Lines, the game generates roughly 2 to 3 cents per capita per week.
The Kentucky Lottery team has tried to modify the game in order to increase its attractiveness to players. It increased the odds to win and started to sell the game on Sundays. Sales increased by 12%. “[The changes we made to our Five Card Cash game] were good from the standpoint that we were able to ‘move the needle’ on sales, but [Five Card Cash] is still one of the weakest games in our portfolio,” Kentucky Lottery President Tom Delacenserie said.
The Kentucky Lottery staff has a couple of options with Five Card Cash. They could pull it from retailers, but still sell it over the internet. They could also keep it as is, but Delacenserie believes there is strong reason to end the game in physical retail locations: “My philosophy is if we’re going to grow the business, we have to be able to build our brands. That mentality goes against just leaving [an underperforming] game out there because it doesn’t cost us anything.”
Bad games could also be costing the lottery money indirectly due to opportunity cost. Opportunity cost is the value of the next best thing a company or person gives up by choosing one path over another. For example, if a high school student decides to go to college for four years, there is the upfront cost of tuition, but there is also the opportunity cost of losing income they could have made if they had decided to work full time over those four years instead.
In this case, the opportunity cost of keeping a poorly performing game would be implementing a different, higher performing game. “We are looking for options that will outperform it, something new and fresh,” Donahue said.
The biggest problem with killing off a game is that it is relatively uncharted territory. Most jurisdictions have not ended a game in the past decade, and those that have, have only done so once. To complicate matters even more, the majority of U.S. lottery play is anonymous, so it is difficult to study exactly what happened after a game ends. Since the industry is very risk averse, this lack of data has prevented many U.S. lotteries from ending draw games.
Tabcorp Holdings’ subsidiary The Lott, a private lottery that operates four out of the five Australian lotteries, was faced with a similar dilemma. Sports Pools was one of the oldest games in the portfolio and was believed to have a very loyal, niche player base due to its affiliation with soccer. But it was one of the lowest sales performing games in the portfolio. With national game portfolio sales exceeding A$5.5 billion annually, Soccer Pools sales were only A$10 million a year.
Its legacy and niche status made the organization very wary of removing it despite its underperforming sales. “We asked ourselves a lot of questions. Should we reskin it? Should we try something new? Should we increase the price and see what the market does? Or should we retire it gracefully because we shouldn’t be spending our time on it?” Callum Mulvihill, General Manager Finance & Commercial (Lotteries), The Lott said.
The Lott put together a project team to assess the game. “There was lots of analysis from both the game’s financial health but importantly player behavior and their motivations in the context of our total portfolio and the other changes being considered,” Mulvihill said.
The Lott utilized their impressive players club to help build a business case on how to proceed. The project team revealed that the player base wasn’t as loyal as expected. There were some ingrained, regular players who just liked playing Soccer Pools. Some players liked it because it was associated with soccer. “But for most of the players, it was just another opportunity to win in the week,” Mulvihill said. “We realized we had games that covered this spectrum and they are far more material.”
From the financial analysis, the game had additional costs to it. The game’s “drawing mechanic” was based on soccer scores around the world, which added risk to the game due to soccer fixing, and it required third party vendors.
The Lott decided to retire the game, but wanted to do it as seamlessly as possible, without losing any players. The Lott heavily cross promoted other games to the Soccer Pool players. They also ended Soccer Pools during a large change to the Australian Powerball, which generated close to an additional A$1 billion in national sales in its first 12 months after the change.
“The transition went quite smoothly. Honestly, consumers didn’t even realize it went missing,” Mulvihill said. “The money just spread to the other segments of the portfolio.”
For this article, Mulvihill looked at what happened to those ex-players a year later. Their total lottery play was unaffected by the retirement of this game as the portfolio had many other game options to cater to their play motivations. “This was consistent with the research findings that told us players saw this game as just another opportunity to win,” Mulvihill said.
For the 19 states that have ended a draw game in the past five years, the overarching strategy was to immediately replace it with a similar game. On average, a game is replaced within one financial quarter.
However, after a year, the replacement games often do not outperform the game they are substituting. The graph below (Time Series: Weekly Sales Depicting Similar Draw Game Replacement) shows the attempts of one U.S. lottery to replace a game from 2014. (I am withholding the name for a few reasons—it is not necessary to make the point; I don’t want to get in trouble; and for product placement reasons. This data is derived from La Fleur’s World Lottery Almanac book.) The graph shows weekly sales for three separate games. The original game is labeled in blue. The second and third iterations are labeled orange and gray respectively; both games are in-state lottos with no bloc affiliation.
From a sales perspective, the replacement games both show an immediate lift in sales and then a gradual decline. The original game roughly averaged $28,000 a week over the last six months of its life. The replacement game (orange) averaged $33,000 a week, but sales were falling precipitously. Finally, the last game is currently averaging $25,000.
Both new games saw a dramatic boost in sales when they were introduced. However, these sales may not have covered the marketing, operational and systems costs of adding a game.
For Life Games
This trend of declining sales was typical for lotteries that replaced games with traditional, in-state lottos. However, lotteries that replaced games with annuity bloc games often performed far better. Both Lucky for Life and Cash4Life improved sales significantly.
For instance, in Delaware, Lucky for Life has always outperformed Cash 5, the game it replaced in early 2015. In the quarter ending 3/31/2014, a year before Cash 5 ended, it earned $210,865. In the quarter ending 3/31/2016, Lucky for Life earned $975,428, a 363% increase. Even four years later, Lucky for Life is still far outselling Cash 5. In the quarter ending 3/31/2019, Lucky for Life earned $739,980, a 251% increase.
“Delaware’s per cap on Cash 5 was very low. As a small state, we have never been able to afford a For Life game on our own. Lucky for Life was a great option for us. Players loved the possibility of winning $1,000 a day for life. We recently had two second tier prizes in one month. It has been a boost for game sales,” Cheryl Couvillion, Marketing Specialist, Draw Games & Sports Betting, Delaware Lottery said.
This wasn’t an isolated case. In four other situations that were very similar to Delaware, after a few years, states saw their For Life replacement game increase sales when compared to the game it replaced by 54%, 27%, 73% and 227%.
Instant Terminal Games
Today, the resurgence of Instant Terminal Games (ITGs), like Fast Play, has seemingly made it the game of choice to replace underperforming draw games. The Connecticut Lottery team, as they contemplate ending Lucky Links, is preparing to release Fast Play in April 2020. “We are trying to make sure that we do have some place for those players to go. We’re not just going to end the game and not have somewhere something new for the player,” Donahue said.
The Kentucky Lottery launched Fast Play in October. “If the lottery plans to end a game, I would have another game ready. If Fast Play comes out of the block and does just as well, then my decision to move Five Card Cash out of the portfolio is very easy. If I just let it wind down and I don’t replace it, then I’ve got a deficit that I hope I can make it up somewhere else,” Delacenserie said.
An ITG isn’t a traditional draw game, but since it is printed from a terminal, many players should find it a great replacement game due to its instant win prizes. Arizona Lottery replaced 5 Card Cash and All or Nothing with a combination of Triple Twist and Fast Play in 2018. The early results for Fast Play alone have been very positive. In the quarter ending 6/30/2017, a year before the two games ended, sales were $1.5 million. In the quarter ending 6/30/2019, Fast Play alone generated $4.9 million in sales, a 225% increase. Fast Play and Triple Twist together generated $8.6 million, a 487% increase.
The graph above shows Arizona Lottery’s weekly sales before and after the introduction of Fast Play.
Overall, Fast Play fills a new role in the portfolio. Delacenserie believes that any new game added to the portfolio must be distinct to succeed. “A good example is Keno. Keno was introduced in Kentucky about three years ago, and now it does more annually than Powerball,” Delacenserie said. “So there’s a good example of a differentiation in the game where it’s not a confusing situation to a player. It is appealing to the player to have that option as opposed to just Powerball. So I think if you’re looking at making these decisions, one of the things that you want to ask yourself is: where does this new game fit in the portfolio?”
ITGs also provide the opportunity to reskin games two or three times a year. This is a distinct opportunity. It is well known that instant games see a boost in sales whenever new games are introduced. Draw games could emulate this by seasonally reskinning their games.
It will always be difficult for lotteries to end a draw game. The cost to maintain the game is almost non-existent, while the cost to start up a new game is significant.
But removing a poorly performing game for a new, mechanically distinct game, like Fast Play, or a bigger prize bloc game, like the For Life games, in the portfolio could provide lottery a real boost in sales over the long run.
“You’ve got to look at the bottom line. What’s the return on investment. If those games aren’t performing then you either have to try to find a way to get their performance up or replace them,” Delacenserie said.
The fear that removing a game may lose a large group of niche players could also be unfounded. The evidence from The Lott suggests that even in a game that would seemingly have a niche audience, most of the players were just looking for a different opportunity to win.
Admittedly, some of these examples are anecdotal. But they do provide food for thought for lottery leaders. Is the opportunity cost of lackluster draw games worth it?
“Do you need to clean up/refresh your draw games portfolio every once in a while? I think the answer is yes,” Donahue concluded.