The Roundup: Inflation & Low Price Points

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Idaho – Inflation and Rising Gas Prices

By Jeff Anderson, Director of the Idaho Lottery

In my nearly 16 years as Director of the Idaho Lottery, we’ve never experienced a marketplace like we have today. Idaho is one of the fastest-growing states in the nation. Idaho’s response to the pandemic in 2020 and 2021 was less restrictive than elsewhere. Statewide, the Governor believes in subsidiarity and granted authority to local municipalities and health districts to address the issue (within limits) as they saw fit. Some cities such as Boise were more aggressive with business closures than other places. That flexibility created an environment for our economy to thrive despite the disruption and change of the pandemic. That boom, though, caused skyrocketing housing costs. Nationally, enormous fuel price increases and market inflation has added more uncertainty and grief for everyone.

We’ve overcome rising fuel prices in the past, but not concurrently with historic general market inflation and soaring costs of housing. Disruption and change did create opportunity and advantage, though. We were prepared and had an excellent couple of years in FY2021 and FY2022.

$1 and $2 Instant Tickets

To your questions about $1 and $2 games, in my view, they remain important to consumers. $1 probably more than $2. While unit sales continue to decline, they still represent a popular component of our portfolio, only eclipsed in unit sales by $5 games that include extended-play games.

In 2019, the Idaho Lottery explored ways to arrest the annual decline in $1 unit sales. This was, of course, pre-pandemic. In January 2020, we changed the value proposition of $1 games with a “new and improved” campaign. Prize expense was increased from 58% to 68%, $1 game weekly second-chance draws were introduced for the first time, and plan-o-grams called for 3-5 games in-counter and in vending.

The results were positive in three ways. First, we arrested the annual decline in $1 unit sales. Admittedly, sales fell back in FY2022 but so did facings. Second, the second-chance draw opportunity created new loyalty club members. We track KPIs and have been able to watch their behavior in the club and how they engage with us. Not surprisingly, when they become members, they become frequent customers and frequent customers who enjoy multiple price-point games.

Third, the cost of customer acquisition has been advantageous to the Idaho Lottery. One hypothesis we started with was $1 games remain an important entry point for new players. It is well-known that retaining a customer is less expensive than acquiring one. Much of the added small wins were churned back into more ticket sales. We affordably acquired many new customers, and we can engage with them in meaningful ways. Frankly, I believe our increased popularity with new players led, in part to, the 34% increase in FY2021.

Draw Games

Legacy draw games seem to have a harder time moving the ball downfield with the higher priced points. We did raise the price of Powerball to $3 by adding a required PowerPlay purchase. We lost boards played but got 50% more on all tickets sold. Demand is somewhat inelastic at the border, but in other parts of the state we may have lost some regular players since we changed the price when the game added the third draw each week. When the frenzy over a “big” jackpot comes, price becomes almost meaningless. Frankly, some have opined that variable pricing (think plane tickets) has been discussed in the past. It may be our future.

It will be interesting to see what Mega Millions does going forward. They may seek to add more value at a higher price. Frankly, it’s about time both games did something different with the value proposition.

 

Arizona Lottery – Responsive

Gregg Edgar, Executive Director, Arizona Lottery

“Arizona has been evaluating the viability of the $1 and $2 lines for a number of years. Recently, we reduced $1 instant facings down to a single game at any given time. The current inflation struggle will certainly exacerbate our position on those lines, especially since the cost of producing and distributing printed tickets only has the potential to go up. Our focus has been to look at the use of the Fast Play line to support the $1 customer base and move the lower-price players into that space, which hopefully will encourage more play of other lines.

Our contracts for draw-based games have fixed pricing for a longer duration than the standard scratch products. Additionally, withdraw or Fast Play games, we are not limited from a facing perspective as we are with Scratchers products. So in particular the Fast Play products could be more viable if production costs rise and inflation continues to spike.

I think we have to be responsive to the conditions our players are facing. Whether looking at ways we can add value into our product lines or partnerships, we can bring, for example, partnering with gas retailers to offer value on their gas purchase or looking at prizes we can offer through our digital channels to bring relief. But at our core we have to stay focused on delivering an entertaining experience for our players that gives a little relief to everyday struggles. People dream in good times and bad times, our dream is to serve our beneficiaries while delivering a little bit of escapism to our players.”

Pennsylvania – Top-of-Mind Awareness

Drew Svitko, Executive Director, Pennsylvania Lottery

“The Pennsylvania Lottery is planning to reduce the number of $1 and $2 games launched and alternate the lower price points to reduce the debate over which price point to prioritize in vending as player demand shifts to higher price points. Seasonal themes will naturally keep the lower price points fresh and relevant, along with a few evergreen, core concepts for those players looking for something less whimsical to play.

During uncertain times, it is important for the Lottery and the Lottery’s mission to maintain top-of-mind awareness, especially when players have many choices when it comes to spending their discretionary income—even if they currently have less discretionary income due to inflation and gas prices. Bringing the sale of our Draw Games online, as well as our modernization and expansion of vending machines at retail will improve availability and purchasing convenience.”

Oregon – Potential Opportunity

Barry Pack, Executive Director, Oregon Lottery

“Although costs are up across the value stream to produce, distribute and market scratch and draw games, Lottery tickets themselves are zero-inflation forms of entertainment. We see this as an opportunity to bring in new players who may be price conscious. (At $1 a ticket, I can buy more tickets which makes me feel like I have more chances of winning.) And with gas and other forms of entertainment so expensive, having a range of price points for our players to enjoy creates lower barriers for entry and more opportunities for fun for some. While higher priced scratch tickets are generating stronger sales, our $1 and $2 tickets remain top choices for new players and younger players in particular.”

Arkansas – The Greatest Threat

Eric Hagler, Executive Director, Arkansas Lottery

“Continued economic erosion is the greatest threat to the lottery sector. As consumer budgets constrict, consumer behavior will adjust. A higher ring at the till for staples and fuel will serve as a drag on consumer retail items. That said, lottery offers a unique form of entertainment… that is unlike that offered by any other retail product.”

Texas – $1 and $2 More Appealing?

Ryan Mindell, Deputy Executive Director, Texas Lottery

“The $1 and $2 games have a strong future. If anything, the impact of inflation may make them more appealing as their price-to-prize relationship is steady. These price points still serve as a valuable introductory price point for new players. As for draw games, I think the industry could do more to expand the price points in their draw portfolios, but the $1 draw game also has a place. Uncertain times make the need to innovate and to be quick to market with new ideas even more important.”

North Carolina – Will Players Reduce Lottery Budgets

Mark Michalko, Executive Director, North Carolina Education Lottery

“Inflationary impacts on Lottery is relatively unchartered territory, given the modern day lottery portfolio has not been tested by inflation. Lower price point games are becoming more of a commodity for us, meaning that the difference in one game’s performance versus another is becoming less and less. Players buy the price point more than they buy the game. Over the pandemic, I believe that we had a large portion of players that played scratch-off games consistently enough to understand the true value of the different price points. They have a better understanding that they have much better chances to win meaningful prizes as they go up in price. I don’t see that trend reversing itself, but I do see players reducing their lottery budgets to accommodate increased costs throughout the rest of their lives, which we are beginning to see at the $5 price point in particular.

I believe that the lower price points have a role in the portfolio, but the important thing for the industry to figure out is what that role is and how it plays into some of the more intangible elements of portfolio performance like the operational impact of merchandising slower moving larger packs of lower price point games.”


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