Approaches to Optimizing House Edge
When considering the levers that an operator can pull to affect revenue and profitability, house edge can be one of the more difficult to assess.
Everyone knows that with a higher house edge on a game, the greater portion of any given wager the house can expect to keep. There are also hidden costs when finding the optimal house edge.
A house edge set too low will allow players to play for longer on a given bankroll, or to keep more of their bankroll in a given session. This is favorable for the customer, but can incur unnecessary dealer costs, lower hold percentage, and potentially alienate players who can’t find a seat during peak periods, reducing overall drop and revenue.
On the other hand, a house edge too high, when on a main game, may deter players from playing it as they aren’t given the experience they want, and an edge too high on a side bet leads to low or no utilization while often incurring a licensing fee to have it on the felt.
In this post, we will discuss two approaches for modifying house edge: rules and side bets.
In a follow-up post, we will present a case study on a property that found success in a combination of these two approaches to improve Baccarat performance.
Casino games are governed by rules of play that result in a particular house edge. The theoretical edge on the game is based on basic or perfect strategy on the part of the player. The effective edge on the game is the result of rules, combined with any mistakes (non-optimal decisions) players may make.
When considering rules or rule changes, the operator should consider three factors:
- Impact to house edge, both theoretical and effective
- Visibility of the rule/change
- Perception of the rule/change
One of the most common examples of a rule variation is in Blackjack, with a blackjack paying 3:2 vs 6:5. Since this payout variation happens after any decisions made by the player, we know that this is an example of a rule change where the effective impact on house edge is the same as the theoretical impact.
The exact impact does depend on other rules but the house edge is generally 1.36% higher on a 6:5 payout.
Another rule variation change unaffected by players decisions is hitting soft 17 vs standing on all 17s. There is an adjustment to basic strategy based on this variation, but all other things equal, the hitting vs standing happens after the player has made their decision, and the effect on house edge is approximately 0.21% in house favor when hitting soft 17.
Contrast these to rules such as allowing surrender or not, limiting on which cards a player can double, the number of splits allowed, or re-splitting of aces. Surrender is a decision that the player can make, therefore the value to the player will depend on the correct use of this strategy.
The same can be said for deciding when to split, re-split, or double-down. Assuming a player is correctly using surrender, they will only gain 0.1% improvement in edge vs not having this option. In practice, if a player is given the option to surrender, and uses it incorrectly, offering this may actually push the games’ effective edge in the house’s favor.
Visibility of the change and player perception of the change are the other considerations. Paying 6:5 on blackjack tends to have medium visibility and negative player perception. Some players may not be aware of the rule until they hit their first blackjack, and all players will feel negatively towards this change. However, since in many cases the 6:5 variation will effectively double the house edge on the game, this means that a $10, 6:5 game will earn more money than a $15, 3:2 game, or a $15, 6:5 will earn more than a $25, 3:2 game.
Hitting soft 17 achieves an excellent combination of all three elements. The edge impact is known, the visibility is low, and perception is mixed. Some players actually believe the dealer is more likely to bust by taking another card in this situation, so there are no negative feelings from the player.
This is likely why it is one of Bill Zender’s first recommendations to any operator:
“Giving the dealer the ability to hit soft 17 allows the dealer to increase their hand-total on the average. As far as I’m concerned, this is a “must” rule for all smaller casinos, and it should be strongly considered for all casinos, regardless of size or wagering limits.”
Offering rule variations, when priced appropriately, allows the operator to offer games to minimum bet-sensitive players AND rule-sensitive players at the same time.
A side bet is any wager option that is not required as part of the primary game. Side bets are typically more volatile than the main game, with a lower hit frequency, but the possibility for a greater payback.
Side bets are appealing to both the player and the operator for a number of reasons. For any player, they offer a possibility for a big win; and for the player craving action, the option to place multiple bets per round. For the operator, they offer a wager that, while more volatile, usually has a higher edge, and since there typically aren’t ‘decisions’ involved in side bets, the effective edge is the same as theoretical. Incremental wagers increase turnover, and with any positive edge, will increase revenue for the house.
Offering a side bet doesn’t usually come with any negative perception from the player. If they feel the hit rate is too low, or the edge to high, they can elect not to play it and continue to only play the main game. There are excellent side bets to choose from and many operators have had great success by adding them.
At this point, it sounds like a win-win, but there are potential drawbacks the operator must consider. The main one is cost. Many side bets are trademarked and licensed to the operator. They come with a daily or monthly cost, usually at the table-level. There are the additional costs of added complexity for the dealer, and extra hardware on the table, which could be covered by the license/maintenance agreement, but could still result in table downtime should something break.
The decision now becomes:
“Does the side bet get enough incremental play or generate enough incremental profit to offset the licensing cost?”
The vendor will undoubtedly say that it does, but in practice, this can be difficult to determine for certain. Here are some of the factors that should be considered:
- Side wager utilization
- Impact to game pace
- Incremental vs cannibalized wagers
- Dealer mistakes
Unless the bet is tied to a progressive, most casinos won’t have a good understanding of how much play it actually gets, and even in the case where it is, and they know for certain how many side bet wagers are placed, they won’t know for certain how many main bets are placed.
This means we cannot accurately determine the weighted average edge of the game with the blend of side and main wagers. Instead, we fall back to the simple assumption that the edge will be higher without any idea of by how much.
All side wagers will result in increased work for the dealer. There is an additional point in the hand where a dealer must determine winning vs losing wagers and calculate payouts. This can only slow down a game, even for an experienced dealer. In the event that a jackpot is hit, the table will come to a dead stop while forms are filled out and paperwork is completed.
The next question to ask is whether the wagers placed on side bets are incremental or only serve to cannibalize the main bet. The goal is to drive incremental wagers, but this is not always the case. Side bets typically have a higher edge than the main bet, which means that wagers placed here, even if only cannibalizing another wager will earn more for the house, but depending on utilization the impact can be less than anticipated.
Side wagers will add complexity to a game. This means the likelihood of a dealer mistake increases. Large payouts will nearly always be confirmed by a floor person, but many side wagers are designed to have frequent hit rates on 2:1 or 3:1 payouts and even infrequent mistakes here will quickly eliminate any house edge that the wager has.
The operator lucky enough to be in a high demand market, with fixed capacity and lower-than-average hold percentage, should benefit greatly from side bets since they aren’t currently able to accommodate demand or capture a large portion of the money on the floor. The presence of extra betting options will drive incremental wagers and the higher edge on those wagers should increase hold. Other operators may not be so fortunate and should make a strong attempt to estimate the value for their property.
Let’s consider a scenario for a sample game:
Now consider adding a side bet with a fixed wager of $5 and an 8% house edge.
Assume this bet has 25% utilization meaning that for every four wagers placed on the main bet, one incremental wager is placed on the side bet ($5 side wager for every $100 on the main wager).
This combination leads to an effective house edge of ~2.29%. We will initially assume no change to game pace, incremental wagers, and no dealer errors.
In theory, this game will net $175 more per day then it did previously, meaning the operator will pay up to this price to have it on the table.
However, our assumptions may not hold. If instead, we assume that the wagers on the side bet are cannibalizing the main bet as opposed to being incremental, the additional complexity of the bet reduces the game pace by two hands per hour to 58, and the dealer makes one error per day, paying out 2:1 on a losing wager.
This change has reduced our incremental profit from $175 to $90, which is 49% less.
The reality may fall somewhere in between, above or below. It will all depend on the property, the market, and the overall demand.
The operator may or may not be able to get a handle on these unknowns prior to making a rule change or introducing an optional wager. Regardless of any of the questions above, the best way to determine the success of a rule change, or addition of side bets, is to regularly perform detailed analysis of your game performance.
Tracking table-level metrics allows the operator to control for things like location or open hours, and compare the relative performance of one game variation vs another.
“Is there greater demand for side bet X vs side bet Y?”
“Does a certain rule variation allow me to support a game at a different price point?”
“Has my win/unit or hold percentage improved since introducing this change?”
“Is the improvement sustained or has the utilization dropped off?”
Tracking game performance before, during, and after a change is the only effective way for the operator to make an informed decision about what is best for their property, and truly optimize their floor. On the surface, the game performance analysis may seem simple, but this quickly becomes more complex when accounting for volatility, seasonality, and other external factors that may impact the results.
As Senior Manager of Analytics and Optimization, Paul coaches partners to leverage the full potential of the TYM Software to enhance their operations. He has 10 years of experience in data analytics, client success, and table optimization.