Richard Metters, an associate professor of decision and information analysis at Emory University’s Goizueta Business School, is the first to admit that one of his latest research projects is a departure from academia’s theoretical approach. In The “Killer Application” of Revenue Management: Harrah’s Cherokee Casino Hotel, Metters, who specializes in operations management—along with a host of coauthors from Georgia Institute of Technology, Harrah’s Cherokee Casino & Hotel, JDA Software and Rainmaker, Inc.—replaces theory with reality to offer a detailed report of the successful revenue management techniques used by Harrah’s Cherokee Casino & Hotel in rural western North Carolina.

Metters’ rare access behind the scenes of the Cherokee’s revenue management system results in a fascinating study of how one hotel has successfully used customer relationship management and sophisticated revenue management to improve its profitability. “Quite often firms don’t want to show you the detail because it’s proprietary,” explains Metters, who adds that he had to be persistent in order to elicit the necessary in-depth information from the Cherokee that is reflected in his “Killer Application” research. “It was great to be able to see at a minute level exactly how they used their system. It helps me in the classroom to better educate my students.” The paper is currently under journal review.

Revenue management, fundamental to the service economy, is considered a critical tool to business success. Service providers, like the airline industry, use revenue management techniques that predict consumer behavior and accordingly adjust product availability and price to maximize revenue growth. For instance, after deregulation in 1979, airlines figured out that they could make money by selling portions of flights for different prices—last-minute business travelers pay higher fares than the bargain hunters who book several months in advance.

Then comes the balancing act—better known as revenue management. “If airlines fill their planes with all these people who make reservations six months in advance, then they can end up with an entirely full plane and still lose money. They must reserve some seats for the high-paying people who reserve at the last minute. But they can’t fill the plane with them. So if they just had the high-paying people, they’d lose money. And if they just had the bargain hunters, they’d lose money. So they have to balance the bargain hunters with the high-paying customers. The ultimate goal of revenue management is to decide when to say no to a bargain hunter who comes in advance with a sure thing. When does the business say no to them because it has an idea that some of the high-paying customers might be coming later?”

The revenue management system at Harrah’s, a casino hotel chain that is not surprisingly run by CEO Gary Loveman, a one-time Harvard Business School professor, has increased revenue per room across the hotel chain by 15%, compared to an average 3% to 7% in other industries. Metters and his colleagues suspect that the Cherokee, which has always operated with a revenue management system in place, has an even higher rate of revenue increase than its Harrah’s counterparts. “It’s the highest dollar impact revenue management operation I’ve ever seen,” says Metters.

Why so successful? That question seems all the more compelling at first glance. Metters and his colleagues write that “The goal of the Cherokee is to have a full hotel with an average room rate of $0/night.” How can customers staying in free rooms generate revenue? Because revenue at Harrah’s is defined as a customer’s total spend—including food, gambling and hotel room. The Cherokee expects to make its money from gambling, which is why the casino’s historically biggest gamblers stay for free. Unlike revenue management in the airline industry that depends on charging the late bookers higher fares, the desirable, higher-paying Harrah’s customers are charged nothing. This guarantees that the hotel will be packed with active players. Meanwhile, the lower-paying customers generate room revenue, and on weekends typically end up staying in a room that the Cherokee has purchased at a neighboring hotel.

The key to the success of this strategy is in customer relationship management (CRM). The Cherokee’s CRM system is based on the “Total Rewards” card program. Customers, who must present the card each time they wager, receive perks and amenities in return. “Their whole revenue management system depends on people trusting this loyalty program and using these rewards cards,” notes Metters. “If they don’t use them, then the whole system falls apart. Most people use them because they know that they will get the free goodies if they do.”

By tracking the reward card numbers, the Cherokee can predict, on average, how much a customer will spend on a given visit and can classify the customer as a high-roller, on down to a customer who is downright risk-averse. Harrah’s uses the data to inform its revenue management system, which forecasts demand for guests by booking date, arrival date, length of stay, room type and customer segment. Rainmaker, a coauthor of this article, handles the back-office aspects of Cherokee’s revenue management system. “You need the information system to run the revenue management system. If you don’t have the history of how people gamble, then you’re not able to make these judgments about who should get rooms,” explains Metters.

Another distinct, yet critical, aspect of the Cherokee’s revenue management model is the extreme difference in booking patterns. “The casino is like the candy bar by the checkout of the grocery store. Going to the casino is an impulse buy,” says Metters. The Cherokee’s guests often very literally plan their weekend gambling getaway on Friday afternoon and end up calling from the car to book a room. “The demand comes at the casino really late compared to any other industry using these techniques so that they are more uncertain as to what’s going to happen,” explains Metters. “Every other industry reacts to this uncertainty by accepting the bookings of low-paying customers just to be sure that somebody is there. Whereas the Cherokee’s information system and revenue management system give them this comfort level that if only 40 rooms are booked out of 576—don’t worry, they’re coming. They can say no to these people that are only going to lose $100 dollars a night. The bigger gamblers will be there. And they are, week after week.”

The Cherokee exceeds all revenue-management expectations, suggests Metters, because of its excellent execution of the various techniques that lead to improved profitability, but also because of the unique model of the casino industry. “Airlines, to enforce this revenue management idea of getting people to pay more who are willing to pay more, have to play games like requiring Saturday night stays,” Metters explains. “Then the customers try to cheat the games and the airlines have to rig up more games. It’s this never-ending battle of putting up fences and restrictions that customers try to get around. That’s not the case with the casinos. The beauty of casinos is that everyone self-prices. Your price is however much you want to gamble.”

And yet, few companies in the casino industry are using these proven revenue-management techniques. It took the arrival of a B-School professor to Harrah’s executive ranks for that company to recognize the value of revenue management. “It’s hard when you’re already making money to be thinking that you could be making so much more if you only did this,” notes Metters. “In general, revenue-management techniques must be used in order for businesses, like airlines, to survive. They’re not always popular with customers, but without them these businesses would go bankrupt.”