NASPL Insights Q&A on Illinois

An interesting article found today.

NASPL Insights Magazine's wonderful writer, Patricia McQueen did Q&A with me six months after I became Illinois Lottery Director for the second time to update the industry on what was going on in Illinois.

We had a full plate: private management, changing advertising agencies, using a minority advertising agency to do general market creative, emphasizing 'special cause' instant games to lead a brand transformation, and plans for the first sale of lottery tickets over the Internet.

There's a great deal on the theory and practice of using a 'broaden the base' strategy to significantly increase a lottery's profits by getting more people to play, rather than marketing to get the same people ('players') to play more. A back and forth on plans to maximize the power of our fantastically diverse retailer network to drive sales, profits, brand and messaging to the 100% of Illinois' adults who passed through their stores weekly.

I'd like to thank Marco Sala, Marco Tasso, Francesco Parola, Brenda Donoghue, Sherman Wright, Sara Barnett, Daymon Ruttenberg and all of their staffs for using all of these theories and strategies to make Illinois the most effective lottery in the world at the time..

A perfect combination of business practice and public policy.

Hope you find it interesting and thought provoking:

Michael Jones was appointed Superintendent of the Illinois Lottery by Gov. Pat Quinn last October. This is his second term as head of the now $2.3 billion lottery, having previously led the agency from 1981 to 1985, during which time annual sales increased by more than $1 billion. After his first term, he founded Michael Jones & Co., a marketing promotion firm that specialized in assisting all forms of gaming with maximizing sales and profits in an ethical and responsible manner. He and his company served as a consultant for lotteries in 13 states, the District of Columbia, the Virgin Islands, Great Britain, Ukraine, British Columbia and Western Canada. Jones also was a director of Independent Lottery Research (now known as Independent Gaming Research), a consulting company that used market and consumer analysis to evaluate growth potential in lotteries. He developed the Batchy Awards to showcase the importance of lottery creative materials; the awards, presented annually by NASPL, honor outstanding advertising and business communications achievements.

What is your role, and the role of the Illinois Lottery, under private management?

The legislation establishing private management specifically sought a company that would maximize revenue to the state in an ethical and socially responsible manner, primarily through broadening the player base. The Lottery itself retains all oversight authority, including budgeting, management and regulation, and determines future direction. The private manager works under the Lottery to put into effect the business plan with which they won the bid.?

When I got here in October, my first task was to figure out how to give the private manager freedom to realize its business plan while at the same time putting into place common sense controls and an oversight capability that would allow the State and the Lottery to retain control as well as being able to understand in real time what was happening in the marketplace.?

Ultimately, the Lottery manages the strategic direction of what we want to do in terms of broadening the player base and maximizing revenue through decisions on games, prize payouts and marketing.

I've worked to make sure that both parties are completely on the same page in terms of what we are trying to do. It’s a dynamic situation, with a lot of lottery experience and talent on the Northstar side, and a Lottery eager to define what lotteries should be all about in the 21st century.?

How is Northstar being evaluated and why should other lotteries take note?

Northstar receives a fixed annual management fee, but their real incentive is to get results from their business plan - they get a percentage of any increase in profit over a base level. They can be penalized if they don’t realize the profit level promised to the state.

I think this profit focus is something that all lotteries need to understand. More and more, lotteries are recognizing the difference between reporting sales increases and reporting profit increases. If those percentages remain out of kilter, for example a 10 percent sales increase coupled with a two percent increase in profits, then that is a narrow track that doesn’t lead to a desired result.

So Northstar is being evaluated on profits to the state and on proof that they are broadening the player base. Their target profit amount, which is $850 million this year, cannot be made unless they attract a huge number of new players.?

What else has the industry’s interest in private management brought out into the open?

The push towards privatization helped the lottery industry realize its untapped potential. If third parties were willing to spend billions for a chance to run a lottery, that clearly indicated there was room for serious growth in sales and profits.??

That potential comes from the difference between the total number of people who are open to playing the lottery and the total number of people who actually do play the lottery. The challenge is to really think through what you’ve been selling and how you’ve been selling it. To make a major commitment to try new ideas that will make the lottery more relevant to a much larger group of people. When you think in those terms, especially in making the lottery relevant to a younger audience, it’s a completely different lottery world with messaging quite different than what has traditionally been done. As an industry we need to recognize that there’s more to marketing than manipulating prize percentages, and there’s more to your audience than just the people who play all the time.

So in light of this potential, what was your first major task when you became Superintendent in October?

The first thing that I wanted to work on was marketing, because that’s the easiest thing to address in order to change direction and increase profits. I immediately encouraged Northstar to really think about the kind of advertising we were doing, to what audience, and to rethink the creative messaging we used in the marketplace. It was clear that we needed a complete brand transformation and re-imaging of the Illinois Lottery.

That point of view led to a change in advertising agencies. We created in a matter of days a process to acquire a new agency, done completely in the open, with full disclosure of our plans and evaluation criteria. And in a very short amount of time, we evaluated more than a dozen full proposals. I can’t stress enough how quickly the marketing team at Northstar acted in making this work nor how important doing??everything out in the open was in beginning the??transformation of the lottery’s brand.

We ended up with four finalists for the contract, and they submitted some very creative solutions for the brand re-imaging goal. We had also asked them to present a renaming and relaunch plan for our Little Lotto game.?

What did the agency proposals tell you?

In their situation analysis, all four agencies said basically the same thing - that about 80 percent of the adult population in the state of Illinois agreed with the statement “the Lottery is not for people like me.” It really showed how poor the image of the Lottery is, how invisible it is to the vast majority of adults, how difficult the task was going to be. All four agencies did extraordinary jobs, creatively, of imagining how to turn that image around; all of them recognized that beyond all else, lotteries are, given their essence, wonderful things.?

The winning agency was a consortium of Downtown Partners and Critical Mass, one of the new paradigms of agency organizations. They had developed one of the best new lottery ideas/campaigns I’ve ever seen. We can’t wait to get that campaign on the air in March. The central phrase is just wonderful - it grabbed us from the beginning: “If you believe that anything can happen, it might.”

The Lottery’s future advertising will be more about what lottery represents, what the emotional appeal is, how luck trumps odds and winners, and what it can mean in everyone’s life. I think it’s a very fertile ground to create a broader player base. It’s a rather narrow creative path to continue to tell people they are going to win when most people don’t. All four of the advertising agencies came to the same conclusion.

Is the messaging that important?

A lottery’s brand, created to a large extent by its messaging, is an absolute key to growth. You have to consistently use advertising and media dollars to affect peoples’ opinions about the basic entity that is your lottery. It’s one of the things that in my experience, lotteries kind of do and then don’t do, do and then don’t do... it’s something you have to do consistently to start changing the brand.?

It’s also important to examine what you are doing at retail, looking at it from the standpoint of someone who has never played the lottery, or who rarely plays the lottery, rather than from the perspective of core lottery players or years in the lottery business.

And you have to take advantage of fantastic opportunities like the recent $325 million Powerball prize to change your brand image, to hammer home the truths about your lottery and make people aware of all the other games you offer.?

The ‘other’ games have to be things that new players, attracted by the huge prize, would be open to playing. They can’t just be the next iteration of price point and prize percentage, because those types of things obviously don’t appeal to people beyond your core group. You don’t want to always buy sales by increasing the prize percentage, you want to generate new sales by increasing the audience with creative messaging, prizes people want to win, and attractively packaged games.

Speaking of Powerball, you also went a new way with the commercial introducing the $2 game.

While we were in the middle of changing agencies, we needed a way to create a campaign for the introduction of $2 Powerball. I didn’t think the commercial being used by a number of Powerball states was appropriate for Illinois. Although we didn’t yet have a new full time agency on board, we did have a contract with commonground, an agency that usually specializes in minority campaigns. I thought they were very imaginative, very creative and pleasant to deal with, so I instructed Northstar to have them develop a Powerball ad for us. commonground knocked it out of the park with a great piece of creative. The ad generated a tremendous amount of good publicity and great brand transformational energy for the Lottery - creatively it was a dramatic change from what the Lottery had been doing up to now.

Getting back to the goal of expanding the player base - how does that happen?

We are starting by getting rid of the kinds of messaging lotteries have done for a long time, which has put us into this position of “invisibility.” We are changing from a lottery that constantly publicizes winners, winning and odds to one that publicizes the essence of the lottery - where you risk a small amount of money against long odds to win a large prize. We’ll be focusing on how net proceeds go to the common good, we’ll be creating games that have fantastic graphics associated with them and that appeal to a broad range of people, and creating prizes that a lot of people want to win.

Are there any specific games you have in mind?

Absolutely. We have four specialty games here, and I inherited one that was just about to launch called Veteran’s Cash, where all the proceeds go to veterans’ programs. Our other ‘special’ games benefit MS, AIDS, and Breast Cancer research. I didn’t want to look at them as just legislatively-mandated games that we ‘had’ to do. I think these games, because of the tangible use of their proceeds, are wonderful opportunities to change the brand image of a lottery and to also attract people who, perhaps, have never played. Maybe, attracted to a cause, they’ll play our other games as well.

For Veteran’s Cash, with no budget and little marketing scheduled, I worked with Northstar’s PR department to generate a lot of public relations support. We created an imaginative set of badges that retailers could wear – “I’m a veteran, ask me about Veteran’s Cash.” We did events all over the state and it significantly increased awareness of the game. The feedback we are getting from people shows an increase in the positive thinking about the Lottery.

And what I found to be really interesting is that Veteran’s Cash is a young peoples’ game. I had thought of it in terms of Vietnam, Korean or even WW2 veterans. But in fact, it’s a young peoples’ game. It is Generations X and Y who are most affected by the wars in Afghanistan and Iraq. They are the groups who have brothers and sisters and other relatives back from those conflicts. And for most of them, the publicity around Veteran’s Cash became the first thing they’ve ever heard about the Illinois Lottery. Until then we were invisible to them. It became a classic starting point of how you turn around perceptions and brand image to get a large number of people to start participating a little bit, as opposed to having the same people participating a lot.

Our MS, breast cancer and AIDS instant games, all benefitting research and awareness programs, are key brand opportunities that we should really support and use to stimulate a new way of thinking about the lottery.

Now for a topic that everyone is interested in these days - selling tickets via the Internet. What is the mandate for Internet sales in Illinois?

Illinois had been considering an Internet test before the move toward private management. During the debate it wound up being combined in the same bill, so the private manager does have the responsibility for creating the Internet lottery test. This is the only state that has a specific legislative mandate to test the technology that allows Internet sales for very specific existing lottery games. All we are doing is testing a sales interface and geolocational and age controls for our Lotto and Mega Millions games, and hopefully Powerball - legislation is currently being considered that would add that game to the list. The legislature always had the point of view that it was legal under federal law. The recent Department of Justice opinion confirmed their legal analysis.?

The legislation called for the Internet test to last three to four years. I suspect that once we are up and running and prove we can control for age and geographic location, the legislature will come back and make this a permanent fixture. But it’s certainly up to them.

How will the Lottery implement the Internet test?

Northstar and the Lottery’s staff were working to achieve the Internet goal when I got here in late October, and one of thing things I pushed strongly for was a very simple user interface. We were cognizant of the experiences of other lotteries around the world, where things like difficult interfaces, onerous registration requirements and mandatory electronic wallets held down the total number of potential players. We wanted the basic experience that consumers are used to with other good consumer goods Web sites, where in just a few seconds, a player can make a purchase using a credit card. If it isn’t as simple as American Airlines or iTunes, we will kill the market ourselves before we barely begin.

We were surprised and delighted with the December 23 DOJ opinion. We had already done a tremendous amount of work prior to that time, and since then we’ve redoubled our efforts to have in place a simple, safe, secure and robust interface. We hope to begin sales in March or at least by the beginning of April. We may be the first U.S. lottery to do so, but that doesn’t matter. What does matter is being there with the best, easiest and most open means of letting people play.

The intent is to make it a convenient extension of our retailer channels so that people can play Mega Millions, Lotto and (hopefully) Powerball from their home. We’ve done another round of research on Internet potential, and think we have real potential to generate significant sales from a completely different audience than we currently have. The data also suggests the positive impact of Internet sales on our existing bricks and mortar retailers. We were in the field in early February, and we estimate 600,000 to one million new lottery players given 100% awareness.

So how will this impact existing retailers?

When you think about it, the Illinois Lottery, and really any lottery, hasn’t had anything major other than huge grand prizes to attract new players into bricks and mortar retailers or to increase their player base in quite a while. It’s not a question of foot traffic - virtually 100 percent of adults walk through lottery retailers every week. It’s a question of whether people find the lottery relevant enough to play - how do you convert those people into lottery players? Couple the research that said the lottery was not relevant with the intimidation factor of numerous games displayed at retail, and it’s tough to get that initial purchase.?

Research we did at ILR with infrequent/lapsed players and nonplayers indicated that they would probably spend $5 if they could play Mega Millions on the Internet when it had a jackpot of at least $100 million. A significant percentage of them said they’d be more likely to buy at a bricks and mortar retailer after they’ve purchased on the Internet - it becomes less intimidating once they have some experience.?

So it’s exactly the opposite of the fears raised by retailers about loss of income from allowing Internet sales.

Speaking of retailers, what is the current strategy for enhancing the Lottery’s retail network?

Originally Northstar had a two-part retailer plan - to greatly increase the total number of lottery retailers, and to move into other retail channels such as the big box stores. They have discovered that bringing in a large number of new retailers is not a correct business strategy, because we probably already have the cream of the retailer base on board. So their current strategy involves optimizing sales per retailer through such things as better design and POP materials. And they are working extremely hard at getting in front of the Walmarts and Walgreens of the world, but have discovered that the Lottery brand is so poor, it’s difficult to gain traction. But our work to improve the Lottery’s image, to show that we are serious about changing how the Lottery is run, how the Lottery is perceived and how it is sold, will help. So overall, I’m pretty optimistic about our expansion into new retail channels.

What’s next for the Illinois Lottery?

Our charge is to maximize revenue to the State of Illinois in an ethical and socially responsible manner. We are moving rapidly to ensure that we can fulfill that mandate. We will begin sales of lottery products over the Internet by April; the Lottery will integrate a group of new marketing agencies into the Lottery/Northstar team by March; we’ll introduce a new branding campaign for the overall Lottery as well as renaming and relaunching ‘Little Lotto’ in the next several weeks. We’ll use that game’s new positioning as the platform to rethink of all of our numbers games later this summer. And, of course, we continue to maximize the potential of our existing retailer base with Northstar’s innovative POP and training programs. It’s an exciting time for lotteries in general and a very exciting and promising time for the Illinois Lottery.