B-School Lessons From Chuck E. Cheese

It's hard to imagine learning about business at a place where the mascot is a goofy rat that wears a purple baseball cap and gives a thumbs up sign. But there I was, at Chuck E. Cheese's, offering my daughter an occasional treat of skee-ball, hoops games and pizza.

Yes, this venue is the one with the mantra, "Where A Kid Can Be A Kid," but I inadvertently found myself learning about the business end of this active playground.

I had just finished a game of street hoops (you can't go to a place like this and not play the games) when I noticed that the machine was dispensing half as many tickets as it had in the past. I used to play this particular game repetitiously to help pad my daughter's end-of-day ticket haul.

Thinking something was wrong with the machine, I mentioned the issue to the restaurant manager, a tall, lanky guy who looked like he had been overexposed to all the loud noises and flashing lights. His name might of been Kip, but that is irrelevant.

Anyway, "Kip" told me that there was nothing wrong with the machine. Sensing my interest in why the outpouring of tickets had been muted, he explained that Chuck E. Cheese insists on making on average 16.1 cents for every quarter played in one of its games. So you take the overall inflow of quarters and tokens and subtract the ticket payouts since those are redeemed for "valuable prizes" such as gummy lips and Whoopie cushions, what the company calls the "cost of entertainment and merchandise."

Every few months, management reviews a print out of each machines input of tokens and output of tickets. Kip explained that there are certain machines, specifically games of chance like the machine that lets you try and push tokens down a chute, bring in tons of tokens (I believe he said $6,000 worth of tokens monthly).
In contrast, the street hoops game had gotten too generous, particularly when adults rack up big game after big game after big game. Management decided to tweak the output, reducing the ticket outflow in half and subsequently tempering my excitement for playing it.

 Maybe they had this guy in mind when they made the adjustment. Well done!

Chuck E. Cheese's was launched by Nolan Bushnell, who also founded Atari and Pong, in May 1977. The first Chuck E. Cheese's was located on Winchester Boulevard, in San Jose, Calif. Today, the chain is owned by CEC Entertainment Inc. in Irving, Texas, trading on the New York Stock Exchange under the stock symbol CEC.

Last year, the company made $55 million off of $821 million in revenue. BTW: cost of entertainment and merchandise made up just 8% of revenue in 2011; most of the revenue comes from selling greasy pizzas and fountain drinks.