December 2014 – The Business of Social Games and Casino

Testing innovation opportunities

While almost everyone now accepts the value of analytics and metrics-driven decision making, one area where it is often neglected is in implementing innovation. Even data driven companies are hampered in implementing innovation because their data is backward looking. In the absence of sufficient data to inform decisions about proposed innovations, managers often rely on their experience, intuition and conventional wisdom, and none of these is necessarily relevant. Although many of my readers are from the mobile game space, where much is tested, even in the game space pure innovation often is not. An article in the Harvard Business Review, “Increase your chances of success with innovation test-drives” by Stefan Thomke and Jim Manzi, does a great job of showing how to test these hypotheses.

Most companies do not conduct rigorous tests of their risky overhauls because they are reluctant to fund proper business experiments and have considerable difficulty executing them. Although the concept of experimentation is straightforward, there are many organizational, cultural and technical challenges to implementing experiments. While running an A/B test on a website is simple, many business need to deal with complex distribution systems, sales territories, bank branches, etc. Business experimentation in such environments suffers from many analytic complexities, most importantly that sample sizes are often too small to be significant (e.g., only a few stores). Continue reading “Testing innovation opportunities”

It’s all about the base

I was recently reading about the challenges NASCAR has faced in the last ten years and it reminded me of that great philosopher, Meghan Trainor, who wrote “it’s all about the base.” When I first moved to North Carolina in the early nineties, NASCAR was the fastest-growing sport in the world. It went from a regional play to a national television contract and star drivers from other auto-racing leagues switched to the NASCAR circuit. Races were sold out and NASCAR seemed poised to capture the number two spot among US sports (the NFL was still the top dog around). NASCAR moved races from places such as North Wilkesboro and Rockingham to big cities including Chicago and Dallas/Fort Worth.

Since those glory days NASCAR has run into major difficulties. Rather than continue on its growth trajectory, television ratings have plummeted to the point where many doubt the contract will be renewed by major television networks. Moreover, many races no longer sell out and on most broadcasts the empty seats are impossible to avoid.

Why NASCAR faded

Although there are many theories on why NASCAR failed to live up to the promise it showed in the 90s, it points to a problem many companies have experienced when they lose focus on their most loyal users. In NASCAR’s situation, it was the audience in the Southeast that largely built the sport, the same people who made “Duck Dynasty” the most popular television show at one point. It moved races from local venues, as described above like Rockingham, to big cities where they felt they would get exposure to a larger audience. These moves broke the bond between the people in these communities and the sport. While NASCAR aimed for the big audience, its base started to disintegrate. Now the sport no longer has its core customers (or at least does not have as strong a relationship with them) and has not added enough casual viewers in the bigger market to stem this loss, let alone grow. Also, with the base less engaged, the virality of these fans has decreased and is bringing in fewer new fans. Continue reading “It’s all about the base”

90-day plan to increase your company’s innovation

While everyone agrees that companies need to innovate to succeed, actually doing it is often quite challenging. While most successful companies can lay credit to some innovations, most have occurred by chance and the companies actually lack an orderly, reliable way to innovate regularly. A recent article in the Harvard Business Review, “Build an Innovation Engine in 90 Days” by Scott Anthony and two of his colleagues, does a great job of laying out a tactical plan to help your company to innovate.

While some companies address this problem by building large—and expensive—innovation centers or R&D facilities, Anthony shows there is a middle way that almost any company can pursue regardless of resources. In many ways, what Anthony describes (and the term he uses) is the equivalent of the minimum viable product (MVP), from lean start-up fame. In this case, it is a minimum viable innovation system (MVIS). There are four phases to building such a system, and it takes about 90 days.

Phase 1: Define your innovation buckets

There are two types of innovation: improving existing products or operations, and generating growth by reaching new customer segments or markets. For an innovation program (including an MVIS) to be successful, everyone involved must understand the two types of innovation. If your team fails to make this distinction, you increase the likelihood that you either discount the importance of innovations that strengthen the ongoing business or demand too much revenue from the new-growth initiatives too early. Innovations meant to improve the core business (the former of the two innovation categories) should be tied to the current strategy and managed mostly with the primary organizational structure. The return on these projects will be relatively quick with high initial returns and thus should be funded at scale.

While all of your innovation projects may be focused on core activities, they you are probably missing preparing for the future and reaching your long-term goals. New growth initiatives, the latter category, should fill this gap. These new growth initiatives push the frontier of your strategy by offering new or complementary products to existing customers, moving into adjacent product or geographic markets, or developing something utterly original, perhaps delivered in a novel way. Continue reading “90-day plan to increase your company’s innovation”

How negative churn can be a strong growth driver

I came across a great post by VC Tomasz Tunguz on a great growth mechanism: negative churn. In effect, negative churn creates the same compounding effect as a high-rate bond; over time it generates tremendous growth. Negative churn means that the actual churn rate, the number of customers or players moving out of a collective group over a specific period of time, is lower than the increase in the value of the retained customers.

What is negative churn

Tunguz uses a great example to illustrate negative churn. Say your company has a five percent monthly churn rate, which means that five percent of your users quit each month. In Tunguz’s example, the remaining 95 percent of the customers increase their spend with your company by ten percent, so total revenue from this cohort (group) of users is equal to 105 percent of the revenue from the previous month. Even with 5 percent monthly churn, each month this cohort of users becomes increasingly valuable.

In the 5 percent monthly churn case, the company exits the year with $919 in monthly recurring revenue and the customer lifetime value (assuming a one-year lifetime and no virality) is $77. In the negative churn case (where you have a 10 percent monthly increase in spend), your company’s revenue is 73 percent larger at $1592 and the LTV is worth $133.

In both cases, the company has the same number of customers (or game, players). But with negative churn, revenue is over 70 percent higher. This shows the power of compounding growth every month.

This graphic from Tunguz’s blog illustrates the opportunity:

How to achieve negative churn

Continue reading “How negative churn can be a strong growth driver”

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Key takeaways

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Behavior

Engagement

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Why NASCAR faded

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True thought leadership

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Phase 1: Define your innovation buckets

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What is negative churn

How to achieve negative churn

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