Had the pleasure of being on Deconstructor of Fun podcast earlier this week to discuss the subscription business model as well as some other timely topics for the game industry. If you want to learn more about the subscription model (or developments at some game companies, listen to the podcast here.
One issue I see repeatedly with game and gaming companies, and many other industries, is under-indexing their investment in retention versus acquisition and reactivation. While there is no evil plot to neglect retention, it is the most challenging part of the life cycle to determine ROI on investments.
With acquisition marketing, most successful companies have visibility into the CPI (or CPA depending on how you look at your UA efforts) they are paying and the LTV for those players. By comparing CPI and LTV, there is a clear ROI. Companies can then allocate resources to acquisition marketing as long as the ROI is above their needed return on capital. Also, as you are probably spending thousands or even millions of dollars per month on acquisition, optimizing that spend justifies additional resources (analytics, tools, etc.) as you want to get the most out of your spend.
Reactivation is similarly easy to quantify. You look at the cost of getting the player back and then how much they are likely to spend once they are back. Not only is it easy to calculate the ROI on reactivation spend, you can justify the investment because the revenue will be higher than the investment. No executive can argue with spending $1 to get $2. The only caveat with reactivation spend is ensuring you are not spending to bring back customers who would return regardless.
While retention is your most important KPI, it often does not get the same level of love because the ROI is much less obvious. You are not adding a user and revenue. You are not bringing back a lost customer. Retention, however, warrants more investment than every other part of the business combined.
Retention spend avoids spending $1 for $0.40
Every dollar you spend to retain existing players impacts your recurring player base. With acquisition marketing, even the best apps and games are lucky to see a 40 percent D1 rate (40 percent of customers who download the app return the next day). Thus, for every dollar you spend on a new player, only $0.40 or less is contributing to your product’s performance the next day. Given that a normal (though still good) D7 retention rate is 10 percent (1 out of 10 newly acquired players play on the seven days after downloading your game), you effectively only have $0.10 left from that $1 of spend still working for you.
Conversely, virtually every dollar spent on existing players is contributing to your product for days or months. A contest that encourages people to play more touches all your players and could impact their behavior over their lifetime. You are not losing 60 percent or 90 percent even before you can do a thorough analysis.
Retention spend can make the cost of acquisition less painful
The first subject everyone talks about at conferences (and even importantly at the bar during conferences) is how expensive it has become to acquire customers. Yet despite the money and resources spent on acquiring the player, the same effort is not made keeping and delighting the player.
Many marketing teams feel their job is done once the player is in the game (or has made a purchase) and thus their efforts are focused on acquisition. The true value to the company, though, is turning those new customers into a loyal player. While it is not solely marketing’s responsibility, it is a critical part of the equation. If marketing acquires a player for $5, they then spend $7.50 and churn, it may look like (and is) a marketing success as they have achieved a 150% ROAS (return on ad spend). However, if they could use retention marketing to have that player make $7.50 purchases every month for a year, the impact is 12X better than the acquisition spend. Moreover, the cost of getting that player to become a repeat customer is almost certainly not 12 times the acquisition cost, but a fraction of that cost. Thus the ROI is significantly higher.
Retention is not just about the product
At this point, many of my marketing friends are probably saying (or thinking) that retention is the responsibility of the product team, they have already done their job. Product and marketing are no longer two distinct functions. Companies like Facebook and Uber have blitzscaled because their products were also their acquisition channels (hence the term growth hacking), thus these products were the marketing. Conversely, product can only touch players when they are in the product (though they can build systems to bring customers back). Marketing, however, can impact players any time. The player may not have been in the game a week but you can still impact them by email, text, Facebook, Snapchat, television, blimp, etc. Retention is largely about triggers, reminding customers to use a product again, and marketing must work with product to ensure customers stay engaged.
A bird in the hand…
Optimal investment is not only about maximizing return but also managing risk. There is much less risk dealing with a known entity (an existing player) than an unknown. If you do take more risk, you should only do it if you will have higher return. A risk-based approach to allocating your resources also suggests that retention is a neglected investment vehicle. With new user acquisition, the new player is a question mark. They may fit your existing LTV curve or they might over/under perform. There is little information to base your estimate (largely the performance of other players acquired from the same or similar channel).
With an existing player, it is easier to estimate the impact of additional retention marketing. You have data on what they play, how often they play, what incentives impact behavior, etc. Based on this data, you can estimate accurately the return one additional marketing dollar will bring. These estimates will track much closer to actual results than new acquisition, especially with new channels, thus reducing the volatility of your return on marketing spend.
Retailers get it
While game companies, and many tech companies, disproportionally emphasize acquisition, retailers have learned over hundreds of years that their marketing budget is better optimized for retention. Most of the advertising and promotions from retailers are focused on bringing back existing customers, not getting them into the store for the first time. JC Penney or Target or Curry’s are not focusing their marketing on getting new customers, they are focused on driving behavior from existing customers. Sales are designed to optimize repeat purchasers and getting existing customers to spend more, very few are built to bring in new customers.
Amazon Prime is arguably the biggest factor making Amazon one of the most valuable companies in the world. Prime, however, does not get many people to try Amazon. Instead it converts existing customers into ones who spend more and are more loyal. The dynamics of retail are not that different than gaming, it is just that they have learned that there is a higher return in devoting resources to existing customers.
What to do
The value of retention marketing does not diminish the importance of acquisition or reactivation but you should design your structure so it is not neglected.
- Build your organization so that retention marketing is on an equal level. The head of retention should not report to acquisition. You should not have an EVP or SVP leading acquisition and a Manager leading retention. On the org chart, they need to be at comparable levels.
- Ensure you have KPIs in place measuring retention, what gets measured gets done. Virtually any company is monitoring daily its acquisition spend, CPI (or CPA) and ROAS. You need to be both measuring and reviewing regularly the success and growth that your retention team is driving.
- Rebalance your resources to ensure that you are optimizing your retention programs. Not only should you be running programs, but you need sufficient resources to build the campaigns, create the marketing collateral and analytic resources to review and optimize. Do not skimp on these resources for the quick thrill of acquisition or reactivation.
- As well as physical resources, you need to deploy sufficient budget to retention for long-term success. Start with a basic smell test. If you are spending $1 million a month on acquisition and your retention budget is $25k, probably something wrong. Try to align all your marketing spend with the understanding that retention drives significant value at lower risk.
If you do not focus on retaining players, any success will be short lived. To become great, your entire company needs to focus on keeping your customers.
- While the primary focus of most game companies is user acquisition, retention marketing is often neglected. Retention marketing, however, is more important to a company’s prolonged success.
- For every dollar spent on acquisition marketing, at least $0.60 is lost the next day only 40 percent (at best) of players come back. Conversely, all dollars spent on retention marketing impact customers over their lifetime in your game.
- You should ensure your structure is built on optimizing retention as well as acquisition and allocate resources (both people and money) to reflect the immense opportunity with retention marketing.
People in the game industry are continually asking about “a new business model” but they usually want new monetization techniques (ie. gatcha mechanic, piggy bank, etc.). Now, however, there is a real opportunity to disrupt the industry with a new model, subscriptions. I have been in the games industry since 1993 and in that time there have only been two new models, try-before-you-buy and free-to-play. Subscriptions may usher in the next era of gaming.
Try-before-you-buy was introduced in the early 2000s and perfected by Big Fish Games, who released via download a game every day that was free for the first hour and then the player would have the option of purchasing the full game. While the model did not have a huge impact on the traditional game companies (who were selling their product for a fixed cost in retail), it was blue ocean as it brought an entirely new demographic into gaming. For the first time, gaming was not dominated by teen age boys playing in their parents’ basements (or 30 year old boys playing in their parents’ basements) but saw an influx of female players, particularly older women.
Early in the 2010s the gaming industry experienced its greatest disruption. Free-to-play gaming gained traction in the US (and Europe) after dominating Asian markets. In this model, games were truly free and over 90 percent of the players would never spend a penny. The games, however, were built to get the most engaged players to spend to improve or speed up their gaming experience, and many of these players would spend tens or even hundreds of thousands of dollars in their favorite games. Social gaming companies, led by Zynga, gained millions of daily players, pulling them from other gaming or entertainment companies.
Free-to-play was truly disruptive. Household names like Atari, Acclaim and THQ (which had earlier reached over $1 billion in sales) went bankrupt. Zynga saw its valuation reach over $10 billion. Disney and Electronic Arts both spent hundreds of thousands of dollars to acquire companies in the space. The concepts behind free-to-play have grown to shape the video game space, even those old-school companies that still monetize with an upfront purchase use in-game monetization to drive their revenue growth.
Given the impact of free-to-play and the millionaires it, everyone has been looking for the next disruptive business model. Based on how other industries are evolving, subscriptions are likely to be the next disruptive model in the game industry,
How subscriptions are changing the world
While Asia provided a clue that free-to-play would disrupt Western video game markets, developments in other industries show the likelihood that subscriptions will emerge as a disruptive force. The largest retailer in the world (by market cap), Amazon, uses its Prime subscription service to lock in customers. Salesforce.com, the most important company in the enterprise software space, eschewed the high fixed fee model for a subscription model that left its established competitors in the dust. Adobe, the largest provider of graphics software, abandoned its old business model to move to a subscription model and is now valued at $135 billion. Netflix, the second most important entertainment company in the world (nobody is beating Disney for a while), gained its position with a subscription model. Even Disney is betting its future on subscriptions with Disney Plus.
Enabling this shift is a change in people’s attitude. Ten years ago, people would not pay for digital content and overall wanted to own things. People did not pay for music (remember Napster). People would buy a DVD or CD, even if they would only experience it once. The examples above (and the hundreds I left out) show that attitudes have shifted. Millions of people are willing to pay Spotify money every month without owning a song. According to the Reuters Institute, in the United States, the proportion of people ages eighteen to twenty-four paying for online news leaped from 4 percent in 2016 to 18 percent in 2017. Attitudes have clearly shifted.
Why subscriptions work
Subscriptions have succeeded because they better align customers with providers than other business models. Rather than the linear model of selling a product to a customer, the subscription model creates a dynamic where the company to please constantly its customers. As Tien Tzuo says in Subscribed, “companies that know what their customers want, and how they want it, will succeed over companies that spend a lot of time and effort creating a product they think is a good idea, then spend equal amounts of time and effort trying to persuade people to buy it.”
Further driving the success of the subscription model are the benefits it has for the provider. Subscriptions allow companies to start the month (or year) with a guaranteed base of business. Rather than having to estimate how many units you will sell, you look at your subscriber base and can accurately forecast your revenue. This stability allows companies to market aggressively, invest in new content, etc., as they can predict cash flow.
The subscription model also aligns companies with their customers. As Tzuo writes, “instead of thinking about reseller margins and unit sales, [companies are] thinking about subscriber bases and engagement rates.” Companies driven by a subscription model have direct ongoing relationships with their customers. They no longer have to segment customers, they now have individual subscribers. With the industry leaders (Amazon, Netflix, etc), every subscriber has their own home page, their own activity history, their own red flags, their own algorithmically derived suggestions, their own unique experiences. And thanks to subscriber IDs, all the boring transactional point-of-sale processes disappeared. As companies can never be too close to their customers, subscriptions create the loop that makes customer intimacy a reality.
Will subscriptions work in the game industry
Now that we agree that subscriptions are a great opportunity overall, will they work in the game industry. First, many game companies already are using this model. According to a great blog post by Google, they have seen global growth in game subscriptions of 70 percent year over year. Second, it is working. According to the post, game companies that have integrated subscriptions experience 20 percent higher retention. They also have seen higher overall monetization. Finally, subscriptions offset risk in developing and launching new content. According to Tzuo, “regardless of whether a show is successful or not, investing in sharp new content helps Netflix to both (a) attract new subscribers and (b) extend the lifetime of its current subscribers. Those shows don’t go away! Together, they’re increasing the overall value of the portfolio. They are instrumental in driving down customer acquisition costs (as more subscribers sign up) and increasing subscriber lifetime value (as more subscribers stick around for longer).”
How you should implement subscriptions in games
While subscriptions are an exciting opportunity, success with the model will come down to execution. Just as hundreds (or thousands) of game companies failed to implement successfully free-to-play, succeeding with subscriptions is more difficult than adding another package to your purchase page. There are several core concepts in building a product that leverages subscriptions.
Subscriptions need to be about access
The biggest challenge, and most common mistake, game companies face is what to provide for the subscription fee. The easy answer is virtual currency, after all it is what customers are willing to pay for with in-app purchases. The easy answer is wrong. As stated in the Google post, “it’s important to move away from the mindset that subscriptions are just an auto-renewal mechanism for discounted IAP. Instead, subscriptions need to be thought of as offering highly-retentive long-term access to content, rather than the one-time situational purchase of content offered by IAP.”
Successful subscriptions are about giving players access to content and special benefits, access that can be gained or lost. In a social casino, it could be access to new slots or unique table games. In a game like Archero, it could be access to special levels or powers. The benefits could also be exclusive tournaments, special avatars or unique in-game events. The key, though, is not limiting (or even relying) on giving players virtual or premium currency but access to a premium experience.
Keep it simple
One of the core principles in creating successful products is to focus on simplicity, which is often very complex to do, and subscriptions are one area where it is easy to fall into the complexity trap. Companies with very successful subscription offerings have very few options.
If you offer customers too many options, it is likely to overwhelm them and preclude them from choosing any of the options. This concept of cognitive load is critical to the success of many products, from games like slots to apps like Uber. Given that the human brain consumers 20 percent of the body’s energy but only is 2 percent of the body’s mass, it is important to understand that people will subconsciously work to reduce the amount of energy the brain is using.
Cognitive load is how much info people are processing at any one time. Cognitive load is tied to working memory, the more information in that short-term memory the higher the cognitive load. As cognitive load increases, consumers are less likely to make a purchasing decision.
With subscriptions, this is directly tied to the offerings. If a player has different options ranging from the term of the subscription, monthly costs, benefits levels, they are likely to choose none. For example, you might offer people a month-to-month, 3-month-, 6-month or 1-year plan, with pricing at $4.99, $9.99, $19.99 and $49.99, each with different benefits. Rather than the player finding the one that optimizes their utility (to use an economist term, or makes them happiest, to use a human term), they are more likely to shut off and just pass on the offerings.
Instead, offer them one or two (at most) options. It can be a regular subscription or a premium one (additional benefits) or a short-term plan and an annual plan. You do not see Netflix offering ten different types of subscriptions. The key is make it very easy for the player to understand the value and choose between the two plans and whether or not to subscribe.
Keep it honest
One of the reasons subscriptions took so long to be commonly accepted is that until recently they were part of a sleazy industry. Companies would trick customers into signing up for a subscription, then make it very difficult to cancel the subscription. They might let you sign up easily, then require you to call them to cancel at a call center open one hour a week every second week. Even then, the agent you spoke to would do everything humanly possible to keep you from cancelling, creating an awful experience. These practices soured people overall on signing up for subscriptions. With social media and sites like TrustPilot, word quickly gets out of deceptive subscription tactics.
Preventing customers from leaving or tricking them into subscribing is not only unethical, it is bad business. One of the fundamental values that subscriptions create for a business is the connection with the customer. It forces the company to ensure every month it is creating value for the customer and that is why the customer renews or maintains the subscription. Everyone on the product team looks at new content and features and judges whether it will help retain customers and bring in new subscribers. While scamming customers may bring short term gain, it is the customer connection that subscriptions create that leads to great companies like Amazon, Netflix, Spotify, etc.
The best companies use subscriptions to improve their underlying business. Tien Tzuo writes in Subscribed that “the smart [companies] realize that if they really want to retain their subscribers, they need to focus on building a great service, without relying on lame tricks like hiding the cancel button.…Make it easy for customers to leave if they want to. You can certainly ask them why they’re leaving, or try to win them back, but don’t get in their way—the digital equivalent of blocking the exit with a hulking security guard. When you build subscriptions into your game, let customer value drive the offering rather than tricks on keeping customers from cancelling.
Build a loop
A successful subscription plan should be tied to engagement in the underlying game. The more a customer plays the game, the higher the value of the subscription. According to the Google post, “in mobile games’ subscriptions design, some offer a booster or bonus points, to reinforce the action of ‘play.’ Some create a durable good, such as a permanent building or character, that levels up as a player remains a subscriber for a longer period of time. In these cases, the desired action is “continue to subscribe.” In other cases, subscribers get bonus premium items, currency or points to reinforce the action of in-app purchases.
Looking outside the game industry, airlines have done a good job of creating a loop around their frequent flier programs. With frequent flier programs, members improve their status by flying more or buying expensive tickets, such as business class. According to the Google post, “the ‘earn’ criteria here — flying or spending — is precisely the desired customer actions that the airlines want to reinforce.”
Another important element of a successful subscription program is that benefits evolve. According to Google, “as the players invest more in the game, whether it’s with their time, skills, or other IAP, the subscription benefit also compounds.” Thus, the player can unlock more sophisticated content or new challenges that would not have been relevant for them earlier in their experience.
VIPs are the core of virtually any social game’s success. Most free-to-play games generate 60-90 percent of their revenue from the top 1 or 2 percent of players. Many product managers have avoided subscription programs because of concern on how it would impact VIPs. If a player can subscribe to a VIP program for a fixed sum, the concern is that would put a cap on how much the VIP would spend in the game.
This concern leads back to the first point on subscription design, that is should be about access, not a replacement for existing purchases. Thus, the subscription plan might give the VIP access to slots they would love to play but not chips to play those slots.
When thinking about your VIPs, do not forget they are already VIPs. If someone is spending significantly in your game, do not try to take another $5 or $10 from them every month. Instead, turn the subscription into a celebration of their VIP status. Give them a free subscription, the goodwill will be worth much more than the short term revenue you would generate from forcing your VIP to purchase a subscription.
Use subscriptions to drive acquisition and convert players
In addition to driving monetization and engagement, subscriptions are a great way of increasing retention they are also a strong acquisition tool and powerful CRM element early in the product life cycle. First, an offer of a one or three month complimentary subscription can entice a potential customer not only to try your game but invest time to learn about your product.
Second, subscriptions can help convert players into customers of in-app purchases. They provide a way to let players see and test the spectrum of in-app offerings. According to Google, “Scopely’s game Wheel of Fortune frames its subscriptions offer as an all-access pass. These subscriptions feature exclusive rewards that a potential buyer would want in addition to a sales discount. Surfaced right after the first-time user experience (FTUE), with benefits such as ‘more energy, this subscription aims to increase these new buyers’ in-game engagement, and cultivate a habit of playing regularly and investing in their future gameplay.”
Third, subscriptions can increase virality, helping your existing users bring in new customers. Campaigns that let your subscribers give free months to their friends, and get free months themselves, are very effective at driving new user acquisition. For example, a promotion where a player can gift a new player three free months, and get a free month for every new player who signs up, helps you acquire players with the only cost being the lost subscription revenue of your advocate.
Making subscriptions a reality
Rather than being a follower, future successful game companies will push forward with subscriptions and help disrupt the industry, not react to the disruption. By focusing on execution and building a strong subscription offering, it is likely we will see the next Netflix or Spotify.
- Many industries are evolving from a discrete purchase model to a subscription model. From retail (Amazon) to music (Spotify) to entertainment (Netflix) to enterprise software (Salesforce.com), the subscription model is redefining winners and losers. The game industry will eventually succumb to the same forces.
- To create a successful subscription program, the offering needs to center around providing customers with unique access and benefits, not replicating what they get when making in-app purchases.
- Successful subscriptions also need to build an honest relationship with players, provide simple options, create a loop where subscribers enjoy more benefits by playing more, appeals to new potential customers and rewards your VIPs.
While revenue in the social casino space continues to increase (a streak that has not been broken since the first days of Zynga Poker and Slotomania), dark clouds on the horizon have started to dampen the enthusiasm. Most social casino companies would not publicly disclose that they are expecting growth to slow (or reverse) but unspoken indicators are bearish.
Stagnant player growth
The greatest threat to the social casino industry is that the user base is not growing. Over the past couple of years industry revenue has continued to increase but active players has remained virtually stagnant. The revenue growth has been driven by certain companies (particularly Playtika) becoming increasingly adept at growing revenue per customer, especially among their VIPs. At some point, however, social casino operators will hit a ceiling as VIPs cannot and will not spend more.
Actions show that the top companies do not believe in the space
While no social casino operator has publicly warned about the challenges they are facing, their actions speak more loudly. Playtika, the largest social casino company, acquired Seriously last month, after acquiring Wooga last year.
Huuuge Games, the biggest success story in the social casino space in the last three years, launched a publishing arm. Critically, it is focused on hypercasual and traditional social games (such as Traffic Puzzle) rather than social casino. Given how involved Huuuge is with social casino, if it expected tremendous growth it would almost certainly be focusing its efforts to further increase market share in this space.
The public markets are also talking
While social casino operators are showing how they look at the industry through their actions, the public markets also show how investors view the opportunities in social casino. The first pure play social casino IPO, SciPlay (the social casino operations of Scientific Gaming), has seen its share price drop from $16 when it went public in May to $10.35, losing over 30 percent of its value.
From 2015 to 2017, virtually every Zynga’s earnings call highlighted its social casino division. Initially, it focused on the growth of its slots products (primarily Hit It Rich!), which was largely the only bright spot for the company. Not only did it tout the success of its slots products, but the big IP licenses it was signing for future products (such as Willy Wonka). The calls then incorporated Zynga’s success with Poker, which experienced a renaissance. Very noticeably, over the last year, Zynga has downplayed or even ignored the role of social casino in its growth projections. In part, this is due to the success it has experienced with recent acquisitions (and the struggles it has experienced recently in the social casino space), but it also highlights that investors are not very receptive to initiatives in the social casino space.
Again, actions speak louder than words. While investors are not perfect (The Big Short, anyone), they are focused on optimizing return and look across a broad spectrum to find the best opportunities. The lack of appetite for social casino shows that investors no longer think social casino is easy money.
The other looming risk
Another cloud dampening the prospects for social casino is real money gaming. The US is disproportionally important for the social casino industry, it derives a much higher percentage of total revenue (over two thirds) than other areas of the video game industry (which derives over 50 percent of revenue outside the US). While there are too many factors to determine causality, the US is the only major social casino market where real money online casino is largely illegal. Thus, many customers who would normally play in a real money environment can only get their online casino experience through social casino.
Eventually, as real money casino play becomes legal in more US states, it represents an existential risk to the social casino industry. This risk is not an immediate one, legislation has to be approved on a state-by-state basis and I do not expect a significant number of states to approve legislation until 2022-2023 at the earliest (sports betting is a very different phenomenon). Investors and companies, however, do look beyond the next few years to determine their best opportunities and real money gaming is an acute part of that equation.
What social casino companies should do
First, innovate. While it sounds trite, innovation is the key to revitalizing the sector. The industry (and many other parts of the game industry) has been driven by copying what is already working, trying to do it a little better and continued optimization. They are thus relying on fewer players to generate more revenue. Coin Master is a great example of how a company can generate hundreds of millions of dollars in the social casino space by breaking the mold and creating a casino product for new customers. Finding Blue Ocean opportunities using casino mechanics can reverse the dynamics threatening the industry.
Second, embrace Real Money gaming. While Real Money is a risk, it is also potentially salvation. Land based casino companies largely resisted social casino for years (one particularly reactionary one still does) only to find that customers who also play social casino have a higher lifetime value. MGM’s relationship with Play Studios (MyVegas) has driven millions of dollars of value to MGM, displayed by MGM’s increasing its support (actions speak louder than words).
While the relationship between social and real money online has not yet been proven, the size of the opportunity should generate more attention from social casino operators. Real Money online gaming, a $54+ billion industry, dwarfs social casino. If social casino companies can learn how to capture a portion of that revenue (and player base), it can exceed greatly the growth rates of the past.
- Despite growing every year since the first social casino products launched, the industry faces significant risks. There are highlighted by recent growth driven by improved monetization of existing players rather than appealing to new customers.
- Further corroborating this problem is how leading social casino companies are looking outside the space for acquisitions while investors are showing little interest in social casino.
- To combat these trends, social casino companies need to look for Blue Ocean opportunities (use social casino mechanics to appeal to new customers) and leverage the roll out of real money gaming.