Why you are probably under allocating resources to retention

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.

1. 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.
2. 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.
3. 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.
4. 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.

Key takeaways

• 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.