Lloyd’s favorite posts – Page 5 – The Business of Social Games and Casino

Why your game’s metrics mean nothing

From the beginning of time (or at least 2009), companies have been basing decisions on game metrics, investors have used performance metrics to base investment decisions and outside analysts have used game metrics to estimate the health of a company. Unfortunately, all of these applications of metrics are deeply flawed and often mislead the decision-makers, investors and analysts (sometimes intentionally, sometimes not).

The charts below from Appsflyer show the critical flaw in looking at a game’s metrics:

Retention performance on Android by source:

It all depends on the source

The first lesson from these charts is that performance depends largely on the source of users. Although these charts show retention metrics, I am certain monetization and virality performance shows similar behavior. Thus, your performance metrics are incredibly biased by the source of traffic and metrics for your game overall only reflect the quality of the various user sources.

As an example, assume your Bingo game has D7 (Day 7) retention of 20% and an ARPDAU (average revenue per daily active user) of $0.25. Your main competitor’s game had D7 retention of 10% and an ARPDAU of $0.15. Based on this information, you may decide to cancel other projects and focus on this game. As a corporate development expert, you may aggressively try to acquire this company. The problem, however, is that the competitive game may be three years old and the company is using a very weak user acquisition channel that does not have a high cost because they have gotten all potential users from the better channels. Conversely, you may have acquired users through a Facebook mobile ad campaign targeting high-value Bingo players. Thus, your new users are of much higher quality than those from competitive Bingo game.

Even if your game is significantly worse, its metrics would look better at this stage. If you decide to focus on this game, the new users you bring in end up performing much worse than when you made the decision. This deterioration is not due to the game getting worse; it’s just based on a different set of users. If you end up acquiring the company for $100 million, you will then find out that as you try to grow it, you have trouble getting new profitable users.

Trends can be misleading

Trends one of are the most powerful analytics tools in your arsenal, as they show how your product or game is performing over time and if it is improving or deteriorating. Looking at the Appsflyer charts, however, it’s easy to see that that trends can largely be created by changes in the user mix. As the user acquisition team changes the mix of players, the new mix could create upward trends even if the game has not improved or deteriorated. The changes in behavior will be caused by the changes in user mix.

The only metric that counts

I have written many times about customer lifetime value (LTV), and the variance in metrics by source shows the central importance of focusing on the lifetime value to CPI (cost-per-install) equation. To summarize, LTV is how much profit a new player will generate for you in total and is a function of retention, monetization and virality. As long as your LTV is higher than the cost of acquiring that customer (CPI for paid user acquisition on mobile or web), you want to continue acquiring players.

Given the variance in performance by source that the AppsFlyer charts show, the LTV by source will also have huge variance. Thus, the goal is to have an LTV higher than the cost of user for that source. The LTV on a global scale is not important, it is finding pockets where LTV is greater than CPI and then acquiring against those targets. Any target KPIs (key performance indicators) outside of LTV being greater than CPI are worthless because this last equation will determine the success of your game. Anything else can be manipulated (e.g., buying users from certain sources who generate your “goals”). As long as LTV exceeds CPI for a source, you can acquire users from that source and grow your game. Once there are no sources where the LTV for that source are higher than the CPI (even if overall LTV is higher than many sources but not higher by source), you cannot buy users and the game will stop growing and start withering.

What it means

The high variance in performance of players by source has several important implications:

You must track performance of users on a cohort/source basis. Only by comparing similar users can you understand how your game is performing.
The sophistication of your user acquisition/growth team is critical. Managing CPIs is meaningless if it is not tied to the performance of the users; you need growth experts who can get you users with the highest yield (delta between LTV and CPI). You also may otherwise miss opportunities where your metrics may not appear to support buying expensive traffic, but that traffic will perform so well that it is a good value.
Holistic game metrics (sometimes referred to as vanity metrics) are meaningless or even misleading. You need to focus on keeping LTV higher than CPI for your sources of traffic.

The critical point is not to focus on vanity metrics that can be manipulated and are not actionable. Instead, focus on the performance of your product for specific cohorts of customers.

Key takeaways

There is an extremely high variance in performance of users based on the source of the users. Thus, it is misleading to look at overall metrics as they are largely a result of your user sources.
You must track performance of users on a cohort/source basis. Only by comparing similar users can you understand how your game is performing.
It is critical to build a strong growth or user acquisition team. Managing CPIs is meaningless if it is not tied to the performance of the users, you need growth experts who can get you users with the highest yield (delta between LTV and CPI).

The importance of competitive intelligence

In most businesses, the need to know what your competitors are doing is a given. In the social gaming space, however, competitive intelligence (CI) is either an afterthought or not even considered critical. That thinking at best leads to a sub-optimal product and at worst facilitates losing your market to another product.

Why Competitive Intelligence is important

Good competitive intelligence is invaluable to all companies, including those in the mobile and casino gaming spaces.

CI shows you the minimum quality level acceptable for your game. In the mobile space, most users will try multiple applications and then settle on one, a winner take all environment, though in casino they may play two or three. Thus, your potential customers are also playing your competitors’ products and deciding which one to invest their time in the future. If your game is clearly inferior, weaker graphics, slower tech, etc., you have lost.
Your competitors are not stupid and you should learn from them. Internally, they are looking at the same opportunities and problems you are trying to tackle. By understanding features and initiatives they are taking to improve, they can inspire you on ways to manage the situation. Not that you want to copy everything they are doing, but understand how they are approach problems and if you have a different approach make sure your solution is better before deploying it.
You can learn from their mistakes. It is great to make mistakes because it means you are trying unique initiatives; it is not great to repeat mistakes as that has no value. What is even better is if somebody else makes the mistake to learn from them without having the cost.
You ensure you are value competitive. A car company would not never release a new model without understanding how its price and features compare with other cars. It would base the price on the competitive feature set, including branding, and then price their car so it is a reasonable option for consumers. Very few people will purchase an auto when they can get a comparable one for half the price.In the game space, companies mistakenly believe users are price inelastic. Many players, particularly those likely to monetize, understand what they are spending money for and how much they will get for it. The value is often in play time (e.g., I will spend $20 in a bingo app to play an extra hour). If the player feels your game is much more expensive than comparable games, they are less likely to spend in your app and will shift their spending to competitors (and you will see lower revenue from higher prices).

Continue reading “The importance of competitive intelligence”

Don’t treat employees like you do your fantasy league

One of the things that bothers me to no end is when managers treat employees the same way they treat their fantasy team. When you have a fantasy football or baseball (or soccer) team, you trade players, you move them around on your roster, you release players and sign free agents, etc. You may have to deal with a salary cap or other roster limitations.

Although many people, myself included, take it very seriously, it is not the real world. You are not actually putting Jay Cutler on the field or releasing Tom Brady (as some fantasy league owners did early last year). Your moves have absolutely no impact on their success in real life.

Fantasy leagues are fun and a great social experience but they do not represent management training. What leads to fantasy league success, regularly changing your roster to leverage match-ups and hot new players, is not the way to build your team or company. Unfortunately, I have seen many cases where managers and companies treat their employees as if they are in a fantasy league. Interestingly, some of the best leaders I have worked with have fallen into this trap.

Playing “Fantasy League Company”

I sometimes see managers trading employees. One manager may need someone with a particular skill set, another manager may need to cut their head count and they agree to “trade” the first employee for a lower-cost employee.

Sometimes managers play fantasy league within their own organization. They will move people into different positions because it improves their chances to “win.” It will not be based on the employee’s performance or career path but there is a short-term opportunity to solve an issue by taking a person from one role to a potentially completely unrelated role.

Another problem arises when a company closes a division or unit. While planning the closure, management often decides where members of the team will end up. Although it is great that the team members are not losing their jobs, they are often moved to positions inconsistent with their existing position, working on products they do not believe in or forced to work with people they do not want to work with. Continue reading “Don’t treat employees like you do your fantasy league”

It is about creating a monopoly, not winning

In Peter Thiel’s hot book, Zero to One: Notes on Startups, or How to Build the Future, he makes many interesting observations (some I agree with, some I do not) but one in particular is particularly valuable. Thiel asserts that great companies are not great because they beat their competition, they are great because they do not have competition. Although he does not quote Blue Ocean Strategy, it is very consistent with their thesis and data that shows that companies that create new markets have much higher economic returns than those who come up with new strategies to defeat their competition.

Basic economics

Thiel’s point about the benefits of creating what he refers to as a monopoly, what I call a blue ocean opportunity, resonated with me as he use basic economics to prove the point. At its core, classical economics shows competition will drive out excess profits. That is why although Exxon makes a lot of money, they do not make a higher return on investment than another oil company. Whatever you are doing, somebody else will copy.

Thiel points out that, “Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.“ Instead he advocates building a virtual monopoly, a company so good at what it does that no other firm can offer a close substitute. Continue reading “It is about creating a monopoly, not winning”

Success = Vision + Process + Output

Possibly the best book I have read in the past year (not just in 2015) is The Success Matrix by Gerry Langeler. Langeler is a highly successful venture capitalist and entrepreneur who credits this concept to his success. The Success Matrix puts forth a very straightforward concept: Success needs a combination of vision, process and output. Langeler primarily uses this idea to suggest how to build and lead a successful team. Rather than trying to find people who excel at all three variables, since very few exist, great companies combine people so that the company can excel at all three elements.

The three elements of success

Vision. Vision represents a broadly understood sense of direction that encompasses competitive leadership in your industry over time.
You should ask whether you or your employee has the vision of where you need to go and what you need to do over time. This vision should be sensible, focused and well grounded with a sense of direction. As Langeler writes, “this is different than any specific task, product plans or targets. It means precisely what it says. If you are headed in a direction, you know roughly where you are going, even if you don’t know exactly where you’ll end up.”
Process. Process is the structures, methods and procedures to produce repeatedly timely, high-quality products or services, independent of changes in people. You can determine if you have strong process whether profitable products and services are
being produced with predictable regularity.
Output. Langeler defines as output as profitable products and services are being produced with predictable regularity. “Profitable products and services” is the key driver for output. It identifies if costs are in line value is recognized in the marketplace. Any Output short of profitable is wasted effort. “Predictable” regularity speaks to whether the Output is both sustained and sustainable. Short bursts of excellence are not enough.

Evaluate your team

Very few people are strong at all three components (vision, process and output) of the success matrix. If you look at vision, process and output as binaries (people are either good at them or not), there are nine possible combinations to classify everyone (e.g., good at vision and output, not process; good at process and output, not vision). Langeler actually puts labels on each of the nine possible combinations but that is the one element of his work I do not like; I feel that the labels are loaded and create unnecessary value judgments. Continue reading “Success = Vision + Process + Output”

Ignorance is a competitive advantage

I recently had a conversation with a gaming industry CEO whom I deeply respect that reinforced a MIT Sloan Management Review article, “Embrace Your Ignorance” by Michael Schrage, about how the savviest leaders promote and embrace ignorance. The thesis for both Schrage and the CEO was that you cannot accurately predict what your customers will want, like or need. Thus, you need to embrace this ignorance and run experiments to get the data.

Moneyball and The Innovator’s Dilemma

I have seen many companies where the leadership “felt” they understood the customer and would develop new products for these customers. It leads to project green light meetings very similar to the draft room in Moneyball, where people argue based on their experience which initiatives have the most potential. It is also one of the biggest contributors to the huge number of failed projects, particularly in the gaming space where we typically see more than 8 out of 10 new games fail.

This issue is actually often a bigger problem with executives who have had past successes. Even if they knew their existing or past customers very well, they do not necessarily know what a broader or new market wants. Even their existing data can skew innovation effort, which is the core point of the Innovator’s Dilemma: Companies that have been leap-frogged often create innovations for existing markets rather than new markets.

You already are ignorant—accept it

In Schrage’s article, he discusses how Microsoft’s Ronny Kohavi (a pioneer in online experimentation) challenges tech-savvy audiences when he speaks. Kohavi shows screenshots of actual A/B tests that Microsoft has run for website design. He then asks his audience to predict the outcome of the tests. Although the audience is sophisticated, they almost always fragment with different opinions. Kohavi then advises, “stop debating…it’s easier to get data.” Continue reading “Ignorance is a competitive advantage”

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”

Foster a growth mindset in your company to improve growth

There are two ways of looking at employees, and for them to look at themselves, either a fixed mindset where they either possess or lack talent, or a growth mindset, where your team can develop new skills. An article in the Harvard Business Review, “How Companies Can Profit from a ‘Growth Mindset’” by Stanford’s Carol Dweck, shows the benefits having a growth mindset has for your company.

According to Dweck’s research, failure is the end of the world for some people but an exciting opportunity for others. People with a growth mindset enjoy challenges, strive to learn and consistently see potential to develop new skills. Conversely, those with a fixed mindset view talent as a quality they either have or do not have.

In the article, Dweck extends her definition of mindsets from individuals to companies. Dweck and her colleagues found that some organizations believe their people have a certain amount of talent, thus a fixed mindset. Others held the opposite view and those companies were considered to have a growth mindset.

Dweck also found the company mindset had a significant impact on its employees. In organizations with a fixed mindset, employees largely felt there was a handful of “star” employees that were highly valued. The employees who felt this way were less committed than employees at growth-mindset companies and did not think the company had their back. These employees worried about failing so they pursued fewer innovative projects. They regularly kept secrets, cut corners and cheated to try to get ahead. Continue reading “Foster a growth mindset in your company to improve growth”

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