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How to succeed in the mobile game space by Lloyd Melnick

Tag: 9X

Why the fear of cannibalization is fear of the inevitable

One of the worst reasons to take action (or not launch a product) is fear of cannibalization. Companies in almost all industries, including game companies, often create strategy to minimize how much some of their products or promotions pull users away from other products from the company. The concept is that you want to optimize your company’s profits by driving users to the most profitable products and ensuring that you do not move a customer or player to a product that costs less.

Some companies have very advanced algorithms to ensure they only move customers to new or other products if it does not have a greater negative impact on the product they are using or playing. Other times they will only release products in certain markets to protect their core market.

While in the short term these strategies can enhance sales, they have a long-term negative impact on profitability and can even endanger your company. The problem with this approach is that while cannibalization may diminish short term profits, it prevents competitors from winning over your customers.

The logic for forgetting about cannibalization

The argument against focusing on cannibalization is simple logic. If a customer or player will switch to one of your other offering, even if they spend less in that offering, they prefer it, otherwise they would not switch. They might prefer the price point or just like the product better but they are happier with the new offering than the existing one they are consuming. If the customer prefers the new product, then any competitive offering will have to be that much better to entice them away from your company.

You can create a simple equation to show the cost of cannibalization. To put it into mathematical terms, lets call your existing product X. Your new product is Y. You earn A per week for X and 0.5A per week for Y. Your analysis says to keep your customer from switching from X to Y, even if you need to ban the customer from Y.

The problem is that your company does not exist in a vacuum. Your competitor will eventually launch its own product Z which costs your customer 0.75A per week (or A per week but provides more value). Even if it takes 8 weeks for your competitor to launch, they eventually will. Thus, you may earn 8A from the customer but nothing else. Instead, if you have a six month (24 week) typical customer lifetime, you earn 12A from that customer instead of 8A. While cannibalization seems like a negative, moving your customer to the less expensive offering actually increases your revenue 50 percent.

Your competition will kill your product if you do not

The primary reason that you cannot avoid cannibalizing your product is that virtually all companies are in a competitive ecosystem. As smart as you think you are, your competitors are also smart and always trying to make their products better. If you can build your product at a lower price, they can build a pretty good copy at a lower price. If you can improve the product by adding certain features or changing the theme, one of your competitors has probably had the same idea and will also try it. While it may take some time for your customer to learn about the competitive product, they will in time. If you keep your customer from their optimal product, a competitor will offer it to them.

Retention, retention, retention

I have written about retention many times and how it impacts the lifetime value of your customer or player. Retention is the key to optimizing a user’s lifetime value, even if they spend a lot if they only do it once or twice it is hard to generate much revenue compared to a loyal user for years. Additionally, as the costs of acquiring users not only in games but in many businesses continues to increase, the relative value of existing customers also increases. It becomes more expensive to replace these customers with new ones so keeping existing customers is critical.

Focusing on cannibalization, however, means you are not giving customers the product they most want to consume. If you let your customer choose which offering they prefer, they will chose the one that puts them on the highest indifference curve (in non-economics speak, the one that makes them happiest). If instead, you decide to limit their options, you are putting them on a lower indifference curve (they are less happy). The less content a customer is, the more likely they are to churn.

The 9X rule strikes again

Further compounding the value of giving your customer their best possible experience is the 9X rule. I wrote about this rule a couple of years ago but in effect it says that a new product needs to be nine times better for someone to switch to it. That’s why a product like the Microsoft Surface, which may be a better tablet, garners very little market share because it is not nine times better than the iPad most people are already using.

The need for a product to be 9X better to get someone to switch compounds the argument above about the value of moving people to their favorite product even if it cannibalizes another offering from your company. They would not switch unless the new offering was 9X better. For a competitor then to win them over, it needs to be another 9X better. So rather than winning your customer over with something 9X better than your original product, they need to release a product 81X (9X9) better than the original product. This simple equation shows how much more competitive you are by disregarding cannibalization.

Focus on the customer

The bottom line is that rather than creating complex and sophisticated algorithms to minimize cannibalization, you should focus on providing as much value to your existing customer as possible. If this value causes a revenue loss, that is the price you have to pay to keep the customer longer and maximize their lifetime value to your company.

Key takeaways

  1. Concern about product cannibalization, customers switching to a less profitable product of your’s, are misguided and potentially cost your company revenue.
  2. If you do not direct your customers to the offerings they prefer from your company competitor’s will give them a reason to switch and you will permanently lose that customer.
  3. By allowing your customers to move to one of your offerings that they prefer, a competitor will need to offer them something 81X better than the product they are currently using rather than just 9X better.

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Author Lloyd MelnickPosted on April 13, 2016March 16, 2016Categories General Social Games Business, General Tech Business, GrowthTags 9X, CannibalizationLeave a comment on Why the fear of cannibalization is fear of the inevitable

Winner takes it all

I recently read The Second Machine Age by Erik Brynjolfsson and Andrew McAfee and they highlighted a phenomenon extremely critical for technology and game companies. The economy has evolved, especially for apps and other entertainment products, from a system in which there are multiple profitable products to one where there is one product that sees tremendous success and virtually all competitors are failures.

Second machine age

Why the economy has become winner takes all

There are three reasons described in the book that winner-takes-all markets have come to dominate the landscape. In addition to the three I detail below, I have noticed an additional strong factor in the app and gaming spaces.

  • Shifts in the technology for production and distribution, particularly these three changes: a) the digitization of more and more information, goods, and services, b) the vast improvements in telecommunications and, to a lesser extent, transportation, and c) the increased importance of networks and standards. Digitization creates winner-take-all markets because with digital goods capacity constraints become increasingly irrelevant, according to Brynjolfsson and McAfee. A single producer with a website can fill the demand from millions or even billions of customers.Facebook is a great example. Since they have had little trouble scaling (not meaning to underestimate the tech effort but proprietary technology was not the key to Facebook’s growth), it did not leave room for competitors to be a successful second or third social network. In the twentieth century, even a business as successful as a Facebook would only have been able to satisfy a subset of potential customers, leaving profitable opportunities for competitors to satisfy people who could not get Facebook. With digitization, everyone can get Facebook.
  • Technological improvements in telecommunications and transportation that expand the market individuals and companies can reach contributes to winner-takes-all markets. If there are many small local markets, there can be leading local providers in each (winners for those markets), and these local heroes frequently can all earn a good income. If these markets merge into a single global market, top performers have an opportunity to win more customers, while the next-best performers face harsher competition from all directions. A similar dynamic comes into play when technologies like Google or even Amazon’s recommendation engine reduce search costs. Suddenly second-rate producers can no longer count on consumer ignorance or geographic barriers to protect their margins.A great example is the demise of chain restaurants, like Darden’s Red Lobster chain, which were very profitable until Yelp came around and helped people find better dining options.As the authors point out, when there are capacity constraints or significant transportation costs, then the best seller will only be able to satisfy a small fraction of the global market. Inferior products will also have a market. Fast forward to now and the top-quality provider can capture the whole market. The next-best provider might be almost as good, but it will not matter. Each time a market becomes more digital, these winner -take-all economics become more compelling.
  • A third reason the authors cite is the increased importance of networks (like the Internet or credit card networks ) and interoperable products (like computer components) can also create winner-takes-all markets. The App store is an example of this phenomenon. When Apple’s app ecosystem is strong, buyers will want to buy into that platform, attracting even more developers. But the opposite dynamic can unravel a dominant standard, as it almost did for the Apple Macintosh platform in the mid-1990s. Like low marginal costs, network effects can create both winner -take-all markets and high turbulence.
  • There is a fourth driver that the authors do not discuss but that contributes to the winner-takes-all phenomenon: The emergence of freemium and free-to-play business models. When a product is sold discretely as a one-time purchase, it is created to have a limited life, be a consumable. People will use it or play it, finish it and move onto a product so there is room for second and third best products. With a free-to-play or freemium product, however, rather than creating a consumable the company creates a service that is constantly upgraded with new content and features. Thus, the user never uses up the product and has no need to switch to the second best offering.

Continue reading “Winner takes it all”

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Author Lloyd MelnickPosted on September 30, 2014October 15, 2014Categories General Social Games Business, General Tech BusinessTags 9X, digitization, Erik Brynjolfsson, Second Machine Age, Winner Takes All2 Comments on Winner takes it all

Why a new product or game has to be 9X better

I have seen many games and tech companies fail even though their product is better. Related, I have written why fast following is almost always a doomed strategy. A classic article from 2006 in the Harvard Business Review, “ Eager Sellers and Stony Buyers” by John Gourville, does a great job of explaining why new products need to be 9X better to disrupt and succeed.

There are thousands of companies trying to build a better mousetrap, be it a more appealing version of Clash of Clans, a better taxi service than Uber or a better marketplace than eBay. While research has shown that businesses that introduce new products are more likely to flourish than those that do not, new products fail at a rate of 40-90 percent depending on the category. One study showed that 47 percent of first movers failed, meaning that approximately half the companies that pioneered new product categories later pulled out of those businesses.

These statistics beg the question: “Why do consumers fail to buy innovative products even when they offer clear improvements over existing ones?” Few would question the objective advantages of many innovations over existing alternatives, but that is often not enough for them to succeed. To understand why new products fail to live up to companies’ expectations, Gourville delved into the psychology of behavior change. Continue reading “Why a new product or game has to be 9X better”

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Author Lloyd MelnickPosted on July 23, 2014August 24, 2014Categories General Social Games Business, Social Games MarketingTags 9X, behavior change, John Gourville, new product launch7 Comments on Why a new product or game has to be 9X better

Get my book on LTV

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Lloyd Melnick

This is Lloyd Melnick’s personal blog.  All views and opinions expressed on this website are mine alone and do not represent those of people, institutions or organizations that I may or may not be associated with in professional or personal capacity.

I am a serial builder of businesses (senior leadership on three exits worth over $700 million), successful in big (Disney, Stars Group/PokerStars, Zynga) and small companies (Merscom, Spooky Cool Labs) with over 20 years experience in the gaming and casino space.  Currently, I am on the Board of Directors of Murka and GM of VGW’s Chumba Casino

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