If you are interested in the basics of customer lifetime value (LTV) and missed my presentation last week at the IGB conference, it is now available on Youtube.
Tag: customer lifetime value
Lifetime Value Part 30: Why clumpiness should be one of the KPIs you focus on
When calculating customer lifetime value (LTV),there is one KPI that is often neglected, clumpiness. Clumpiness is a term coined by Eric Bradlow, a marketing professor at Wharton. Think of clumpiness as binge-watching Ozark (or, if you must, Tiger King). Rather than an extended, constant period of consumption, a short, intense buying burst. By understanding and tracking this behavior, you have a significant weapon for improving LTV.
Defining clumpiness
Clumpiness refers to the fact that people buy in bursts and that those customers could be extremely valuable. When calculating customer value and segmentation, we focus on analysing recency, frequency and monetization of the customer (what Bradlow refers to as RFM). This analysis is based on customers making purchases in a regular pattern, i.e. coffee, diapers or milk. Bradlow’s analysis, however, shows that for certain products (and I would classify social and casino games here), customers actually monetize in bursts. Thus, you need to add C for clumpiness to your RFM modeling.
Why clumpiness is important
Bradlow researched how to predict the future value of customers (predicted LTV). Bradlow explains, “[l]et’s imagine you want … to predict who are going to be the valuable customers in the future. And you have four things you can use to predict it. As I mentioned: recency, frequency, monetary value and let’s say the marketing spend towards the customer. Those are the classic ways in which companies build what are called scoring models…. [T]he findings of my research suggest that higher clumpy customers are worth more out of sample, meaning in their future value, even after controlling for RFM and marketing expenditure — which means we have found another variable that firms should track [concerning] our customers and use it to predict their worth in the future.”
This finding is particularly interesting as most companies, especially in the game space, currently base their LTV projections on the RFM model. While this calculation may have worked in the traditional retail economy, consumption has evolved, especially for digital goods. Binge consumption is a fact of life in the entertainment space, and gaming sits squarely at the center of the modern entertainment environment. This analysis is consistent with Bradlow’s findings, where he says, “[i]f you look at historically purchased goods, clumpiness really isn’t there. But if you look in the new wave, the new economy, clumpiness is pervasive in every data set I’ve analyzed.”
Using clumpiness insights
Calculating clumpiness should be easy and not require tracking any new events. It is the same data you are using to calculate R, F, M and LTV. There are then several applications for this insight:
- Incorporate it into your segmentation to get a better understanding of who your VIPs and high value players are, then focus your premium treatment (and benefits) on these players.
- Use clumpiness to predict better what players are likely to become VIPs. This will help you concentrate your early retention efforts and reinvestment.
- Focus reactivation on your clumpy players. Bradlow explains, “[i]f you reactivate them, they’ll come back and be clumpy again, and do a lot of stuff in the future. “
- Do not simply rely on the KPIs you have always been trusting. Do not rely on simple theories of how your players behave, also look at things about arrival time or when people play. People who come in bursts, then go away and then come back in bursts and then go away are fundamentally different and have a different LTV.
By understanding clumpiness, you have a more accurate predictor of LTV. Once you know how to predict your LTV, you can then impact it by making changes that drive these variables.
Key takeaways
- We normally focus on analyzing recency, frequency and monetization of the customer but by adding a new KPI, clumpiness, we get a much better understanding of their expected value.
- Clumpiness refers to the fact that people buy in bursts and that those customers could be extremely valuable.
- Clumpiness can help you better segment players, predict VIPs and target your reactivation efforts and spend.
Lifetime Value Part 25: Why retention is THE KPI
Whenever I write about lifetime value (LTV), I always try to stress that the key to growing a high LTV is retention. I recently came across an article, The One Growth Metric that Moves Acquisition, Monetization, and Virality by Brian Balfour, one of the top experts on growth, that does a wonderful job of showing just how powerful retention is to your LTV. Balfour identifies four areas that retention impacts.
Acquisition
As you improve retention of existing users, you also acquire more new customers. A number of organic acquisition channels, such as virality and user-generated content (UGC), work when existing users take an action that introduces new users to your game or product (via inviting friends, sharing, word-of mouth, creating new content, etc.). A larger base of active users leads to better acquisition metrics. Players remaining in your game or product can invite new people to the product, so the more you retain, the more players who can send invites.
Monetization
Monetization is the second area impacted by retention. I get very frustrated when people, usually Product Managers, act as if there is a trade-off between retention and monetization. The reality is that retention drives monetization rather than damaging it. First, retention allows players to spend more frequently. If you retain a customer for three months rather than one month, they have 3X the opportunity to spend. Moreover, if your model is more robust than simply discreet purchases (either in-app purchases for a game or sales for a retailer), you also generate a longer stream of advertising or subscription revenue the longer the user is engaged with your product.
User acquisition becomes a competitive advantage
Paid user acquisition is one of the critical elements to growing a game or app, you need to have a positive return on ad spend to justify scaling your product. More importantly, since a bidding model drives user acquisition in the app space, with acquisition muscle you can push competitors out of acquisition channels, dominating a market and growing faster. As described earlier, your users are generating more revenue (they are in the product longer so spending more often and driving ad and subscription revenue), you can afford to outspend your competitors.
Payback period
Retention accelerates your payback period, allowing you to avoid raising additional funds or providing more free cash flow to funnel into acquisition. Payback period is the amount of time to pay for your full loaded user acquisition costs. As Balfour writes, “if you have a longer payback period, you either need to raise more money to fuel acquisition or wait longer to reinvest in acquisition. If you have a shorter payback period you will be able to reinvest the cash earned sooner in acquisition. Since improving retention drives monetization – meaning you make more money over a designated period of time – it also shortens your payback period.”
Build with retention top of mind
With retention driving so much value, you need both to create products that will retain customers or players and then the live services need to focus on improving retention. While it is sexy to try to boost ARPDAU, you will create the most value by strengthening your retention.
Key takeaways
- Retention is the most important area to focus on, as it drives four areas critical to growth: virality, monetization, paid acquisition and payback period.
- Retention generates more users because there is more virality, word of mouth, user generated content and an ability to spend more to acquire.
- Retention drives revenue because players have more opportunities to make purchases and generate additional advertising and subscription revenue.
Why Super Mario Run was destined to fail: Lifetime Value Part 24
I am surprised that people are surprised about the lack of success for Super Mario Run from Nintendo. While I do not claim that I can predict the future, and this time of year I scoff at everyone’s predictions because if the so-called experts actually could foresee develops they would be much wealthier than they are, in January 2012 I laid out the reasons traditional gaming companies were unlikely to succeed in the free to play space . The reasons I stated nearly five years ago were also the headwinds that doomed Super Mario Run.
Different businesses
As I wrote then, the biggest challenge traditional game companies face when moving to a free-to-play model (at the time it was more Facebook than mobile) is that they are different businesses. Old school game companies, be it Nintendo or EA to Take2, are skilled at creating a great product that someone buys, enjoys and finishes. Free-to-play companies are creating a service (hence the now relatively old term software as a service), something that customers use over time and becomes part of their life (like Netflix or Amazon Prime).
Building and running a service requires a different skill set than building a great game. The former needs
- Analysts to look at customer behavior and suggest changes to continually improve the product
- Product managers to create new features and elements that keep existing players engaged and ensure strong elder gameplay for the most committed players
- User acquisition specialists who not only can bring in new players but can reactivate the most valuable players
- CRM experts who can communicate with existing players both inside and outside of the product through multiple channels to increase their engagement and loyalty.
Conversely, traditional game companies succeed with a very different skill set
- Great game designers who can create a fantastic experience, though usually of a limited nature
- Marketing gurus who can get people to purchase a product
- Distribution experts who can ensure the product is placed prominently in front of potential customers.
I have no privileged information in how Nintendo structured its Super Mario Run team but based on the product and how they are managing it, I would bet the focused more on the skills needed by traditional game companies than those creating a free-to-play game service experience. The game clearly has great designers and their promotion by Apple shows they still know how to manage channels.
They do not understand free-to-play LTV
What they are lacking is an understanding of free-to-play economics, primarily how to optimize player lifetime value. I have written way too many times about customer lifetime value (even wrote a book on it) but it is still a concept that traditional game companies like Nintendo fail to grasp. In summary, lifetime value is the monetary value to your company of a new player and it is a function of monetization (how much they spend), retention (how long they remain a customer) and virality (how many other customers they bring in).
In the traditional game space, this equation is quite easy. For Nintendo, LTV is largely how much a payer pays for a DS and Wii game. It does increase by downloadable content (DLC), whether they buy additional Nintendo products and if they encourage friends to buy but it is largely driven by that retail purchase of a game.
This experience is evident in how Nintendo approached Super Mario Run. The product is built so that the free element is a teaser to get a $10 purchase. It is not built to create a long-term relationship between players and the game, where they return (and often spend) daily for months or years (no exaggeration, take a look at Mobile Strike or Clash of Clans or most of the games on the top grossing charts). They are still focused on the discrete purchase, selling the razor and not the blades.
This approached doomed Super Mario Run (and by the doomed, I meant compared to expectations and potential, as it will still generate millions), even if they were seeing more traction getting the initial $10 purchase. In the world of free-to-play, $10 is largely an irrelevant transaction. Supercell was acquired by Tencent for $8.6 billion because players are spending hundreds or thousands of dollars in the game. By focusing on the first ten dollars, Nintendo missed where the bulk of free to play revenue comes from and largely capped what most players would have to spend. Thus, a player who Nintendo could have built a relationship with that would generate $20,000 is now spending $10 and moving back to a Supercell or King or Zynga game.
Core game companies will continue to flail in the free-to-play business
I said it almost five years ago and it has largely held true, traditional game companies won’t succeed in free to play. Since I wrote that article a handful of game companies have seen some free-to-play success (most notable Hearthstone) or acquired respectable free-to-play businesses but most have either failed or gone bankrupt. We still have not seen EA turn their core games (FIFA, Madden, Battlefield) into free-to-play franchises. There is nothing from Microsoft or Sony on any mobile chart. Take2, not a player in the mobile space. You get the point. It’s no longer a question of when the core game companies will successfully move into free to play (and mobile) but when they will just give up (and investors will stop expecting it) and focus on what they understand.
Key takeaways
- The failure of Super Mario Run by Nintendo was very predictable, as traditional game companies face many structural issues in creating free to play mobile apps.
- The biggest hurdle is their team structure, as they are built to create a product and not run a successful service.
- Core game companies also do not truly understand free to play economics, that customer lifetime value is driven by long-term retention and monetization and not a discrete purchase.
My lifetime value book is now available
I am excited to announce that my book (with an assist from Wendy Beasley) on lifetime value, Understanding the Predictable, is now available on Amazon in both a Kindle and print edition. Understanding the Predictable is based on my blog posts about lifetime value with some case studies added to illustrate the various concepts and key takeaways (now a staple of my blog) for each section.
If you do read Understanding the Predictable, I would appreciate it if you posted an honest and open review on Amazon (good or bad) so others will see the plusses and minuses. I hope you enjoy.
