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.
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.
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.
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.
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.”
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:
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.
I have written many times about LTV (customer lifetime value) being the lifeblood for a successful business, as a new customer has to have a higher LTV than the cost of acquiring the customer, and how retention is the biggest driver of LTV. Given the importance of retention, a recent article by Google’s Adam Carpenter, Why the first ten minutes are crucial if you want to keep players coming back , provides great guidance on what to measure and then improve to have the most impact on improving retention.
Retaining new installs is arguably the most important driver for whether your product succeeds or fails. As Carpenter says, “retention is the primary metric, since if you can retain your new players, you can always figure out how to make money. If you can’t retain any players, you have no ability to make money.”
The metric to focus on is your day 2 retention (D2). According to Google’s data, median day 2 retention (number of users active on the day after they installed your game divided by the number of installs in your cohort) is 38 percent, while exceeding 46 percent puts your product in the top quartile (3/4 of all products would be doing worse than you if hit this target). Conversely, if your D2 is 22 percent, then 78 percent of the players you pay to acquire do not come back the next day. It is very hard to justify marketing spend if 78 percent is wasted.
While the amount of time a player spends in your game after they install it is important, the critical factor is the first ten minutes. If you divide Carpenter’s data by performance, the strongest games (top quartile) average Day 2 retention of 52 percent, with 22 percent returning the next day with virtually no gameplay the first day and then seeing D2 steadily increase with each successive minute played (see chart below). The second quartile has a similar curve but starts at a lower point. The key, though, is the impact from the first ten minutes.
In Carpenter’s analysis, performance is driven by how quickly in the first ten minutes you lose players. For games in the top quartile, retention starts out good and steadily improves. In the second quartile, retention is essentially flat across the first minute and a half, and then begins to increase steadily. In the third quartile, retention is largely flat for the first four minutes, then increases but more slowly than highly performing games. In the lowest quartile, retention declines in the first two minutes and does not start to improve until the fifth minute.
These early patterns have a strong impact on players. The worst apps lose 46 percent of their new installs by the fifth minute and this number increases to 58 percent by minute ten (so in less than ten minutes you have less than half the players you have spent money acquiring). The top games, however, only lose 17 percent of players by the fifth minute and 24 percent within ten minutes (retaining more than twice as many players as the lowest group).
Once you understand the importance of the first ten minutes, you need to focus on improving this performance. Carpenter explain this as avoiding retention flats and gorges. “The first pattern is called the ‘Flats’. This anti-pattern shows largely flat retention for up to 10 minutes, with the percentages only rising meaningfully after the 5th to 10th minute. The second is the ‘Gorge’, whereby retention appears to drop minute by minute for the first five minutes or so, and then begins to rise again.”
Once you review your data, you can understand if you are suffering flats or gorges. To alter the curves, you can then:
By focusing on a quick, fun experience, you are more likely to get your customer to return on Day 2. As the Google data shows, if you get them back the next day, you will enjoy greater long-term success. By increasing this one KPI, you will experience a disproportionate positive impact on your LTV.
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.
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 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.
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.
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.”
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.
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.
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
Conversely, traditional game companies succeed with a very different skill set
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.
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.
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.
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.
I have heard many people in the game industry complain that advertising in games (free to play or otherwise) is a bad thing, or even immoral. The reality is it is actually a benefit to people—your customers—if done properly. It provides players with more options, allows developers to create games they would not try and allows people’s favorite games to remain live.
Most other industries embrace advertising because it provides the same benefits to users. Viewers of television often prefer networks that do not charge (though they complain about it sometimes) rather than pay subscription fees. Those who hate advertising, though, have options to focus on networks like HBO or use services like Netflix. Print readers often enjoy subsidized costs for newspapers and magazines as advertising revenue allow the magazine to offset most or all of its costs. Additionally, advertising allows many publications to give away their product for free in exchange for the user to consume ads.
The reality is that advertising benefits players in many ways and developers should embrace it as a way to provide more value to users. By integrating advertising into the business model, you can find ways to add value to your players and give options to players you other wise had to neglect because they did not monetize through in-app purchases.
A friend recently mentioned how he met with a game company who told him they were doing great but not focused on monetization yet. This should be a red flag if you hear this at your company or a company you are thinking of working with.
If there was a Google translate for game development, when you type in the phrase we are not focused on monetization yet, the output would be “want don’t want to admit to ourselves or to you that our game does not work and is a failure.” Continue reading “We are not concerned about monetization and other lies people tell investors”
Most people understand the importance of selling to your existing customers, or monetizers in a free to play environment, but most efforts and features are built around attracting new customers. That despite the fact that the probability of selling to an existing customer is 60-70 percent while the chance of selling to a new prospect is 5-20 percent, according to Marketing Metrics. A recent online article from Matt Perl called “5 Sexy Rules of Customer Retention,” (better named than any of my posts) discusses five straightforward ways to improve sales to existing users.
You often give incentives to new users, give repeat customers some reward. As Dan Ariely has written, free is very powerful, so giving your customers something free (with no strings attached) is a very powerful tool. I once wrote how thank you notes can help your business, as they can provide a low cost way to give back something to your customers.
The goal is to recognize customers automatically when they come into your game or encourage them to register. The less friction involved (if you can identify and track automatically without violating privacy issues), the more customers you can touch in this way. Company or product portals are a strong and deep way to tie together a customer with your brand and if your customer comes to you without any pushing than you are doing a great job. Continue reading “How to develop repeat customers”
One channel largely neglected in social media marketing conversations is the growing importance of podcasts. While not as sexy as SnapChat or Secret, this relatively old channel is becoming a critical component of effective social media marketing. Podcasts were originally built for the iPod (hence the name) but are now listened to not only via iTunes but also multiple IOS and Android apps and even via the good old Internet.
Looking at the numbers, the growth of consumer interests in podcasts is clear. A Washington Post story reported that podcast subscriptions on iTunes reached 1 billion. An Edison Research report shows that over 39 million people listen to a podcast last monthly and that 20 percent of podcast users consumer six or more podcasts weekly.
The accessibility of podcasts has led to their growth. As the Washington Post writes, “despite some early enthusiasm, podcasts faded in popularity in the early 2000s, partly because of the many steps required to download them and play them in a vehicle. The introduction of the iPhone in 2007 changed that, making podcasts as convenient to access as a Netflix show. It’s easier to play them in cars, too, as automakers build wireless media functions into more and more models. And faster WiFi and mobile data speeds have made podcasts a snap to stream.”
There are multiple benefits for integrating podcasting into your social media marketing mix. First, they increase engagement. Rather than a few seconds to share a message with your customer or player, you have minutes or more to share your narrative. Rather than a superficial message, you can go in-depth on the value your product has to the user, how to get the most out of your product, the background of how it was made, etc. These messages can have a strong impact on users, if they get more value out of the features they are more likely to keep using it. Continue reading “The power of the podcast”