Lifetime Value Part 27: How to know if your advertising is working (with benchmarks)

The key to any successful product, particularly a mobile game, is for your CPI (cost per install) to be less than your LTV (lifetime value of a customer). As long as it costs less to acquire a new customer than they are worth, you have a healthy business. Once the cost of acquiring a new customer exceeds the value of that customer, your product or company will languish and eventually die.

The challenge of computing LTV

While virtually nobody would argue the logic behind using LTV to drive your marketing, implementing it is not always easy. Many companies do not have a reliable LTV formula for all of their products or a data scientist (or team) to create one. New products also do not have enough data to calculate LTV.

Even when you have a reliable LTV calculation for your product, every cohort of user will have a different LTV. Players acquired one month will not have the same LTV as those acquired a different month. Players acquired through one marketing channel will not have the same LTV as players acquired through a different channel. Same can be said for country, marketing creative, platform and many other factors.

You will also not have enough data early in a campaign to calculate LTV reliably. However, you do not want to spend on unprofitable campaigns and you want to support good campaigns with more resources.

The answer to measuring campaigns reliably

The best proxy for understanding if your CPI is below your LTV is ROAS (return on ad spend). ROAS measures how much revenue a certain cohort of users generates over the first X days of acquiring those players (with X normally measured after 3, 7 and 30 days).

While it sounds overly simplistic, short term ROAS tracks very closely with your long-term return, thus whether CPI < LTV. You can be very certain if your 30 day ROAS is performing ahead of target, your acquisition is profitable. Moreover, I have found that even 3 day ROAS is very indicative of long term profitably. I have not yet come across a situation where ROAS has indicated a campaign is profitable for it to falter when analyzed after months or years. I am now very comfortable relying on 3 day and 7 day ROAS metrics to decide whether to continue, increase or decrease spend for a product, specific vendor or campaign.

Benchmarks to target

Without benchmarks, ROAS numbers would be useless. You need to know what numbers to target. As I have been in the social casino space for about five years, I am only comfortable providing social casino benchmarks. When evaluating a product or campaign, I target a 3 day ROAS of 5 percent, 7 day ROAS of 10 percent and 30 day ROAS of 20 percent. For other genres, such as hyper-casual (where you generate most of your return early), your targets would be very different so understand your space before making decisions (actually before launching a product).

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What to do if you are missing your benchmarks

As with all metrics, ROAS provides guidance, not black and white answers. If your ROAS is slightly below the benchmarks, you may not have a problem, it could be noise. If one agency is outperforming another by 1 or 2 percent, again it may not be indicative, it may be luck (one caught an extra VIP). Conversely, if you are missing even by a little, it could be indicative of a deeper issue. A small miss also means that you should adjust conservatively until you see your 30 day ROAS numbers.

If performance is significantly behind ROAS benchmarks, then you need to find the cause. If it is across the board (all campaigns), then your product has issues. You either need to address these issues and improve retention or monetization (the key drivers of LTV and return) or not invest in the product. If the performance is worse on a particular platform, you need to dive deeper into your technical performance on that platform versus other platforms and how the user experience (CX) differs on the underperforming platform. If the underperformance is with a partner or channel, you should adjust your spend to focus where you have a stronger ROAS.

Key takeaways

  1. While the success of any product or company long term is ensuring its cost for acquiring a customer is lower than the value of the customer, it is difficult to calculate in the early days of a product or marketing campaign. ROAS (return on ad spend) based on the first 3, 7 or 30 days of a campaign provides a good proxy for whether the campaign is successful.
  2. In the social casino space (other genres may be different), the benchmark target ROAS is a 3 day ROAS of 5 percent, a 7 day ROAS of 10 percent and a 30-day ROAS of 20 percent.
  3. If your ROAS is underperforming significantly, you need to evaluate if you should continue investing in the product overall or in the specific marketing channels, while adjusting your marketing mix to optimize ROAS.

Why e-mail is still one of your most effective channels

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While growth hackers are continuously looking for the sexy, new trendy way of obtaining or reactivating users, they often neglect one of the most effective methods: e-mail. A recent article published by McKinsey & Co., “Why Marketers Should Keep Sending You E-mails,” makes a strong case for e-mail marketing. In fact, the article shows e-mail is 40X more effective to acquire users than Facebook and Twitter combines (though maybe 1/40th as cool). The argument is very consistent with what I wrote about Bayes’ Theorem: The underlying baseline data is very powerful in driving results. In this case, the “40X more effective results” assertion states that about 91 percent of US consumers use e-mail daily, and that e-mail prompts purchases at three times that of social media with an average order value that is 17 percent higher than from other sources. Given e-mail’s power to improve your user-acquisition efforts, there are three keys to making it a successful channel.

Focus on the customer journey

Understand the recipient’s journey from the time they receive your e-mail to the final desired action. This action is not opening the e-mail or clicking on a link but it is potentially installing an app, making a purchase, etc. While it is good to optimize every part of the e-mail, from the subject line to the images to the copy, you should focus on optimizing the entire customer journey. Once they click on a link in the e-mail, do not stop optimizing. Rather than taking them to a generic landing page, keep their experience consistent with what persuaded the user to click on the e-mail in the first place. And ensure the experience is just as good on a mobile device, given that 45 percent of all marketing e-mails are opened on a mobile device. According to Google, 61 percent of users are unlikely to return to a mobile site they had trouble accessing and 40 percent visit a competitor’s site instead. Continue reading “Why e-mail is still one of your most effective channels”

How to generate growth through referrals

With the ever increasing costs of acquiring users (either to a game, an app or a retail establishment), the ability to acquire users by referrals becomes increasingly important engine for growth. Jason Bosinoff, an engineer at Airbnb, one of the fastest growing tech companies around, recently posted about how it built its successful referral program.

Airbnb referral screen

Not only does a referral program help you get users, it generates users who usually have a very high lifetime value. This happens because word of mouth is a very directed user acquisition channel, people will refer a product or game only to friends they believe are likely to value the product.

Airbnb’s referral program is pretty straightforward, with both the sender and recipient getting $25 travel credit when the invited user completes their first trip (or $75 if the recipient hosts). One of Airbnb’s keys to success is that users can send and accept referrals on all platforms (web, iOS and Android), a lesson many game companies would be smart to replicate.

According to Bosinoff’s post, there were five steps to creating the successful referral program:

  1. Know what success looks like. The first step is to define success. What metrics are you trying to impact and what would represent a positive result. Create three cases: good, better and best.
  2. Measure. Integrate robust analytics into your program so you can constantly be tracking how you are performing versus the success metrics that you have set. You want to be tracking everything on the customer journey from when they first see the prompt to create a referral to when the accepter rates their experience after using your product. Airbnb built a rich logging taxonomy of over twenty user events that happen during the referral invitation and sign up journey. With this tracking in place they could follow an invitation from invite page impressions to referred users’ making bookings or becoming hosts. They could then easily review an metric or view it graphically.
  3. Test and improve. You then want to test the product on a subset of your user base. This testing both allows you to improve the stability of the referral program and think of additional functionality that could improve metrics. Some functionality that Airbnb added during its testing process included personalized referral codes and landing pages as well as customizing the experience based on what the user clicked to enter the experience.
  4. Go live. Launch your referral program and compare with the results you targeted in step 1. As your analytics are implemented across the product, you should easily see how you are doing compared with plan.
  5. Iterate, iterate, iterate. Compare the analytics you are getting with the plan you established in the first step. Where you are trailing your projections, optimize the referral program to overcome the weakness. For example, if you are seeing fewer invitations per user, increase the incentive for using the program. If you are seeing too few senders, increase surfacing of the program. If you are seeing a weak acceptance rate, change the copy of the referral or increase the benefit to the end user.

Continue reading “How to generate growth through referrals”