For those of you who were not at Casual Connect and missed my talk on Blue Ocean opportunities in social casino and why they are the best path forward, below is a copy of my deck. The key takeaways are
- Social casino is one of the bloodiest of red oceans, with excellent well-financed companies competing ferociously. The best path to success is to take a Blue Ocean approach.
- Blue Ocean is all about turning non-customers into customers, rather than competing for the same customer.
- You do this by looking at what you can remove from the existing product offering, what you can add, what you can increase and what you can reduce. This leads to a new offering that appeals to new users.
The full presentation can be seen here:
For those of you who foolishly decided to take a vacation this summer rather than stay at home and read my blog, I wanted to summarize what I feel were my top ten posts this summer (and below will also summarize the rests of my posts since I am sure you will want to catch up on all of them). Continue reading
As this is my nineteenth post about customer lifetime value (LTV), I obviously think it is very important, but I wanted to take some time to provide examples of how it can impact almost any business. Even if the examples do not cover your initiative, they will hopefully help you see how understanding, marketing and designing for LTV is crucial to any company’s success. Examples range from tech companies to business types that have been around longer than the United States. The breadth of companies that LTV is critical for shows its central importance.
Mail order catalogs
Catalog companies, from the days of Sears and Montgomery Ward, to the current heavyweights like Restoration Hardware and Crate & Barrel, have always needed a deep understanding of LTV to succeed.
With the cost of printing and mailing catalogs, these merchants need an LTV higher than the shipping/printing costs. Thus, they have to first understand different customer segments (e.g., location/postal code, sex, age) and only send catalogs to those people who will have a higher LTV. If they sent their catalog to everyone, the average LTV would decline and make their efforts unprofitable. In addition to understanding the LTVs of each segment they have to optimize along the three key LTV variables: Retention, monetization and virality. If a person reads through the catalog once, makes an order and never picks up the catalog again, it is hard for their value to be higher than the costs of shipping them the catalog. If they, however, keep the catalog and place ten orders in a six-month period, the LTV is likely to exceed to costs of sending them a catalog. Monetization is also critical. If they love the catalog, keep it on the coffee table, but never make a purchase, the merchant loses. Even if they make very small purchases the merchant proposal loses. Successful direct marketing companies succeed by getting larger shares of wallet from their customers. Finally, virality is important even for a non-digital good. If the person shows the catalog to ten family members or friends (who have an equal potential to buy), then the costs of sending a catalog are effectively one tenth as you are reaching 10X people. Continue reading
At this time of year, most of you are expecting me to write a post tying business with sports, but I want to surprise you with a parallel between business and the military. Many of the issues the military faces and the value it derives from reconnaissance (recon) is very similar to those game and other tech companies derive from data. In the military, recon is used to gather intelligence on the enemy. In business, analytics is used to gather intelligence on your customers. By exploring these similarities, you can better use analytics to achieve victory.
How deep to probe
One of the first question military planners face is how far to send its units. The deeper you send your assets, the more information you will gain. As they go deeper, however, the cost increasing as they are more likely to get killed or captured. You face the same decision, how many assets should you devote to getting intelligence on your customer.
To succeed in business, you first need to determine what information you need from analytics to drive your business (the military equivalent of winning a battle). Then, you need to devote sufficient resources to generate this analysis.
What assets to use
Military commanders have multiple ways to reconnoiter the enemy. They can use troops, special forces (e.g., Rangers, SAS), ships, aircraft, drones, etc. These assets are not mutually exclusive and a leader will combine them to generate the information they need.
The key to using customer lifetime value (LTV) effectively is the understanding that it is a prediction, not a value. In my previous eight posts on LTV, I stressed the importance of LTV to the success of your game and company and the key components in determining LTV. After reading Nate Silver’s The Signal and the Noise, I realized that it is crucial to understand that LTV is a prediction and suffers the same risk as other predictions (e.g., elections, weather, sports scores).
The Uncertainty Principle
Many people mistakenly believe (and I may have inadvertently implied this in a previous post), that LTV is an exact function of virality, monetization and retention. It implies you put those variables into a formula and get out a number that shows precisely how much a player is worth. That would be the case if you did it with historical information after five years and then calculated how much that player had been worth to you. However, you are calculating how much the player will be worth, which is inherently different because you are predicting their future value.
The uncertainty principle, a key tenet of quantum mechanics (as popularized by Stephen Hawking), postulates that perfect predictions are impossible if the universe itself is random. Since you cannot have a perfect prediction, your LTV cannot be a distinctly quantified value. You are predicting future events (how much the player will monetize, how viral they will be and how long they will stay in your game) based on the available data. Your LTV model is a simplification of the world the player is in; you are looking at several variables but you cannot look at everything (e.g., chance of war, plague, everyone switching to Blackberry devices). In effect, your LTV calculation is very similar to a sportscaster’s estimate of how many home runs Albert Pujols will hit or a weatherman’s prediction on the likelihood of a hurricane to hit Cape Hatteras. Continue reading
A recent article in the Harvard Business Review, “Three Rules for Making A Company Truly Great,” pointed to three elemental rules that were consistently followed by exceptional companies. There are a lot of hyperbole and clichés about how to create great companies, but the research by Michael Raynor and Mumtaz Ahmed (in the HRB article) shows that three fundamental principles are the keys to success. This finding was based on a statistical study of thousands of companies, so it is much more analytic than what business book happens to be at the top of the charts in a particular week. It is also apparent that these principles apply to social and mobile game companies.
I have written several times about Moneyball and many times about customer lifetime value (LTV), so I wanted to bring the two together. Moneyball was the Michael Lewis book turned into a successful film about Billy Beane and how he made the Oakland A’s competitive by relying on analytics over intuition (for more detail, please see Lessons from Moneyball for the Social Game Industry and Moneyball Strikes Again). The same principles that help the Oakland A’s compete effectively could help social game companies compete, even against better financed firms. The same phenomenon holds with LTV, in which many of the metrics people focus on do not have maximum impact on long-term success.
Runs = LTV
LTV serves the same role in your business as runs do in baseball. Beane and his analysts realized that the success of a baseball team comes down to scoring more runs than your opponent. They thus reverse-engineered the game and its players into what contributed to scoring runs and what contributed to preventing runs. They then used their resources that maximized the delta between runs scored by the A’s and runs that they allowed. Continue reading
One of the biggest challenges for a social or mobile game company is managing the challenges of an industry that is hit-driven. Understanding the laws of probability is a good step in overcoming this hurdle. Since the beginning of time, game companies have been struggling with the hit-driven nature of our industry. Although new markets and technologies (e.g., casual, social, and mobile games) held out the promise of not being as hit-driven, they all ended up having a few titles drive the majority of revenue. The number I use is that 25 percent of games will break even or make a profit after launch (without accounting for development expense); this means that there’s a 75 percent failure rate. (I have heard estimates that as many as 90 percent of game projects fail and I would not argue strongly against that number, but for the sake of analysis I will use a success rate of 25 percent.)
The argument for taking a portfolio approach
Basic probability theory shows the importance of having multiple independent game projects to improve your company’s chance of success (more on independence later). By using probability, the benefits of taking a portfolio approach become clear. Continue reading
Retention is one of three components that you use to determine LTV (lifetime value of a customer) and in many ways most important to the success of a product (and the most difficult to improve significantly after launch). Three weeks ago, I wrote about the central importance of lifetime value (LTV) to the success of your game and your company. This week I want to discuss retention, its importance and how you can improve it.
How to define retention
Retention is how often players play your game and thus, also, how long they remain active players. As with all the LTV metrics, different companies use different measures of retention to determine lifetime value.
There are several components of retention for you to track and roll into your LTV formula. Continue reading
Although this is by no means a prediction based on any scientific data, I am already seeing big trends this holiday gift season that will impact game companies significantly. By talking to my children and their friends, visiting major retailers and getting virtually every online retailers newsletter, it is becoming clear there will be some big winners and losers this holiday season that also show how the industry will continue to evolve.
Nintendo and Microsoft look like the losers
I expect two companies that I respect greatly, Microsoft and Nintendo, to have poor Q4 product introductions. Unlike the iPad and some of the Android tablets, nobody is advertising or discussing the Surface. Although Microsoft has set up stands at malls and is leveraging retailers that normally sell PCs, most consumers who are in the market for a tablet are deciding between the iPad or the Kindle Fire (at least the people I spoke with). Retailers are drawing traffic by selling cut-price Android tablets (normally under $100),showing that they believe consumers will go out of their way to buy such a tablet (say what you want about traditional retailers, but they still understand their customers very well). Worse for Microsoft, the Surface is not even on people’s radar; outside of Microsoft ads I have not heard it mentioned once. Continue reading