Hot on the heels of Boris Johnson’s in-minecraft launch of London’s own gaming fund, it’s a great time to be a player in the UK gaming industry. At Oxford Capital, we’ve made 2 gaming investments (Outplay and Kobojo) and continue to be excited by the market opportunity. Here I share the 3 key points that we like to bear in mind when assessing the performance of free to play mobile gaming companies.
This post is written with free to play mobile games in mind, but applies to other apps with a similar high churn, low LTV customer profile (for a look at how we analyse eCommerce businesses, check out this post from my colleague Will).
1. Split users by acquisition channel – paid vs organic
As a first step, we find it very important to consider paid and organic users separately. ‘Paid’ users have downloaded the game as a direct result of being served advertising, while ‘organic’ users might have seen the game featured on the app store or heard about it from a friend, and theoretically haven’t been influenced by direct marketing. In our experience users in each category behave differently; paid users are often disproportionately higher value than organic users. Assessing the behaviour of paid users separately to organic users is important in determining if a game can be marketed effectively and ultimately perform.
2. Assessing game and marketing performance; CAC:LTV, but with a twist (Virality).
With the range of KPIs cited in gaming, it can be easy to lose sight of the most important metric in any marketing driven consumer business; user CAC:LTV (Customer Acquisition Cost : Lifetime Value ratio). In Gaming businesses, CAC is referred to as CPI, or Cost Per Install.
LTV (Lifetime Value) is the net revenue that an average (paid or organic) user will contribute over their lifetime.
LTV is the product of several underlying metrics that are often referenced, including;
- Retention rate – the % chance a user is still active after a given number of days of playing the game
- Conversion rate – the % of players who purchase in a given time frame (usually months or days)
- ARPU (Average revenue per user) – usually given over the same time frame as conversion rate
Tracking each of these underlying metrics can be important for understanding and driving improvements in game performance. In particular, retention is often overlooked, as is tracking when players spend along the retention curve. For example, if your data shows a high chance that players will only spend money once they’ve played for 30 days, but many users are only retained for 25 days, then a small improvement in retention rates could have a big impact on revenues.
However, as LTV is the product of each of these metrics we find it a helpful simplification to assess and forecast game performance using LTV for paid and organic users.
The CPI is the amount of marketing spend needed to acquire a new user through direct marketing, and the blended CPI is the amount of direct marketing spent per all acquired users (ie including users acquired ‘organically’, and not just those acquired through marketing).
If paid user CPI is lower than paid user LTV, a game can be marketed effectively and profitably, as is the case with all consumer businesses. However in gaming there is an additional complexity. Marketing spend drives downloads, which drives chart position, which creates a feedback loop driving more downloads (as with so few distribution channels and no cost to download, chart position becomes a very strong predictor of downloads). Given this non-linear relationship between marketing spend and user acquisition, gaming businesses can scale successfully where paid user CPI is initially higher than paid user LTV. Once the viral effect of chart position kicks in, the blended CPI will reduce rapidly as more organic users are acquired. Understanding this relationship and knowing when to buy users at seemingly unsustainable rates in pursuit of a higher chart position is key to scaling the user base (and revenues) of a successful game.
3. Moving in the right direction?
Through frequent content updates and patches, free to play mobile games companies have the opportunity to iterate often. Therefore, we look for incremental but sustained improvements in user LTV over time (be they driven by underlying improvements in retention, conversion, monetisation or all three), and a team that understand how to use data to drive improvements in performance over time. In order to drive the volume of users needed for a successful game, marketing will need to be scaled. We like to see a relatively steady CPI over time, despite increases in marketing spend.
The economics of gaming companies can seem daunting, as can the variety of metrics used to describe user behaviour. I hope this post has provided a useful overview and gives some insight into how we assess investment opportunities in the gaming space. If you’re a gaming entrepreneur looking for investment or someone on the industry or investment side with any questions or a different approach to assessing games, then feel free to get in touch!