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IN-DEPTH 24 August 2016
Online gaming operators: Balancing new and existing players
For operators, striking the right balance between focusing on new and existing players can make your business rocket, or leave you running in place says Shauli Rozen, Head of Strategic Services at Optimove
By Gambling Insider

Online gaming operators must focus on growing their player base through new user acquisition while simultaneously keeping their existing players happy and engaged. Investment, however, is a zero-sum game, and the reality of most businesses is that investment in acquiring new players comes at the expense of nurturing relationships with existing ones, and vice versa. Herein lies the great importance of optimising the company’s new-to-existing player revenue ratio, what we call the “player revenue mix.”

Innumerable articles and blogs have been published on the topic of acquisition vs. retention. The consensus, especially in the gaming space, is that acquiring new players is dramatically more expensive than retaining existing ones, and that up/cross-selling to your existing player base is easier than selling to new players. But all agree that neither group can be ignored, and that in order to grow successfully, gaming operators need both new and existing players. The optimal player revenue mix depends in large part on the operator's growth stage. But some questions still beg to be asked: “What is the ideal revenue mix between new and existing players?”, “Is there a correlation between the player revenue mix and a company’s success?” And: “Which player revenue mix benchmarks should companies consider as they evolve and grow?”

ANALYSING NEW TO EXISTING PLAYER RATIOS

We turned to Optimove’s player database, covering more than 100 brands in a variety of growth stages, to examine the possible correlation between a company’s growth and success rates with its new:existing player ratio. We limited the research to companies more than five years old and with more than $10m of annual revenue. We eliminated the impact of mergers and acquisitions, because they commonly create outliers in terms of growth and new:existing player ratios.

To assess each company’s state of affairs, we used a combination of top-line factors that included year-over-year growth during the past three years and five-year CAGR (Compounded Annual Growth Rate). We then identified clusters of companies with a similar player revenue mix that also share core attributes such as years in business, growth stage, conversion rates, retention rates, churn rates and changes in customer lifetime value over time.

OUR FINDINGS

Our research revealed four groups of companies, which we named Running-in- Place, Rockets, Healthy Grown-Ups and Old Cash Cows. A look at their common characteristics offers insights into the preferred player revenue mix and the dynamics through which a healthy player revenue mix promotes growth – or hinders it. The following chart shows the new:existing player revenue mix for each of these four groups.





RUNNING-IN-PLACE

These companies have experienced stagnated growth or declining revenues for the last three to five years, with a five-year CAGR lower than 2% and a player revenue mix skewed dramatically towards new players. Companies with great marketing that continually acquire new players are expected be able to grow quite quickly. However, our data shows that when 90% of a company’s revenue comes from new users, it is a signal that the company is not successful in turning those players into active, valuable players. These companies experience churn rates 100% higher than our sample average. Therefore, while continuously working hard on acquiring new players, the companies in this group stand still in terms of growth and do not ramp up.

This can usually be attributed to one of two things: Either the company is not acquiring the right kind of new players, or the company is not doing an adequate job of converting those new recruits into ongoing, active players. In many cases its both. By investing in retaining even a small portion of new players, Running-in-Place companies will slowly but surely build a stronger core player base that can help turn them into Rockets.

ROCKETS

These are companies with annual growth of more than 50% for the last five years and a five-year CAGR of over 100%. These companies are usually relatively early in their growth cycle and have been around for less than seven years. While Rockets have a player revenue mix that tilts towards new players, all the Rockets in our sample derive at least 30% of their annual revenues from existing players, and 80% of them derive about 50% of their revenues from existing players. Rockets in our sample managed to retain their acquired players and experience churn rates 50% lower than the sample average. However, the reality is that startups that don’t shift their mix towards existing players and improves churn rates don’t manage to become Rockets, and remain at the Running-in-Place stage, experiencing low or negative growth after a short ramp-up period.

HEALTHY GROWN-UPS

These are companies with a five-year CAGR between 20% and 60% and that have been around for over seven years. These companies usually possess significant market share in the industry and have managed to continually acquire new players while keeping retention rates high. In our sample, the typical Healthy Grown-Ups derive 60% to 80% of their revenue from existing players, and 70% of Healthy Grown-Ups had over 70% of revenue coming from existing players.

The success of these companies is attributed to their low churn rates and high “new-to-active” player conversion rates. The average churn rate in this segment was 60% lower than the sample churn rate average. When companies reach a significant volume of active users, the churn rate becomes a critical factor in maintaining growth, because player churn rates can easily overtake new player acquisition rates. These companies have also optimised their player acquisition process and are bringing in the right kinds of players, keeping “new-to-active” conversions well above the industry average.

OLD CASH COWS

Like the Running-in-Place group, Old Cash Cows show stagnated growth or declining revenues over the past three to five years, with a five year CAGR equal or lower than 2%. However, they differ significantly in their player revenue mix and cause of stagnation. The typical Old Cash Cow in our sample derives 90% or more of its revenue from existing players. While on the surface this appears to indicate healthy, recurring revenue, the fact is that even the most loyal players eventually churn or reduce their spend levels, and churn levels of these companies are usually lower than the sample average. An old player base is therefore highly risky: even if these companies are still making a lot of money, sooner or later they get the reputation (true or not) of being non-innovative or outdated. And with a limited number of new players joining, the road to declining revenue may be short.

CONCLUSION

There are several typical new:existing player revenue ratios that operators should be aware of as they grow their business, and these ratios depend highly on the specific company’s growth phase. A new, growing company must remember to nurture its new players, and bear in mind that driving 90% of revenue from new players could be a red flag.

Our research further suggests that for gaming operators, this can be an ongoing concern even past the growth stage. Many operators are experiencing increasing competitiveness, a decline in brand loyalty and an increase in player attrition. Operators should be aware of this predicament and try to incite their existing players to increase engagement by varying products, gamifying campaigns and investing in smart retention.

On the other hand, mature, solid companies should constantly refresh their player base and keep in mind that an “old player base” that is responsible for more than 90% of revenues may predict a business slowdown. For operators, this sometimes requires spinning out into new brands to bring in new blood, especially if the original brand can no longer attract new players. Rebranding offerings for new target audiences by rethinking key attributes that affect these audiences may afford a path to the hearts of new audiences and new generations, that will create a far healthier revenue mix.

Finally, identifying the new:existing player revenue mix is only the tip of the iceberg as far as a company’s business model is concerned. Two companies with the same revenue mix may tell very different stories and drive growth in very different ways. A quick example might be two companies that both derive 75% of revenue from existing players. One might be acquiring many new players and converting only a small portion of them to active and loyal players, while the other may choose a more focused acquisition strategy, acquiring a smaller number of new players, but turning a larger portion of them into loyal, long-time players.

In the end, it’s up to each operator to decide how much investment to pour into new user acquisition versus nurturing player relationships. But using the data above, operators can tell whether their business has a healthy mix of new versus existing players, or if it needs to focus more on one segment over the other.
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