PART A: MUSHROOMING USER ACQUISITION COSTS ATE MY LUNCH
As the marketplace for mobile apps has become larger and ever more crowded, it’s increasingly difficult for publishers and developers to get their products noticed. Producing a good game, or even a great one, is no longer enough to stand out from the crowd and be discovered by enough prospective users. Even some critically-acclaimed games go largely unnoticed by consumers.
- There’s a steadily mushrooming discovery problem. For just the month of March 2013, Xylogic counted almost 31,000 new iPhone apps and over 22,000 new Android apps in the US app stores alone.
- The cost of marketing and advertising is correspondingly on the rise, which make life harder for smaller developers (who may not be able to afford these costs) to reach new audiences. Developers already do all they can to grow revenues by improving conversion, retention and monetization rates. But they’re fighting an uphill battle, as long as the expense of customer acquisition costs continues to rise and eat into profits.
- According to the FIKSU Cost Per Loyal User Index, the average cost, for brands who proactively marketed their apps rose from $0.94 in March 2011 to $1.36 in March 2013. That’s an increase of 45%!
If the Cost Per Install for a free-to-play game is $1.36, and the game has a monthly conversion rate of 2.5% (the conversion rate across all genres, according to SuperData Research numbers from last year), that means the Acquisition Cost Per Paying User (ACPPU) is $54.40. So in order to break even on the customer acquisition cost alone, the game would have to generate an Average Revenue Per Paying User (ARPPU) of $54.40 (NET of the 30% platform share).
According to the same SuperData Research numbers from last year, the average paying social game user in the US spent $37.59. Subtract the 30% that goes to Google or Apple and you’re left with $26.31. Against $54.40, that’s a loss of $28.09. (Even if you double the conversion rate to 5% and keep the acquisition cost at $1.36, the result is still a loss).
In short, the combination of the vast number of releases and the rising cost of acquisition has turned discovery into mobile gaming’s thorniest problem.
This new landscape has created a new role for content licensing, which has historically had a bad rap and is often (mistakenly) assumed to have a prohibitively high cost. The use of licensed content, and the marketing buzz that it brings (if utilized correctly), can provide the edge needed to solve mobile gaming’s discovery problem and can also significantly lower customer acquisition costs at the same time.
PART B: TIME TO TAKE NOTICE OF CONTENT LICENSING
One way that mobile developers and publishers can get their games noticed and potentially lower their customer acquisition costs is to use well-known and recognizable intellectual property – characters, stories and brands from movies, TV, comics etc. – which can provide immediate attention, differentiation and credibility.
Licensed games have a pretty bad history. Gamers and industry insiders are well aware of the crappy games that have been launched using popular licenses, where the license has been little more than an attempt to cash in on the value of the brand, or where game development has been held back by a licensor’s long approval process, and the end result has been a third-rate product. Or where a game has been thrown together to meet a movie launch deadline - just another piece of merchandising from the point of view of the movie studio (on somebody else’s dime).
Everyone has their list of famously bad licensed games - of Family Guy: Back To The Multiverse and Enter The Matrix, ET, Catwoman etc. But right there is an illustration of the marketing power of well-known IP – everyone knows these games, however bad they may have been.
In short, popular licensed content shouldn’t be an excuse for a bad game. But there’s no reason why it has be. If you’ve got a fun game with good conversion, that retains players and monetizes well, then there are ways in which licensed content can provide the marketing edge that’s needed to have a major impact on the discovery problem.
Popular licensed content brings many benefits – a built-in audience of fans (including non-gamers) and a much greater viral appeal. It allows the use of logos and keywords that are instantly recognizable to people browsing the app stores.
- PR is also much easier to generate for content that’s already popular. And if the licensor is a movie studio or a TV company that’s contracted to help via its existing marketing channels, these will be as good as it gets.
- Even if potential players don’t see your PR, the decision-makers at Google Play and the Apple App Store will - and they’ll certainly be way more likely to pay attention to a game that’s built around a popular brand they already know. Well-known IP is one of the top factors in getting feature placement on the App Store or Google Pay, which is the ‘holy grail’ of app discovery (generating around 100,000 free users per day, according to industry observers).
- Licensed content can also help with retention and monetization. A well-designed licensed game, with scenarios and characters that are already familiar and meaningful to players, can make the game more rewarding and make players more emotionally committed to the game and more likely to return.
- In-app purchases of virtual objects, as well as rewards, are also more appealing if the items are based on a brand the player recognizes. According to Ze’ev Rozov of Iconicfuture, “users are willing to spend a lot more money on a premium item based on rights they recognize than on a generic item” and Nick Bogovich of GSN says that their Wheel of Fortune Slots game gets higher click-through rates and longer player engagement as a result of the use of the licensed brand.
Managing User Acquisition Costs
It’s often assumed that the cost of licensing popular content for use in a game is prohibitively high, whether for building an entire game around the content or for the use of pieces (for example, selling branded virtual goods). This is incorrect.
- Licensing agreements usually involve the payment of royalties on sales, or some sort of revenue-sharing agreement. There’s a minimum guarantee of a certain dollar amount in royalties that must be paid over the lifetime of the agreement and part of that is payable upfront. Different licensors may demand different minimum guarantees and upfront payments, depending upon the property involved.
- The most important things, however, are whether the licensor likes what the prospective licensee proposes, and trusts that they are able do a good job. Thus even small developers or publishers can license some very popular brands.
- Currently, developers are helped by the fact that, relative to the vast number of properties available and already licensed for products in the broader market (toys, novelties etc.), very few have been licensed for mobile apps - a situation that is likely to change quite fast.
Since royalties are paid on the backend (on actual sales), rather than upfront for impressions, clicks or unpaid installs, there can be a major impact on customer acquisition costs.
Let’s take a look at the math.
- Let’s say that with a Cost Per Install (CPI) of $1 (including customers acquired virally, not only those paid for directly, for example via clicks on Google Adwords), a publisher is able to spend $200,000 and thereby obtain 200,000 installs. With a good conversion rate of 5%, that will result in 10,000 paying users and an Acquisition Cost Per Paying User (ACPPU) of $20.
- Let’s imagine that the net Average Revenue Per Paying User (ARPPU) is a healthy $40, so that the expense of $200,000 generates $400,000 in net revenue and a gross profit of $200,000.
- Instead of paying $200,000 (most of it in advance) to generate $400,000, now let’s imagine that the cost of generating that $400,000 was a royalty of 12.5%. Not only would the total cost be only $50,000, but perhaps as little as $10,000 of it would be payable in advance.
Of course it’s wrong to imagine that the use of licensed content should take up the entire user acquisition budget, or even most of it. But there’s little doubt that a popular brand would result in much more effective marketing and customer acquisition, through vastly better PR, getting featured in the app stores, or exponentially more powerful organic, viral growth.
- Instead of 10,000 paying users, let’s say that the expense of $200,000 results in 300,000 installs and thus (also at the 5% conversion rate) 15,000 paying users, which is not an unreasonable expectation.
- Other things being equal, the net revenue generated would then be $600,000, against the combined cost of $200,000 and now $75,000 in royalties.
- The gross profit would be $325,000, significantly more than the previous gross profit of $200,000.
PART C: LICENSING DOs AND DON’Ts
Those profit numbers are all well and good, but not just any old license would have that sort of impact. You have to find a good one.
One of the great things about licensing, though, is that a real measure can be taken of the popularity and target demographics of a prospective licensed property – something that cannot be done with a developer's brand new title and characters. For example, just doing a little market research on Facebook will uncover how many “likes” a prospective licensed property has, as well as their age, locations, education level, related activities and likes, and so on. And this is barely scratching the surface.
It’s also a question of finding the right licensor and negotiating a good deal with them, both of which can be pretty tough unless you know what you’re doing. A few unpleasant scenarios were mentioned above, and we will revisit some of those. The developer should always be careful that they are not so entranced by an exciting prospective license that they fail to obtain a good agreement or ignore warning signs of possible troubles ahead. There are many points of due diligence that should always be part of a successful license negotiation.
What A Good License Looks Like
There are many types of licenses available.
- Some are new properties (for example an upcoming movie) and others are existing properties, whether current (in theaters or on television now, for example, or older ‘catalog’ properties).
- New properties, while they may look exciting, are generally more risky and are often (though not always) more expensive than older ones. Even if a developer is convinced that an upcoming movie will be a big hit, it may flop, (and, unlike current or catalog properties, there’s no way to conduct meaningful market research in advance on its popularity).
- Developers and publishers should bear in mind that the Hollywood studios like to create as much buzz as possible around NEW movies by trying to license as much merchandise as they can in time for the launch. But if a licensee is shouldering all the costs, AND paying royalties upfront to the movie studio, then the licensee is taking all the risk upon itself in exchange for a shot at some upside. And, some would argue, also paying for what should be the studio’s own marketing. It’s risky, and it can be hugely successful. The rule when it comes to new movies is definitely caveat emptor – let the buyer beware!
Maximizing PR and getting an advertising bump is one of the main reasons for licensing in the first place, and the licensor’s contribution to this effort is big part of that. Prospective licensees should always obtain very clear commitments from the licensor for a whole range of marketing activities, from print media PR, getting the game featured in the licensor’s website and social media activity, events and so on.
Game developers and publishers can also encourage active marketing participation from the licensor by negotiating an agreement with a tiered royalty structure. This can work in different ways, but one example is for the licensor to agree to a specific marketing budget for customer acquisition, and the licensee pays a higher royalty rate until some percentage of that spend has been recouped.
Working With Licensors
Developers should remember that the brand owner will want to protect the quality and integrity of its content – and it’s good if a brand is properly cared for. On the other hand, the licensor may have a different vision than the developer, so it’s important to ensure that both are on the same page. There are some important questions to ask:
- Will the licensor work well with a developer or publisher. It should be possible to talk with existing and previous licensees to determine whether their experience was a good one. (Bear in mind that content licensing for games may be new for many licensors).
- The licensor may want to be more involved in the creative process than the developer would like. If this process is well-managed, though, it can be turned into an advantage instead of a problem. Getting the licensor’s help in unlocking the value of players’ emotional connection to a game (and thereby increasing retention and monetization rates) can be a valuable part of a license.
- Some licensors are notoriously slow with their approvals process, and it’s an important part of a developer’s or publisher’s due diligence to be sure to avoid getting into such situations. The written agreement should clearly lay out time frames within which approvals need to be granted (plus specific mechanisms for the correction of disapprovals and automatic approval for failure to respond) and perhaps contain penalties if the licensor fails to meet its deadlines.
It’s an unavoidable fact that the gaming landscape has changed due to the unprecedented proliferation of products competing for the same audience. Even as developers refine their retention and monetization techniques to maximize revenue from each customer, the vast number of new game launches and the rise in paid user acquisition costs is making it increasingly difficult to reach those customers in the first place.
Licensing well-known content can have a major impact - both in making a game stand out from the crowd and in lowering customer acquisition costs. Even though some in the industry take a dim view of content licensing (due to its spotty track record), if done correctly, with due diligence in finding the right license, the right licensor and negotiating the right agreement, there is no reason why it should not play a major role in solving the discovery problem and holding down user acquisition costs.
David Garth can be reached at [email protected]