Analyst: Zynga loses $150 on each new customer

[buzz_n64]

“We also know that they had 3.4 million unique payers in the September quarter, which is up from 3 million at the end of December 2010. In other words, they added 400,000 additional payers and they spent $120 million to acquire them.”

According to these figures, the company spends $300 to acquire every user – and it doesn’t pay off.

“We know that, on average, these people are spending about $150 or so,” Bhatia said, indicating a loss of $150 on each customer. “That’s our math; that’s not what the company says.”

The analyst isn’t keen on demonising Zynga, noting a market for its rapid-fire release strategy, but warned of a general slowdown in social gaming – and beyond."
http://www.vg247.com/2012/01/22/anal...-new-customer/

What do I have to say about it? HAHAHAHA!

But, what I'm still wondering is how are they making $150 on average on their customers?

[Diatribal Deity]

Say Farmville has 30 million plus users. Roughly 3-5% pay for virtual goods ... voila (numbers are not accurate but this is basically how it works)...

Development = 300-400k
Support = 5 million

Marketing is where this analyst believes they blow their load though...

[calthaer]

I hate these farmville games, too, but I don't think this automatically points out that Zynga is stupid for paying more for customers than they're worth. This may be the case, I'm just saying that it isn't automatically the case.

Any marketer worth their salt does segmentation of their customer base. Depending on their market (in Zynga's case, it's largely Facebook users), this could be based on all sorts of things: age, race, number of FB "friends", geographic area (and all the data that goes with it: avg. household income, avg. property value, etc.), marital status, educational level, number of times they log in per day - etc., etc. They then create segments. These could be as simple as "Single moms" or "Married men", but the more useful segments are generally things like:

-Lonely housewives in rich areas who spend all day on Facebook.
-People employed at Fortune 500 companies who live in major metro areas

or whatever group of people do the sorts of things the company wants them to do - in Zynga's case, "spend a ton of money on their worthless little farm game." They may find that two or three different types of people spend the most money - say it's lonely stay-at-home housewives living in rich zip codes and people with a load of friends who also play farmville. If they're smart, they will then be willing to spend MORE to acquire those big-spenders than they would to acquire the people who buy one virtual item and then never spend another cent with them. They target their marketing dollars towards acquiring AND retaining those big-spenders. It's key to remember that (usually) some marketing expenses come in the form of customer retention, and not just acquisition - although the analyst is claiming this is not what Zynga's doing.

So, say (this is just a wild guess, but might make sense) that the biggest spenders are people where 5-10% of their entire FB friend list also plays farmville (and there's some sort of feedback loop going on - people spend more to "keep up with the Joneses"). They might figure that that feedback loop is worth fueling with a little bit of primer to make sure that at least 5% of the friends list of people in that group stay on as paying customers - because even if those other friends (the friends of the one who's the big spender) only spend a few bucks, the big spender will spend a lot of money on their friends, or to show off to their friends - and therefore it's worth keeping the "duds" marginally involved, or getting a few more "duds" in the mix to give big-spenders an audience for their virtual bean garden and cabbage patch, so that the big spenders will feel like they need to keep up their bragging rights.

So this analyst is making the following assumptions:
-All of Zynga's advertising dollars are spent on customer acquisition (thus, applying all the costs to the new customers instead of the existing ones, to keep them buying, and coming up with "$300 / new customer") and none is spent on retention. I'd like to see exactly how he "knows" or why he thinks that this is the case. If it's true, then Zynga might be stupid - which is good news, because that means maybe farmville will bite the dust. But it might not be the case. The analyst might be assuming that all pay-per-click ads are being targeted to new users instead of existing ones (to remind them to come back and buy a new pig or something).

-The marketing isn't targeted such that the customers (or non-customers who are similar to existing good customers) bringing in the most cash are getting a proportionate amount of marketing dollars, and that therefore each marketing promotion they do is profitable (viz., each segment is getting the amount of money per customer that does not exceed the average total sales per customer in that segment)

Besides those two assumptions, there's also no discussion of customer LTV (life-time value) here. It's worth spending $300 to acquire a customer and $25 / year thereafter to keep them, if they spend $150 (avg) in year 1, $125 in year 2, $100 in year 3, and $75 in year 4. Total four-year sales: $450; total 4-year marketing costs: $375, profit = $75 on average per customer. Multiply that by a million customers, and that isn't too shabby even if you spread that revenue out over four years.

He may be right about the number of new customers platueaing / being harder to get, and he may even be right about the marketing spend being stupid - but I'm just not convinced from this little blurb that he is. There are a lot of details missing. We don't know enough about Zynga's customer base, and their purchasing habits, to reasonably conclude that Zynga is totally missing the mark here in their ad spend. They might be, and that would be great news as far as I'm concerned, but the evidence here is inconclusive.

[calthaer]

And here's another analyst debunking the numbers, taking into account attrition rate (which I didn't think of), and which also adequately explains the discrepancy:

http://founderware.co/online-games/z...y-paying-user/

The real point should be that analysts rarely know as much about companies' inner workings as they purport to. I know everyone's out to find the next piece of Enron chicanery / stupidity and blow the whistle, but most campanies who have been in business for more than two years probably aren't quite that stupid.