Why is user acquisition important?
What is User Acquisition?
User Acquisition (UA), as the name suggests, is the process by which a user-based business increases its user base. This practice falls within the scope of the marketing department of a company and is vital to most companies to allow them to reach the break-even point first and win market share later.
Especially in the gaming industry, user acquisition is of utmost importance as the market resembles many features of a ‘winner-takes-all’ market, in which, within each category of games, there is usually a major player attaining most of the market share and leaving only small crumbs to independent game studios, if these are not efficient enough to construct a solid and reliable user base and strategy to scale it.
Why is that?
The reason for this are network effects. Network effects are demand-side economies of scale, present in certain markets. Markets in which network effects are present are those where the value that a user derives from using a specific product or service, directly depends on the number of users using that product or service. The gaming industry is an example of a market with network effects. If all of your friends are playing a certain game, then the value that you derive from playing the same game is higher than the value you would derive from playing a similar but different game. This is true not only for multiplayers games, but also for single-player games.
From this follows that it is vital for a game studio to be able to reach the tipping point, the point at which the network effects start to kick in, as soon as possible (i.e. sooner than its competitors).
Hence, having an efficient and proactive user acquisition strategy is paramount to success.
How can an independent game developer or studio boost its user acquisition function?
Increasing the performance of the user acquisition activity is not that easy and requires a proper strategy. First of all, user acquisition involves several sub-activities. These can be summarised within three main areas:
Segmentation: the process of analysing the market and the market demand in order to find heterogeneous, identifiable and actionable clusters. These clusters represent the different segments in the market and the users within each segment might differ from users in other segments across several dimensions and audience characteristics (such as demographics, wealth, education, interests, …).
Targeting: First, the process of conducting a profitability analysis on each segment to define which ones entail the most value for the company (i.e. which ones are most profitable). Second, identifying the right channels to target the segmented audience clusters.
Positioning: the process of defining the brand image of the company and its communication to properly position the company according to the segments it decided to target, in order to maximise the probability of converting those users into clients.
Segmentation:
Should independent game studios put as much effort as they can into getting as many customers as possible?
No. Customers differ from each other in terms of:
Cost to acquire
Cost to serve
Margins
Volumes
Since the resources that a game studio can allocate to its user acquisition activity are limited, it must be wise in determining which customers it should target. Simply speaking, considering the differences mentioned above, not all customers are equally profitable. So, to maximise the bang for the buck, developers should use their resources in the most profitable way and only target the most profitable customers.
Targeting:
Who are the most profitable customers to target?
Several metrics could be used to answer this question but the most common one is probably the Lifetime Value (LTV) or Customer Lifetime Value (CLV). The LTV represents the sum of all discounted cash flows (inflows and outflows) that a customer generates for the company over its lifetime. This means that the LTV measures the net present value of the profits that a customer generates for a company during all the transactions they will have. Thus, the LTV is a forward-looking measure of profit.
Once the acquisition cost is deducted from the LTV, we can calculate to the Net LTV from
Net LTV = m * (r / (1 + d - r)) - ac
Where:
M = revenues - operating expenses
R = retention rate
D = discount rate
Ac = Acquisition Cost
If we translate the same formula into the LTV for a gamer, we get something like:
Net LTV = ARPU x 1/Churn - ac
Where:
ARPU = Average Revenue per User
1/Churn Rate = Proxy of Retention Rate
Different customer segments might have different margins, retention rates, discount rates and acquisition costs, which will result in different Net LTVs. In order to maximise the efficiency of their efforts, game studios should target the segment with the highest Net LTV.
Now it is easy to understand that user acquisition, together with customer retention and margins, directly concur to LTV.
Positioning:
Once the market has been segmented and the most profitable segments targeted, a game studio or developer needs to convert those segments into actual users. This is done by positioning the game so that it can attract the specific segments that were targeted. The most common way to achieve this is via online advertising and a structured marketing campaign. This might be tricky because it requires a deep expertise both in cash flow management and in marketing. However, most of the time, companies do not have enough cash or experience to maximise the efficiency of their marketing efforts.
Moreover, based on what has been explained above, waiting to have enough cash to start your user acquisition campaign will be counter productive because the tipping point must be reached before competitors do it. Revenue payout delays of up to 90 days make things even more difficult. Acquiring new users requires the right investments into the right marketing channels at the right moment in time.
This is where a user acquisition fund comes in and helps. With their deep financial and marketing knowledge and expertise, user acquisition funds can provide huge value for companies looking for money to build their user base or scale an existing one.
Here at 1Up Capital, for example, we finance against all gaming distribution platforms. We aim at enabling locked up cash to allow game studios to continue with their user growth efforts.
Our management team will work with you to define what the marketing channels most suitable to your company are, decide the right form and amount of investment and find the most efficient way to transform your efforts into an increase in your user base.
What is a User Acquisition Fund?
A user acquisition fund is a fund that finances a company’s growth activities through receivable-backed payouts. The advantage of relying on a user acquisition fund to acquire more users is that the fund is usually specialised in understanding, predicting and managing the cash outflows that a game studio will face and has a deep expertise and ability in how to market the game to its audience. Thus, joining these two competencies in one unique partner is extremely valuable for a game studio as it will kill two birds with one stone. It will be able to manage its financing needs and at the same time gain efficiency in user acquisition. The risk of relying on traditional financing, without seeking professional help in marketing, is that the effectiveness and efficiency of your user acquisition campaign will be suboptimal and your user base won’t reach its full potential.
Most game studios face the challenge of managing to perform a satisfactory marketing campaign with the constraint that the revenue payout is delayed for up to 90 days. A user acquisition fund like 1Up Capital can solve this problem by providing developers with the capital they need today.
At 1Up Capital, we offer fair and transparent rates based on your game’s key performance metrics. We are using a proprietary tool based on machine learning to find the most suitable solution for your needs and to assess your financial situation. We partner with a top-class performance marketing company to guarantee a top-notch and comprehensive user acquisition campaign.
