Conversion Corner: Making sense of the numbers

I am often asked about the unit economics of the gaming industry. Recently, this has come under extreme scrutiny as the major operators are spending tremendous amounts of their total costs on marketing. Simply spending a lot on marketing isn’t such a big deal if the return on investment for marketing results in tremendous growth to the bottom line. Currently, the cause for concern is that there isn’t a realistic return on the marketing investment being made. In this instalment of Conversion Corner, I will detail the unit economics of the cost per acquisition and revenue per user, and how these two important elements tie into each other in the current North American igaming industry. When considering customer acquisition costs, you need to look at a couple of figures: marketing costs and how many customers were acquired over the period of time the marketing money was spent. Marketing costs are typically easy to find in an operator’s financial results. DraftKings, for example, breaks this out under the line items “sales and marketing” and spent $185m in 2019, $495m in 2020, and $982m in 2021. For PointsBet, the line item is also “sales and marketing,” and in 2019 it spent A$25m, then A$35m in 2020 and A$170m in 2021. These marketing numbers account for all marketing costs including sponsorships. From these financial reports, it is clear that most of the main players have been increasing their marketing spend from 2019 to 2021. Some of the marketing costs that aren’t accounted for in these numbers are the bonuses that fall under other accounting buckets. Typically, bonuses fall under “cost of sales.” It is really difficult to identify how much a $100 first deposit bonus cost the company per player or over a certain timeframe. This ambiguity and the fact bonuses are lumped in with many other items in the cost of sale category result in very little transparency in the offering of bonuses to customers and the ROI on those bonuses. Where we see the true size of the bonus costs is typically in the difference between gross win and the operator’s net win. In PointsBet’s case, it is defined as “client promotional costs” (the costs incurred to acquire and retain clients through bonus bets, money back offers, early payouts, and enhanced pricing initiatives). This is normally a good chance to see how much an operator really spends on bonus costs. This can also be gleaned from the state-level reports that have a gross win and a net win margin like Colorado. But with many operators, it’s simply too hard to determine what their bonus costs are with the limited amount of information available.

Cost it up

Interesting to note is that some marketing costs are already committed due to long-term sponsorship or media deals. This is the case with most operators but with PointsBet in particular – this is what the operator has said about its partnership with NBC: “PointsBet’s total committed marketing spend of $393m is allocated in progressively increasing amounts over the five-year media partnership.” This is an incredible commitment for future marketing costs, and operators such as PointsBet that are committed to similar deals will really hope that the spend will result in new customers. To determine customer acquisition costs, it is best to use an operator’s given marketing and sales costs as the numerator for the simple fact that it is easiest to determine. Trying to add in the complexity of the costs of bonusing can easily distort the cost per acquisition. Besides, the differences are minimal in the size and strategy of bonuses per operator related to the marketing costs.

Keep it consistent

When determining the number of acquired customers over a given time period, the key is to find consistency in reporting. Some operators share monthly active users, which is normally determined by the number of customers that place a bet in that month. Other operators define yearly actives, which are bettors that have placed a wager in the last 12 months. Either way, it is critical to be consistent while measuring so that one can make a clear comparison of year on year or month-on-month activity. Unfortunately, operators don’t report consistently between them so it can be difficult to compare like for like. That said, DraftKings, FanDuel, and Rush Street are all pretty consistent with their measurements of new customers. For example, if an operator had 100 players per month last year and now they have 150 players per month this year, we can assume that they increased their customers by 50 per month. Once the marketing costs and the number of new players have been determined, I simply divide the costs by the number of new customers. If a company spent $1m and gained 1,000 new customers over the time period, that would equate to $1,000/new customer. It’s critical to compare these figures among all operators and also compared to the figures from the previous year. For example, if DraftKings had 800,000 monthly active users (MAUs) in 2020 and had 1.3 million MAUs in 2021, we can quickly determine that they increased MAUs by 500,000 and can simply divide the marketing and sales costs ($1bn in 2021) by the number of new customers they acquired to determine cost per acquisition. Typically, companies publish revenues per monthly active user. This varies from operator to operator depending on their focus. Some operators are focused on DFS and betting, which will result in a lower number, and other operators are focused more on online casino so the figure is much higher. This is why DraftKings earns less than $75 per MAU, whereas Rush Street Gaming achieves more than $200 per MAU. Determining customer acquisition costs and revenues per active user in this industry is easier said than done. It does take some digging and ultimately finding consistent reporting is critical to determining unit economics. Once found, though, they provide incredible insights into the industry, the challenges operators face, and who may be winning in the early stages of the industry.