Social Games are Not Social. They should be called Viral Games. Part II

So, in my previous post I went over Life Time Value (LTV) of a user of a social game and how the Facebook ecosystem dramatically improves it.  However, this LTV is not exceptionally high given that only 1 to 2% of Monthly Active Users actually pay each month.  LTV of a user for these games is only about $.40 which is actually low but the great thing about Facebook is that the marketing costs are so low and you can a ton of volume therefore you are able to scale.  There are two factors that makes marketing so efficient on Facebook:

1. Paid Marketing is really Cheap!

So there are 3 paid marketing channels if you want to advertise your social game on Facebook.  The first is on other social games that have a virtual currency system.  These social games allows you to buy virtual goods either through actual payment (credit card, paypal, etc.) or through offers.  Offers consists of getting virtual currency for actions such as signing up for Netflix or a credit card.  It also consists of installing another Facebook application.  You can advertise with companies that power these “offer walls” on a cost per acquisition basis.  A social game without any targeting with a basic sign up would pay about $.25 to $.40 per install.  Warning, these are incentivized offers and the quality of the users may not be that good given that they are not doing it primarily for the interest of your game.  However, if they are already thinking about paying for virtual goods on a social game one could argue that this would actually be a very attractive customer.

Another paid marketing channel are Facebook application ad networks.  These ad networks represent the ad inventory of many app publishers that serve up advertising within their app.  Given the explosive growth in Facebook and app traffic, the supply of inventory is greatly larger than demand so this inventory is very cheap.  This inventory is not incentivized and is served up as standard display ads.  You can also cut CPA deals with these ad networks mitigating your risk.  You should expect to pay about $.70 per install.

The third paid marketing channel is buying Facebook ads themselves.  These are the ones that you see on the right hand column while you are on Facebook.  If you haven’t seen the power of the Facebook ad platform, you are missing out.  You can buy on a CPC basis and the level of targeting is amazing.  Not only can you target by incredibly detailed demos but you can also base your targeting on specific psychographics whether it be interests and even more interesting if that person uses specific apps.  This type of marketing may be the most costly but you can still achieve $1 CPA or less with good execution.

So if the LTV of a user of a social game is only $.40, how do you make the economics work since your CPA costs from paid marketing is between $.25 to $1?  Well, this is when the Facebook Viral Loop kicks in.

2. Facebook Viral Loop Makes the CPA much better!

Successful social games know how to leverage all the viral marketing channels on Facebook by building incentives in the game.  Let’s take a look at how Farmville uses the Facebook viral loops.

– If you add more “neighbors” which consists of inviting your friends, you get to expand your farm.

– As you “level up” in the game they prompt you to post to your Newsfeed for all your friends to see.

– They constantly offer virtual gifts that you can give to your friends in order for them to join.

These are just  a few of the game mechanics to get users to share the game with their friends.  The main benefit here is that this is free marketing that really makes your marketing efforts much more efficient.  How well a game is at this viral marketing is measured and represented as a Viral Coefficient.   By effectively using the Facebook viral loop, an effective social game can reduce their effective CPA cost down to $.10 or less.

So let’s recap on wht the economics looks like:

If Life Time Value of a User > Cost per Acquisition then the game  will be financially successful.

So based on my estimates:

$.40 LTV of a user > $.10 CPA of a user = SOCIAL GAME GOLD RUSH!

As you can see the Social Game Gold Rush has less to do with any real paradigm shifts in game play or design.  Where the paradigm shift has happened is in Facebook being this incredible distribution system that allows the games to be viral.

What does the future entail?  Well, the economics of this distribution will change.  Cost per Acquisition will increase as it gets more competitive.  However, the quality of social games and apps will improve and monetization will become more effective.  This industry will be experience some serious growth over the next few years.