Late last week a piece of analysis circulated that Zynga was losing $150 on every new paying customer. It was widely reported by just about all the mainstream games media. There was just one problem: it was complete crap.
The original article states that Zynga’s marketing spend for nine months (Dec-Sep) was $120MM and the difference in paying users was 400,000 (they started with 3M paying users and finished the period with 3.4M). Hence, acquisition cost per user is $300.
“Over a period of nine months, Zynga (like all social games companies) will lose a proportion of paying users through normal attrition. Let’s say that this attrition rate is approximately 20% (may actually be higher or lower). With a base rate of 3M users, that’s a loss of about 600,000 during the period.”
“However, Zynga finished this same period with 3.4M paying users so taking this attrition rate into account, this means they actually acquired 1M new paying users (or 2.5x what the original article suggested). With a $120MM marketing spend, this obviously equates to an acquisition cost of $120/new paying user. And with an average revenue per paying user of $150, it means Zynga are actually generating $30 of net revenue per user.”
“Obviously, all of these calculations are back-of-the envelope. Not all of the $120MM marketing spend will be for user acquisition. And not all of the new users are acquired through marketing (Words With Friends being one example of a successful non-marketing acquisition channel).”
This whole debacle highlights how little Wall Street really knows about gaming but I’m still not sure whether to be more embarrassed for the analyst or for the various media who didn’t stop to question the numbers in the first place.
(Btw, for future games industry debunking, you should follow Torsten on Twitter).