High Customer Acquisition Costs Are An Ongoing Worry For Online Casino And Sports Betting Operators

In the great redistribution of wealth that is gambling, it’s a truism that “the house always wins.” However, that phrase, credited to 19th century bookmaker William Crockford leaves out a key detail: In order to truly win, the house needs to bring in more than it spends getting players in the door.

That truth is why 21st century iGaming and online sports betting operators are working hard to reduce their customer acquisition costs.

For US online gamblers, customer acquisition costs (CAC) may seem like a boring topic, not worth taking the effort to understand. They may not even see their app downloads as significant to anyone but themselves. They may not think of themselves as highly sought-after entities, much less proof of a bookmaker’s effectiveness.

The time is right to lower costs

Operators don’t mind this blind spot. In fact, it may work in their favor to seem endlessly rich. But finding and keeping profitable customers is the true goal of any operator, and it always has been.

Just as Crockford needed bored British aristocrats to regularly traipse into his luxurious London gambling hall, US gambling operators need to entice users to download their apps, wherever they’re legal.

So in 2021, three years after online sports betting’s legalization in the US, operators are working to reduce their CAC and increase the quality of their customers.

The reason for the timing is customer acquisition costs generally start out high, as they did in 2018. Then as apps are introduced in states, operators spend to entice the first group of customers.

However, now that online gambling markets in some states are becoming more predictable, operators can ease off on that spending frenzy.

They can stop losing so much of their revenue to the marketing and promotions necessary for initial customer acquisition. That way, they can ensure that the house does, in fact, always win.

Margin is as important as gross revenue

Online casinos and sports betting apps have smaller profit margins than Americans may realize.

Even if billions of dollars in wagers pass through their hands, the house only holds a few cents on the dollar for most casino games, and an average of about 7% on sports bets. That smaller amount is their gross revenue. All their various expenses then come out of that, leaving an even tinier fraction as net profit.

For instance, in Pennsylvania this March, statewide online sports wagering handle surpassed $514 million. However, taxable revenue (that is, after deducting direct promotional payouts to players) for those ten PA sportsbook apps was only about $26 million.

State-by-state profit figures aren’t available. However, looking at the market leader’s national figures, FanDuel’s casino and sportsbook apps generated $800 million in revenue during all of 2020 according to Morgan Stanley.

FanDuel’s primary owner, Flutter, controls 31% of the total US market. It said about half of the revenue of its US brands went to marketing spending in 2020. Most of that would be FanDuel, though the company also owns the Fox Bet, TVG, PokerStars and Betfair Casino brands.

Thus, we can assume FanDuel’s marketing spend was roughly $400 million last year, making it clear just how high CAC can be in the beginning.

Flutter’s US net profit was negative in 2020, so that’s a house that isn’t yet winning. Aside from growing revenue, the main way to push that profit into the black is to reduce expenses. Increasing the efficiency customer acquisition spending would go a long way in that regard.

Retail casino companies have the edge in customer acquisition

Worrying about customer acquisition costs is a luxury that only established brands can typically afford. Newer brands or those entering a market for the first time often require costly brand awareness marketing campaigns, often in the form of TV commercials.

In the relatively new US iGaming and sports betting spaces, the companies with the privilege of spending less on customer acquisition efforts are those with an established retail casino presence.

That’s because they already have brand recognition through those properties. They also have loyalty programs with sizable memberships to whom they can market their new gambling apps. For instance, operators like BetMGM – half-owned by MGM Resorts International – can attract new customers primarily with omnichannel, data-driven campaigns.

That’s how things have gone so far. Now the situation is starting to change.

Market maturity means an opportunity to slow down

US online betting app companies have been spending millions on brand awareness in markets where online wagering only recently become legal. Many of these states, such as Pennsylvania, are finally experiencing some stability after a lengthy period in which the market was establishing itself.

Some brands that hadn’t been household names before are now very well-known to their target audiences. Those brands now have sizable user bases and can start thinking more strategically about optimizing costs and increasing profits. One major place to seek such improvements is in upfront costs like customer acquisition, which can now become more targeted.

One method organizations often employ to perform such optimizations is creating so-called lookalike models, perhaps via rented email lists or contracts with data suppliers. They then use those models to create a picture of their best existing customers and market to consumers who most closely resemble them.

Additionally, as those markets mature and the operators are able to retain customers, they can start to use lower-cost options to find similar gamblers in those marketplaces.

The state of the states legalizing online gambling and sports betting

When states legalize online wagering, sports betting has often preceded iGaming. Michigan was an exception, with a synchronized launch in January 2021.

[ Editor’s note: We are ignoring New Jersey and Delaware here, because they were early adopters of iGaming at a time when sports betting was still illegal under federal law. ]

Many more states are coming online in 2021, increasing the audience for these apps. However, more legal markets also means higher CAC.

These states with legal online sports betting would be prime locations for operators to considering lowering their costs, if they haven’t done so already:

  • Colorado
  • Illinois
  • Indiana
  • Iowa
  • Michigan
  • Nevada
  • New Hampshire
  • New Jersey
  • Oregon
  • Pennsylvania
  • Rhode Island
  • Tennessee
  • Virginia
  • West Virginia

Of these, Michigan, New Jersey, Pennsylvania and West Virginia also have online casinos. However, New Jersey and Pennsylvania are the most mature markets for this vertical and already be seeing reduced CAC.

Customer acquisition costs are a necessary evil

Operators aren’t spending hundreds of millions on television commercials and other marketing efforts just for the fun of it. In any nascent market, even household name brands need to make consumers aware of their new products.

BetMGM, one of the Big Three online gambling and online sportsbook operators, enters new markets at a distinct advantage. It has name recognition and a 25-million-member loyalty program, M Life Rewards, which it can leverage to attract new customers to the app.

In its April 21 BetMGM Investor Day presentation, the brand revealed:

“Player acquisition costs drive upfront cash burn.”

In other words, the first three months after launch in a new state are expensive. After that, BetMGM can start spending less on marketing, until finally after three years, it expects to be turning a steady profit.

Elisa Richardson, head of public relations and communications at BetMGM, told Online Poker Report:

“We’re continually evaluating ways to reduce our cost of acquisition. Safe to say, it’s one area of focus for us in 2021 – but definitely not the only area.”

That is to say, operators lower CAC for their brands after they have done all they can with mass marketing and believe they won’t bring in enough new customers to justify continued spending at the same levels.

Operators say reducing CAC is a priority for them in 2021

It may seem early in the state-by-state rollout of legalized gambling for operators to optimize marketing spend. However, many of the operators already have online sportsbooks taking bets in about half of the states. So they may not have to do as much brand awareness work in those states once online casino gambling is allowed to launch there, too.

The operators who spoke to Online Poker Report for this story said CAC was a priority this year. FanDuel’s primary owner, Flutter, provided extensive thoughts on the subject.

FanDuel, the No. 1 operator in the US, saw $800 million in revenue during 2020 and only expects to generate more this year. That’s likely to happen, considering Flutter is expected to spin off FanDuel in an IPO – probably around July.

This focus on CAC may be due to Flutter’s hard work since obtaining a controlling interest in FanDuel in 2018. Before that, analysts believed FanDuel and DraftKings were spending far too much on acquiring DFS players. In 2014, they were mainly relying on venture capital funds in order to do so.

FanDuel

Vanessa Simpson, a investor relations and corporate communications manager with Flutter, responded to OPR about FanDuel’s CAC strategy:

“When considering customer acquisition it is important to take into account both sides of the equation (i) cost per acquisition (“CPAs”) and (ii) expected customer lifetime values (“LTVs”). Provided that the gap between these two variables remains attractive; investing behind the customer economics remains an attractive proposition.”

For FanDuel, customer economies “are very good” and new customers keep downloading the app across the US, she said. In Q1 2021, FanDuel saw more than 900,000 new customers come online, making the number of average monthly players rise to 1.6 million, a 132% year-over-year increase.

FanDuel CPAs

Simpson said FanDuel’s 9.5 million DFS players provide the operator with a huge competitive advantage in acquisition cost. Since 2018, when states could legally allow online sports betting, 41% of FanDuel’s sportsbook customers came from its DFS player roster.

She added:

“We are, therefore, able to acquire customers efficiently and at-scale through cross-selling sports betting and iGaming products to these DFS customers. This also allows us to acquire customers in US states that have yet to legislate for sports betting and iGaming. In 2020 we moved FanDuel onto our own proprietary account and wallet, making cross-sell journeys easier for players and, therefore, improving the customer acquisition funnel.”

FanDuel LTVs

“Once you acquire the customer it is then important to retain them with your product offering,” Simpson said.

That’s why Flutter’s “continuously investing” in its in-house product innovation, “to be first to market with products such as Same Game Parlay,” she said. Customers love how easy it is to use FanDuel Sportsbook. Plus, they said they enjoy its in-play betting offering.

Simpson continued:

“Providing customers innovative products satisfies consumer demand and maintains good customer retention on our platforms, with rates which were 80% higher than our mature markets. Ultimately this contributes to higher LTVs.”

Flutter’s mature markets are in the UK.

Simpson said in the growth market of the US, FanDuel is already seeing the value of customer retention. During fiscal year 2020, $91 million in revenue came from customers FanDuel acquired during 2018 and 2019 in Indiana, New Jersey, Pennsylvania and West Virginia.

She concluded:

“We will continue to reinvest to grow our customer base in both existing and new states further to retain our market-leading position. We believe our scale and structural advantage in DFS will enable us to continue acquiring customers efficiently.”

DraftKings

A DraftKings spokesman provided comparatively little information in response to OPR’s queries:

“Acquiring customers efficiently has and always will be a priority for DraftKings.”

However, an investor presentation from March shows DraftKings is optimizing its CAC as it goes:

“CAC efficiencies increase with every new state launched.”

Despite heavy spending on marketing and promotions when states launch iGaming and online sports betting, DraftKings also leverages its DFS player database well. The presentation shows the operator “consistently” gains 60% “of active DFS players during the first 12 to 18 months of an OSB and/or iGaming state launch.”

That’s partly how DraftKings realized a profit in New Jersey in two years. The company believes it can see a profit in each state within two or three years of launch.

So DraftKings plans to “achieve CAC efficiencies from national marketing scale” by going live in new states, which will make its products available to 33% of the American population.

Unibet and others

Maria Angell-Dupont, external communications manager with Stockholm-based Kindred Group, spoke on behalf of Unibet. She told OPR that her group, which owns 11 online gambling brands, is making customer acquisition cost a priority this year:

“Yes, improving our marketing efficiency and optimizing the CPA/CAC are top priorities for us in the US, as well as in all our markets.”

Unibet operates in New Jersey, Indiana, Pennsylvania and Virginia. During 2020, Unibet’s US operations generated £23.8 million in gross gaming revenue.

OPR also attempted to contact other operators for this story. WynnBet declined to comment, and a representative for 888 stopped responding after being told other operators would also feature in the article. OPR received no response from Bet365, BetRivers, Caesars, Golden Nugget Online Gaming and Penn Interactive.

Techniques for efficient customer acquisition spending

The next logical move to lower marketing costs is to migrate from brand awareness campaigns to nurturing existing customers. Marketers call that phase “customer retention.”

That change in marketing strategy usually means moving from expensive channels like TV to less expensive, digital ones – like email. That has its own challenges, of course. The biggest mistake is bombarding the entire mailing list with spam, rather than providing relevant information to opted-in, interested customers.

However, the main challenge in a mature market is continuing to acquire quality customers while lowering the cost of finding and converting them. The most common strategies have already been mentioned. Using existing databases for retail casino or daily fantasy customers is one. Lookalike models are another. Third party data providers may also have information about consumers willing to be contacted for marketing purposes.

Beyond that, marketers can branch out into direct response channels like direct mail, custom URLs and more.

The possibilities are endless, as long as operators stay on-brand and using marketing best practices, such as only contacting opted-in consumers.

An outside perspective from Riad Shalaby

In newly opened states, “first-mover advantage” to obtain customers is important, says Riad Shalaby, the chief marketing officer for Audience Acuity. His “consumer identity management company” works with operators to optimize their CACs, often significantly reducing them.

Shalaby told OPR:

“While the concepts are simple, successful implementation is tricky. Because success is more about organizational alignment, discipline and a firm grasp of marketing fundamentals in a dynamic digital environment.”

That’s why in more stable states, like New Jersey and Pennsylvania, operators need to think more strategically about market share and retention as they factor in tax rates and regulatory nuances, he said.

What’s the best CAC strategy?

The smartest CAC strategy is to incorporate a holistic, fact-based understanding of digital player behavior into the acquisition planning. That is, companies should model the known player attributes to help predict the drivers of new, prospective audiences, Shalaby said. That involves researching target audiences and understanding their behavior, communication and media preferences, as well as interests – and doing all this dynamically, in addition to studying transactions.

Shalaby said:

“Rationalizing marketing expense (getting marketing right) is fundamentally based on an understanding player behavior as players (and prospects) consider, engage and follow up with the online gaming brands. (Said differently, spending more time understanding holistic player behavior drives efficiencies in ad targeting and promotional spending.)”

One of the major aspects online operators wrestle with is that the behavior of online consumers if different from that of retail casino customers. The apps also have to create seamless, user-friendly experiences that engage customers. These may seem like obvious points, but if they have to be said, it means that some operators are still getting this wrong.

Online players live on their phones. They make the rules, not marketers.

Shalaby concluded:

“Player-defined recency will have an increasingly important role in driving marketing engagement, conversion rates, spending and loyalty.”

All of this work adds up to ensuring the house always wins. Crockford would be pleased.

- Heather Fletcher is the lead writer with OnlinePokerReport. She's a career journalist, with bylines in The New York Times, Adweek and other publications. Reach her at [email protected]
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