Customer Acquisition or Customer Bribery?

DraftKings is the poster child of online gaming for overspending on customer acquisition. And the company paid the price in its fourth-quarter results. But how should you acquire players in a cost-effective manner? Bruce Merati has some suggestions.

Customer Acquisition or Customer Bribery?

DraftKings’ stock price dropped by 21 percent on announcing its 2021 fourth quarter’s results to a recent low of $17, representing a 74 percent drop from its all-time high price of $72 in 2021. It was a bonanza payday for short sellers who foresaw it coming, for some it was a windfall bigger than any jackpot any casino has ever paid out. Reviewing DraftKings’ 10Q for the nine months ended September 30, 2021, sales and marketing which primarily is customer acquisition cost was 86 percent of its revenues and 130 percent of its cost of revenue.

Customer acquisition makes sense for certain businesses, but it is hard to justify the cost for a business such as sports wagering, a business which has low margins, is too risky and is for a product that essentially is a commodity. When it comes to fixed odds wagering, sportsbooks fundamentally offer the same product unless they differentiate themselves with more advantageous odds and payouts to the consumer than their competition, a strategy that could be extremely risky.

In states with online wagering and multiple operators, bettors can open accounts with several operators, shop the lines and look for promotions before they make a bet. Some promotions currently offered by some books are not going to be sustainable and will not work long-term as they are more like bribing and spoiling the customer than acquiring them. As an example, a promotion with a 100-percent deposit match bonus may give an operator new customers and new revenues, but the question is whether it makes sense when the bettor, after taking advantage of the bonus, can easily look for another promotion from another operator at the comfort of his couch.

Spending money to acquire a customer makes sense when you are selling something unique, but it doesn’t always pay when you are selling a commodity product that has a low margin. If I use a simple example where a bettor deposits $250 and receives an additional $250 as a bonus match and places 100 bets averaging $50 per bet on fixed odds with point-spreads i.e., a 50/50 chance to win, over say a three-month period, the player’s balance at the end of that period will be at $250 representing the player’s deposited amount. This means the player essentially gambled with the house’s money during that three-month period.

The math for the above example is simple: the odds of winning on each bet is 50/50, total amount wagered is $5,000 (100 bet times $50 average bet) and gross gaming revenue is $250 (5 percent juice times $5,000 wagered). At the first glance the operator seems to be winning and can brag about its increased revenues and more bettors but looking under the hood, the book lost in many other ways. It paid for all the fees associated with the business such as credit card, KYC and geofencing fees, etc. plus the operator now must pay wagering taxes on its $250 net win which could be as high as 51 percent in a state such as New York.

In the U.S. where gaming is highly political and is controlled by land-based casinos, translating sports wagering business to online casino gaming, a business which unlike sports wagering is very profitable is not going to be a slam dunk for an operator that does not own or have access to land-based casinos to market its products. Spending money to acquire new bettors will ultimately benefit land-based casinos who will get the benefit of a new breed of bettors who have already learnt how to bet and are accustomed to betting at the expense of their competition. An operator with a local casino can easily do cross marketing promotions by offering loyalty points that can be redeemed at their properties if they make deposits for online wagering.

To distinguish themselves from their competition, sportsbooks who cannot compete with land-based casinos in offering loyalty points in line with those offered by land-based operators need to be innovative and offer new products which are unique and offer new values to the consumer without adding to their sales and marketing costs to make their business unprofitable.

For example, they can offer innovative products or tournaments with potential high payouts or offer added benefits such as bundling their payouts with NFT prizes. Non-fungible assets (NFTs for short) are “one-of-a-kind” assets in digital format that have value, can be bought and sold like any other piece of property and are increasingly becoming popular especially with the younger generations, the demographics that tend to bet on sports and are not typically attracted to casino-style games such as slot machines to care about casino loyalty points.

Articles by Author: Bruce Merati

Bruce Merati is cofounder of BC Technologies, a sportsbook system provider and CEO of Uplay1, a gaming IP company.