Books face a delicate balance in the war to win sports bettors

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Take a walk to the Rivers Casino & Resort in Schenectady and there’s a good chance you’ll catch a glimpse of a billboard promoting mobile sports betting in New York.

The banners, similar to Caesar’s sports betting ads Curb your enthusiasm Star JB Smoove as the Roman dictator of the same name are ubiquitous in the capital area of ​​New York. With online sports betting now available in the nation’s fourth most populous state, the race is on to capture the sports bettor’s wallet.

On Saturday, the first day of mobile sports betting in New York, bettors placed more than 300,000 bets in the opening hour of the state debut, according to geolocation security company GeoComply. Overall, GeoComply recorded 17.2 million transaction volume during the first weekend of online sports betting in the Empire State, an unprecedented figure in the short history of the US legal sports betting market since the Supreme Court’s historic PASPA decision in 2018. Convenience seems to be important, especially when it comes to in-game betting at popular Manhattan dive bars.

While it’s early days, numbers suggest that sports bettors could hit a $1 billion run on online gross gaming revenue in 2022. If the first cell phone week in New York is a harbinger of market dynamics for Year 1 overall, then the struggle to acquire new customers will be cutthroat.

Ever since New York legalized mobile sports betting, leading sportsbooks have grappled with a difficult business proposition. On the one hand, sportsbooks need to spend enough on free bets and other clever promotions to outsmart their competition. However, companies must be sensible enough in their spending habits to generate a hefty return on investment relative to a metric known as customer lifetime value (LTV).

“Managing this ratio is absolutely essential for anyone in this industry,” said Matt Prevost, BetMGM’s Chief Revenue Officer sports grip. “Every finance team will look at things differently. You have to go in knowing that there is enough of it in the LTV [the customer acquisition costs, or CAC] will play a role.”

The importance of the LTV:CAC ratio

In 2020, DraftKings reported that the lifetime value of a customer was around $2,500, while the average CAC was $371 per customer. Since New York granted conditional mobile sports betting licenses to nine companies in November, sports grip has reached out to a wide array of industry experts — sportsbooks, Wall Street analysts, marketing consultants, and others — to assess whether New York’s metrics will be in line with the rest of the nation.

The unique aspects of the New York market make the exercise challenging, as evidenced by differing opinions. When asked if the CAC cost will be sustainable in the market, some believe it could be astronomical at first and eventually drop significantly. Analysts with no skin on the game suggested acquisition costs could fall in the $1,000 to $2,000 per customer range, while officials at a New York-based mobile sportsbook expressed cautious optimism the cost wouldn’t be that high.

“Oh, I hope not. I hope it’s a lot less, that would be insane,” said Soo Kim, Bally chairman sports grip last month on the sidelines of the SBC North America conference in the Meadowlands. “I don’t even understand how people would make money there.”

Bally Bet is one of four prominent companies that participated in a so-called “super bid” to gain market access in New York. Two of the four, DraftKings and FanDuel are now live while Bally Bet and BetMGM prepare to launch.

Market trends have evolved over the past 15 months as DraftKings’ LTV:CAC ratio has remained at around 6.75:1. For context, a ratio of around 3:1 is typically considered to be one preferred among SaaS (Software as a Service) companies, a subset used by analysts as a comparative tool for evaluating sports betting IPOs. As the ratio approaches 5:1, it’s widely believed that companies are stifling growth by underspending. Conversely, if the ratio dips closer to 1:1, these companies may be overspending.

When calculating lifetime value, companies look at “churn,” or the rate at which customers end their relationship with a company. For example, if 5% of a company’s customer base stops placing bets on mobile sportsbook over a 12-month period, the average customer lifetime is around 20 years (1/5% churn rate). The company will also achieve a customer retention rate of approximately 95% (1.00 churn rate).

Lifespan = 1 / churn rate

Average Revenue Per Account (ARPA) = Total Recurring Revenue / Number of Accounts

Gross Contribution = ARPA*Gross Margin

Lifetime Value (LTV) = Gross Premium * [Retention Rate / (1 + Discount Rate – Retention Rate)]

Customer Acquisition Cost (CAC) = Total Sales and Marketing Spend / Number of New Customers Added

LTV/CAC ratio = lifetime value / cost of customer acquisition

Methods according to WallStreetPrep.com

When calculating customers-per-acquisition metrics, one of the most difficult aspects is determining what goes into the counter, Prevost explains. While it’s striking, it’s now common for top companies to spend hundreds of millions each quarter on sales and marketing.

DraftKings spent $304 million in this category in the third quarter of 2021, marking the fifth straight quarter in which the figure exceeded $170 million. Caesars CEO Tom Reeg, meanwhile, has unveiled a plan that includes plans to invest $1 billion in sports betting and iGaming spending to capture market share.

Reeg appeared on CNBC on Monday Squawk box Morning Show to discuss the company’s opening weekend in New York. Caesars is offering new customers $300 in free bets and a first deposit of up to $3,000. Reeg said Caesars would incur “significant startup costs” from such incentives and from airing commercials at top sporting events. Still, he projects that Caesars Sportsbook will be profitable as a company by the 2023 football season, while the company’s sportsbook division will deliver EBITDA margins of 25-30% at maturity.

However, New York offers a unique market environment. A state-high tax of 51% on gross online gambling revenues will put immense pressure on operators to spend wisely. EBITDA margin, which measures a company’s earnings as a percentage of sales, can be a better gauge of long-term success than sales alone. In other states, it is much easier to achieve a desired margin with a low business tax rate, said Crispin Neiboer, partner at British consultancy Orange Cap Ltd.

Consequently, the stifling tax rates could be a major factor in whether the New York sportsbook can sustain the promotional blitz beyond Year 1.

“It’s going to take a lot of soul work on how heavily you’re going to handle marketing,” Neiboer said sports grip.

The road to profitability

The New York environment can also force operators to find creative ways to differentiate themselves from the competition. A loyalty solutions provider, Philadelphia-based OtherLevels, sends automated intelligent messages to sports bettors to inform customer behavior.

For example, on an NFL Sunday just after New Years, you can check NFL scores between pickup games at a local YMCA. Then suddenly Antonio Brown rips off his jersey and storms off the field at MetLife Stadium. You have a sizeable bet on the Bucs moneyline. A warning from OtherLevels about Brown’s departure might convince you to hedge with the Jets in the in-game market.

“For me, it’s about player engagement,” said Jenny Lu, who serves as general manager of OtherLevels’ North American division. “You can’t hold them by throwing money over them. You keep them by actually engaging them and giving them information they want to hear.”

Industry heavyweights may be able to absorb the excessive costs if they can provide strategies for using sports betting as a means of expanding other “neighboring sectors,” according to Lloyd Danzig, founder and managing partner of Sharp Alpha Advisors. These sectors include complementary business segments such as digital collectibles, crypto trading, brick-and-mortar sports bars, and NFT marketplaces, in addition to various NextGen initiatives targeting millennials.

“Because New York is such a highly visible state and operators have so many eyes, some operators may be a little less sensitive to customer acquisition costs as they seek to bolster lifetime value with revenue opportunities outside of sports betting,” Danzig recounted sports grip.

For one, DraftKings is investing heavily in its NFT marketplace. Last July, DraftKings announced a partnership with Autographs, a digital sports collectibles company backed by Tom Brady. When it comes to New York, DraftKings is playing the long game. DraftKings CEO Jason Robins plans to use a playbook similar to the company’s in other prominent states to chart a “two- to three-year path to profitability” in New York.

When asked if New York’s top players can make profits that quickly, others aren’t so sure. While Neiboer pointed out that DraftKings can take steps to become profitable by acquiring a smaller operator, he believes the task is more difficult when the company tries to do it organically. The New York client acquisition environment will be intense, and Neiboer expects DraftKings’ competitors to keep fighting.

“It’s going to be a while before anyone makes money in New York,” Neiboer said.

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