Playing Games

Mr$.$ Ford is a mobile game developer. He's developed a new game called MyPet whereby

customers raise their virtual pets on their phones. He will not charge customers to

download MyPet but he will charge for "add$-$ons" they can purchase in order to make their

pets happier $($e$.$g$.,$ snacks, toys$).$

He decides to acquire customers by running a Facebook campaign. The campaign will

serve ads to Facebook users who have shown interest in mobile games. That is$,$ these users

will be exposed to Mr$.$ Ford's ad$.$ They then can click through on the ad and download the

game. The campaign cost $$7$ per thousand ads served $("$exposures$"$ or "impressions"$).$

This is called a $$7$ cost$-$Playing Games

Mr$.$ Ford is a mobile game developer. He's developed a new game called MyPet whereby

customers raise their virtual pets on their phones. He will not charge customers to

download MyPet but he will charge for "add$-$ons" they can purchase in order to make their

pets happier $($e$.$g$.,$ snacks, toys$).$

He decides to acquire customers by running a Facebook campaign. The campaign will

serve ads to Facebook users who have shown interest in mobile games. That is$,$ these users

will be exposed to Mr$.$ Ford's ad$.$ They then can click through on the ad and download the

game. The campaign cost $$7$ per thousand ads served $("$exposures$"$ or "impressions"$).$

This is called a $$7$ cost$-$per$-$thousand.

Mr$.$ Ford runs this campaign. It generates $500,000$ exposures and $50$ users download the

game, thus becoming acquired customers. Mr$.$ Ford finds they generate $$20$ per month in

add$-$on profits. He also finds he retains $80\%$ of these customers per month $($measured by

whether customers continued to play the game$).$ He monitors these numbers for several

months and verifies that the $$20$ and $80\%$ are constant over time.

Assume Mr$.$ Ford uses a $6\%$ annual discount rate for valuing the long term.

a$.$ What is the lifetime value of a customer for the Facebook campaign? $[$HINT: Profit

contribution and retention rate are constant over time. This makes your calculation easier!$]$

b$.$ What is the return on investment $($ROI$)$ of the campaign $($ ROI$=\frac{\text{T}\text{o}\text{t}\text{a}\text{l}\text{p}\text{r}\text{o}\text{f}\text{i}\text{t}}{\text{T}\text{o}\text{t}\text{a}\text{l}cost}?$

c$.$ Mr$.$ Ford is thinking of reducing the prices of his add$-$ons. He assumes that users will

therefore purchase more add$-$ons, but because of the price reduction, profit contribution

from add$-$ons will slip from $$20$ per month to $$15.$ However, he believes retention rate will

increase to $90\%$ per month. Assume again these numbers will stay constant over time.

Also assume that the $500,000$ impressions, the $$7$ cost$-$per$-$thousand, and the $50$ users

downloading per $500,000$ impressions remain the same as in part $"$a$".$

Will Mr$.$ Ford be better off with his new plan or should he stick with the old plan? Justify

your answer.per$-$thousand.

Mr$.$ Ford runs this campaign. It generates $500,000$ exposures and $50$ users download the

game, thus becoming acquired customers. Mr$.$ Ford finds they generate $$20$ per month in