You’ve always dreamed of building video games, and here you are. But like most entrepreneurs, you probably didn’t anticipate the administrative burden that comes along with running your own business.
You likely realize there are financials you need to be on top of, but it’s not always as easy as it sounds. And while your accounting file might give you some visibility into performance, the insights are most impactful when combined with other data sources.
To put this all into perspective, we’ve broken down the key performance metrics you need to know, along with our accounting must-haves to successfully manage your gaming company.
Ready? Let’s go.
Key performance metrics for gaming companies
In the gaming industry, there are some baseline key metrics that you should know and follow.
It’s not a comprehensive list as you’ll want to refine this based on your business model. For example, your “users” as daily active users (DAU) and monthly active users (MAU) if your game is app or cloud-based.
1. Average revenue per user (ARPU)
Knowing your average revenue per user (ARPU) is key to building any kind of hypothesis around future growth and planning.
It’s simply your total revenue divided by the total user base. Revenue includes your one-time download fees, monthly subscription fees, in-game purchases, content downloads, and more.
This is an important number for investors and they will use this number to understand the value that users place on your game. Watching the trends in ARPU will also indicate if the perceived value of your game is increasing or decreasing.
2. Average revenue per paying user (ARPPU)
This metric assesses the profitability of each paying customer and the company’s ability to generate revenue. Average Revenue Per Paying User refers to the average amount of revenue generated from each paying user during a specific period. This metric only counts users that have paid your gaming company money for their subscriptions, in-app purchases, or downloads. It is mostly used by mobile app businesses to identify their most valuable customer segments and buyer profiles.
ARPPU = Total Revenue/ Total # of Paying Users
Though similar, this metric will always be higher than the average revenue per user (ARPU) because it only accounts for active paying customers, not the entire customer base.
3. Lifetime value (LTV)
In gaming, the LTV is the total monetary value of a single user over the time span of them playing your game. This is important because it will inform your company of how much it should spend on acquiring a single customer. To stay profitable, you should not spend more than the amount you will be earning from a single user.
Lifetime value = Average Revenue per Daily Average user * # of days a user spends in a game
This is the most basic way of calculating your LTV. Your company can use LTV to optimize each revenue source for profit maximization and estimate the game’s profitability.
This metric calculates the average net profit that each user will generate. It will allow you to have a view of a user’s financial contribution and their relationship with your gaming company. This metric is used to measure the growth of a company.
Lifetime value rate = (Annual profit contribution per customer * Number of loyalty years) - Initial cost of customer acquisition
The lifetime value rate metric can help your company gain and retain highly valuable users.
4. Retention rate
In free-to-play or subscription models, retention is a critical metric as it helps to highlight the relevance of your game. (Note, you may also track stickiness as its own metric by looking at the frequency of play, but we’re going to keep it simple here.)
There are different ways you can look at retention.
A very simple way of calculating retention is to take the total number of users in a specific period and divide it by the total number of users in a previous period (i.e. total users this month compared to total users last month).
Retention rate = Total number of users in a specific period/total number of users in a previous period
You can get more specific by separating users into cohorts. In this case, the segmentation is based on download date. Based on the download date, compare the number of cohort users on common days like 1, 7, and 30. The formula, in this case, would be cohort users on day 1 (or 7 or 30) divided by total cohort users. This is based on whether the user opens the app on those days.
Example: Retention rate = Total number of users over this month (30 days) / total number of users in the previous month
If you have a free-to-play model, then retention will look at a broader time frame after the point of conversion.
5. Churn rate
Churn captures how many players are no longer playing your game. High churn, naturally, is considered to be bad because you need to backfill churned users with new users just to maintain the status quo and it hurts your growth.
The churn rate can be as simple as the opposite of your retention rate. So if your retention rate is 40%, then your churn rate is 1-40%=60%.
Churn rate = 1 - retention rate
You can also look at it from the perspective of how many players are no longer playing your game after a specified period of time. You may decide that, say, 28 days of no play is indicative of a churned user. In this case, your churn rate would measure this.
6. Conversion rate
Measuring your ability to turn free users into paying users is a high priority for investors. A high conversion rate is, of course, favorable. The conversion rate measures the number of users that have made a purchase during a specific time period.
To calculate your conversion rate, take your users (unique) that have made a purchase divided by the total number of users within a specific time period.
Conversion rate = Unique users that have made a purchase within a specific time period / total number of users within the specific time period
If you have a free-to-play model with no in-game purchases, then you may look at ad clicks to calculate this conversion.
Accounting To Dos for Gaming Companies
#1: Keep up with bookkeeping
It’s very easy to avoid bookkeeping, and inevitably, fall behind. In order to calculate your KPIs, you'll need to have accurate financial data and up-to-date books. Furthermore, if your company is looking to apply for funding or grants, you’ll need up-to-date books to kick start the application process – and catching up on your bookkeeping can be an incredibly time-consuming process.
Your best bet is to have a dedicated person doing your bookkeeping, having processes in place to capture receipts, and getting your accounts reconciled properly every month. This will put your mind at ease and save you a lot of manual effort in the long run.
Pro tip: Don’t forget your GST refund in your pre-revenue days! If you are registered for GST, keeping track of receipts will mean that any GST you pay gets captured and you can later claim this amount for a refund.
#2: Build a cash flow projection that gets updated at least monthly
Building a video gaming company usually involves taking bold moves and requires a high upfront cash investment. Founders and CEOs naturally develop optimistic cash flow projections, but it’s critical to drop the rose-colored glasses and rely on your financial data.
An accountant can help build out this projection. By using your actual key metrics in your assumptions, you can plan for different future scenarios.
Pro tip: Compare your cash flow projections with your actuals. It is one thing to build a projection and another thing to build one and measure it against actual real-time results pulled from your accounting system. This is where the insight on your runway will become clear and you can rely on the data to make informed business decisions.
Build a strong bookkeeping foundation
We’ve only barely touched on accounting priorities for gaming companies – we didn’t even mention R&D credits like SR&ED or how to prepare for funder meetings.
At the end of the day, how your books are set up can have a significant impact on the insights you’re able to pull. Combined with your KPIs, you’ll have the visibility you need into your business to make decisions and drive growth.
If you’re looking for help with your bookkeeping or building out cash flow projections, reach out. We’d be happy to chat.
