Maybe Zynga's Analytics Show What Will Kill the Company's Growth

Zynga proclaims its secret of success: it's an analytics company masquerading as a gaming company, as data analysis vice president Ken Rudin revealed to the Wall Street Journal.

Sorry, was that supposed to be a secret? Making intelligent use of analytics is a must for any marketing, and the practice goes back at least 80 years. The clever twist that freemium companies -- and that's exactly what Zynga is -- grasped is that you could use the Internet to do your marketing at low cost. But any direct response business has limitations, and the ones that Zynga likely knows will be unlikely to appear in its IPO fillings. They would be too scary for investors.

Always about who you can draw in
Direct response marketing has worked since the 1870s because of two factors: artful psychological pitches and coldly reasoned analysis of results. The interesting thing is that the logical analysis actually leads to recognizing the psychological brilliance.

That's because companies follow the results to see what actually works. Is headline A or B more effective, all other things kept constant? Which list of recipients is more likely to yield responses to a particular marketing pitch? Over the years, direct marketers gained many useful insights, such as longer headlines work better, or adding a note to the person who isn't inclined to buy from a direct mail package can add enough incremental response to make the additional cost of printing and mailing worthwhile.

At the heart of any smart direct response campaign -- and that includes all the activities of freemium businesses -- is the understanding that you focus on your potentially best customers and learn through experimentation what will get the largest percentage of them to purchase.

Zynga uses tools already in wide use
The same is true of Zynga, which first looks at what seems to work and then reproduces the method:

Traditional videogame companies create games they think players will like, then sell them. Zynga offers free games through Facebook Inc.'s social network, then studies data on how its audience plays them. It uses its findings to fiddle with the games to get people to play longer, tell more Facebook friends about them and buy more "virtual goods." At the heart of the whole process is Zynga's ability to analyze reams of data on how players are reacting to its games.

Why fight the SEC over saying how big the audience is?
One big reason that Zynga delayed its IPO was because it has avoided stating what percentage of its customers pay for virtual goods. So far, SEC pressure got the company to admit that less than 5 percent of players are actually paying customers, but the agency wants a more definite statement.

Zynga doesn't want to say for two likely reasons. Such a statement offers important information to its competitors, but that's part of the drawback of a public company. The other is concern that investors would not be so warm if they know that Zynga only got 1 or 2 percent of players to pay.

That wouldn't be unusual in a direct response model. But talk about psychological hurdle. If you haven't worked in a direct response business, that sounds really bad. Then again, what percentage of the populace buys coffee at Starbucks? Probably not much more.

The scary question
There is also probably a bigger concern at Zynga. If it has to admit to actual percentages, what then keeps the SEC and investors from demanding to know the demographics of the paying players? For a growth tech company, you'd want to know not how big the current audience is, but how many more people who fit the demographics of current paying customers there are left and what it would take to reach them.

According to mobile analytics firm Flurry, the 25-to-34 year-old age group spent 49 percent of the money on freemium mobile games. Even people 35 to 54, the second largest-spending group, only accounted for 28 percent of spending.

That's for mobile games. Maybe the statistics are different for those playing at home. But take it as the best available data for a moment. Customers spend money when they have disposable income and enough time to play. That's why25 to 34 becomes a key age group: enough time and enough money.

But the median age of the U.S. is getting older at the moment, according to the Census Bureau, and as young people get older, the number in the sweet spot for freemium gaming will drop:

Chances are, Zynga may find it difficult to keep expanding its revenue over time unless it can get paying players to shell out more and more, and there will be a limit to that.

Also, Zynga is highly dependent on Facebook to make its revenue. What if Facebook has a small likelihood of significantly expanding its subscribers in the necessary demographics?

These are questions whose answers will determine if Zynga is likely to keep on its growth spurt, or, if like Groupon, its glory days seem to be waning.

Related:

• Zynga Delays Its IPO to Keep the SEC Happy
• Groupon Might Be Fine, If Only Its Customers Weren't Burning Out
• Zynga: This Year's Zinger IPO, With Revenue, Profit and Hype
• Zynga IPO: Real Profit Puts Zing in Its Public Offering
• 8 Things You Didn't Know about Facebook and Zynga