When does marketing become arbitrage?


Jon Radoff, the CEO of mobile gaming company Disruptor Beam, gave an excellent presentation at GDC 2014 about mobile gaming commerce models and the interplay between customer acquisition costs, lifetime customer value, and profit. In slide 19 of his presentation, he lays out the differences between two content-oriented business models: the gaming business and the arbitrage business.

Conceptually, the difference may seem obvious: gaming companies focus on game development and arbitrage companies focus on scaling the spread between lifetime customer value and customer acquisition cost through marketing operations. But in practice, those two activities aren’t mutually exclusive, and neither is unique to mobile gaming. Very few consumer tech companies are able to grow to global scale without investing in marketing infrastructure and eventually focusing intently on achieving positive yield on customer acquisition (LTV > CPI). This is arbitrage masquerading as marketing — but is it a bad thing?

Probably not. Benchmark Capital’s Bill Gurley argues that LTV zealots take comfort in the deterministic nature of the LTV formula and confuse it for a competitive advantage – and he’s absolutely right. LTV quantification is, at best, fuzzy and, at worst, horribly misconstrued gut-level bias arithmetic. Often, the assumptions that go into LTV calculations are completely dependent on the dynamics of the relationship between user acquisition and monetization that are at odds with each other (for instance, increased marketing spending resulting in lower per-user monetization as a result of adverse selection). LTV therefore doesn’t “scale”; user base growth feeds back into the LTV calculus and creates a setting in which most product metrics are moving targets.

But precisely because marketing arbitrage is not a business model, it cannot force the distinction between a content company and an arbitrage company. In other words, since marketing can’t (and absolutely shouldn’t) be seen as a proprietary competitive advantage, it can’t (and shouldn’t) define the business’ strategy. Just because a company invests heavily in marketing doesn’t mean it’s no longer focused on product.

Reaching massive, global-level scale almost by definition involves building a marketing operation that, at some point, will resemble an arbitrage machine: acquire users for less than they are expected to contribute, minus the costs of servicing them. That’s not to say that marketing ever becomes “more important” than product or that organic growth is not essential. But virality has its limits, and organic growth is constrained to the potential users most enraptured by the product’s purpose. If a product can (profitably) grow larger than what virality and organic discovery provide, should it not just because arbitrage-based marketing tactics would be involved? Why leave that money on the table?

At a large enough scale, all marketing is arbitrage, even virality-oriented product development and PR. This doesn’t mean that a company’s strategic focus is arbitrage or that product is relegated to an afterthought; it simply means that consideration is paid to bringing users into the product’s orbit that haven’t been affected yet by the product’s own gravitational pull.

It also doesn’t mean that concepts like brand and the Four Ps lose relevance – brand marketing and performance marketing can co-exist.

So when does marketing become arbitrage? Probably at the point past which additional user base growth can’t be relied upon without addressing the unit economics of marketing campaigns (ie. performance marketing). Some products might never reach that point, and for others this might be a starting condition at launch.

But this being the case – that the product can’t break some user base threshold through word of mouth and organic discovery – doesn’t negate the primacy of product quality. In fact, a product’s marketability – that is, that money can be profitably spent in acquiring users for it – reaffirms its quality.