Online Casino Financial Model
Bonjour! Today I want to make a discussion about an online casino financial model. This may be interesting for those of you who:
- want to start an online casino,
- who already have an MVP, and
- for those who want to invest in an online casino.
Below is a video version of this discussion for those who prefer to watch.
Application of unit economics
So here I insist on the use of unit economics in modelling online casino finances. For exact definition of terms I use below, please my article on use of the same financial model in making an audit of casino's affiliate teams performance.
Revenue stream: number of units & price per unit
If you look there, you will see that the revenue stream is made up of the number of units sold and the price per unit. Here, in the world of online casinos, we take it for the number of New depositing customers (NDCs) or First time depositors (FTDs), whatever you call them, as well as their Lifetime value (LTV) per quarter.
Why do we even say first time depositors?
So why do we even say new depositing customers or first time depositors? This is to emphasise that we have to be careful to address them correctly in the balance sheet, in our financial statements, because each customer, each player, has to be counted as a real unit only when they make their first deposit and throughout their lifetime.
For simplicity's sake, we take a lifetime value of just four quarters or one year. After that we assume that the Lifetime Value is completely exhausted. So whatever a player brings in after that is added to the lifetime value of the second or next customer.
Expense stream: Fixed costs, variable costs and SG&A
All right, if you look at the expense stream, you'll see that it's mostly made up of Fixed and Variable costs or expenses. So fixed costs are something that you incur no matter what you do, no matter whether you bring in new customers or not. It's mostly your salary for the core team, rent and other expenses that you would incur on a daily basis. The variable costs, on the other hand, are something that can be clearly attributed to the number of units sold to a number of customers. So it means they are really easy to calculate. So it includes, for example, the expenses of the marketing function, also the costs of customer acquisition and so on and so forth.
So the trick here is to be able to correctly allocate all the things that you have, all the numbers that you have projected or real that you have on your balance sheet to fixed or variable expenses, to break them down to LTV by quarter, to accurately calculate the number of your first time depositors.
A link to online casino financial model template (free)
So I'm going to leave a link to an online casino financial model that I've built, and I recommend it for use. It is free. You can download it from the link. It's a Google Sheet document. You can copy it if you want to, not to edit it right away because somebody else might be downloading it too. But the idea is that the financial model is available for free, except that you might need some additional ideas on how to use it.
So the model is quite simple. It consists of four parts.
Composition of the online casino financial model
- the revenue build, then, it's
- the Income statement, and finally,
- Product operations ratios and
- Business operations ratios.
So now that we see the revenue build, we can discover: What are the costs of running a business? What is the margin on sales? And what is the growth potential of this business?
So this revenue build part includes:
- number of FTDs or new depositing customers,
- the LTV by player by quarter and then the
- fixed costs and
- the variable costs.
The fixed costs are something that's necessary to run the business and the variable costs are made up of two strings: one is a customer acquisition cost or CAC, which is a cost per acquisition or CPA per se, and the other part of the variable costs, which is specific to online casinos, is called revenue share.
So when we look at the number of FTDs, we look at the LTV, we look at the total variable cost and the total fixed cost, we have the Revenue build template like this.
So we are talking about the next one and the next one is the income statement. So here in the income statement we have revenue, fixed costs, variable costs and the resulting gross profit as well as selling goods and advertising (SG&A) costs. So in this order, to get revenue, we multiply the number of FTDs by the LTV on a quarterly basis. To arrive at the fixed costs, we take the part of the total fixed costs that we allocate to a particular quarter. And then to arrive at the variable cost, we calculate the sum of the customer acquisition cost, so the prepay plus the cost per acquisition( the CPA) together with the revenue share part of the marketing cost.
What we have is, we subtract from the revenue the fixed costs, the variable costs, and that is how we arrive at the gross profit. And then from the gross profit we subtract the variable SG&A. This is a platform fee, actually, all the fees that you pay as an operator to run all the casino platforms, as well as other costs, for example, retention costs, other selling expenses and so on and so forth.
How income Statement formulas work in the Spreadsheet
So if you look at this file, you'll see the income statement, the revenue is growing significantly from quarter to quarter. So to find out how, you would click on the cell. You can see that it's actually done by multiplying the number of FTDs by a quarter by the LTV by a quarter. What's interesting is that, as we discussed, the lifetime of a player is one year.
So effectively the LTV is added up or aggregated quarter by quarter until it's finished or completely exhausted at the end of the year. So it means that... After the fourth or fifth quarter, when growth has stabilised and margins have flat, it's time to realise all the profits.
And this is where you will see the flat margins that we are talking about. So if you look here, the fixed costs are spread evenly. Revenue is galloping because it's built by aggregating LTV by quarter and they have variable costs also the same, they're galloping because all the time it's aggregating the revenue share and the prepayment of CPA of new players.
So the gross profit obviously goes from negative to positive and then stabilises around certain amounts. The platform and distribution costs are also related to the revenue because they are part of your revenue. So obviously in this model we are using some numbers. They're close to real for some geographies.
You can have your numbers, but the bottom line will still come through.
Product Operations Ratios
So the next one is the Key ratios and the first one is the Product operations ratios. So now that we've done the financial model from the revenue build part and the income statement, we want to look at the indexes or ratios, which are the relationships between the numbers that we have. So here in the product operations ratio's part, we have units growth or how the number of customers or units is growing by period, the pricing growth or how the L T V or what we earn from each customer is growing by period.
Then ROAS or return on advertising spend, which is the ratio of variable costs, which for us is essentially advertising, to revenue. So it says how effectively we are leveraging the variable cost or the advertising cost to get to the revenue.
So that is a gross margin. Gross margin is one of the most important ratios here. And it says, it says the ratio of gross profit to revenue. So it actually tells us how much money out of the revenue we can keep as profit less fixed costs and variable costs. Finally, these are two, these are two more ratios: LTV by CAC and unique contribution margin.
So LTV by CAC, it shows the relationship between how much we paid to acquire a player or a customer and their lifetime value, what proportion of their lifetime value that player brings us after we have paid money to acquire them. And the unit contribution margin shows us how each unit, or in our case a customer, helps us cover the fixed costs.
That is the cost of paying rent, salaries and so on. So basically these are the ratios that you want to know when you look at the casino's profit and loss statement.
Practical uses of this financial model
What could be a practical application of this financial model? I can think of at least three cases where it could be really useful.Firstly, let's say you have been invited to become an investor in an existing online casino. So what you might be interested in is the overall reasonableness or how their financial model compares to your understanding and whether the projection of ROI is even plausible, or even realistic.
So this financial model can also give you some answers.Firstly, is the pace at which they are growing their customer base realistic? What is the LTV that they have put into the model?What is the average?What is the LTV that they're claiming?And finally, the cost of customer acquisition: what is their amount and what is the structure of the cost of customer acquisition: what part responds to prepayment, CPA and RS part. The next case is that, suppose you're a person who wants to start a casino himself or herself, and who is looking at different proposals to figures from online casino platforms. And the question you ask yourself is, will this business be profitable? In terms of platform fees. And the focus of your efforts might be the gross profit versus the variable costs as well as the other costs of selling and running a business, including the platform fees.
So the answer to look at here is your ability to bear the minimum level of marketing requirements, marketing costs, customer acquisition costs in order to maintain profitability or to realise profitability over the numbers. And the second area to look at is the ability to cover the required amount of expenses, including the platform fee. If you are able to cover those fees at all. And the third point of application is, for example, if you're trying to scale up. For example, you've already built your casino and you want to scale up or you want to go to the next level.
So this financial model will give some answers to the point of better understanding the effectiveness of your affiliate teams or overall your customer acquisition teams.
Please contact me if you have any questions by email: [email protected]