Don't Go Chasing Waterfalls

Focusing on the wrong metrics has created an environment where the sports betting industry is chasing vanity metrics instead of building a sustainable ecosystem.

Earlier this week, I highlighted an interesting data point from Eilers & Krejcik Gaming (a newsletter sponsor): Fanatics’ promotional spending to gross gaming revenue (GGR) ratio surged to 76.7%, with its promo-to-net gaming revenue (NGR) ratio reaching a staggering 334.0% in the trailing three months.

Davis Catlin from Discerning Capital picked up on the data, saying on LinkedIn, “This metric indicates to me that the US online casino & sportsbook market still has too much money chasing too few opportunities.” I’ve included Catlin’s complete thoughts at the end of the column.

And that is the million-dollar, or in this case, billion-dollar question for the industry.

The US online gambling market’s total addressable market (TAM) is vast, with online sports betting and casino gaming poised for growth as markets mature and more states legalize. Yet, customer acquisition cost (CAC) remains a formidable barrier, eroding margins in a sector where differentiation is elusive — basically, customers are following a trail of free money from operator to operator.

Companies are pouring capital into customer acquisition, betting on scale to offset early losses. While the TAM offers immense potential, the CAC’s relentless pressure highlights a sobering reality: growth comes at a steep cost, and only those with staying power will thrive.

Critics would argue that the industry’s strategy is a doom loop that prioritizes aggressive customer acquisition over immediate profitability, underscoring Catlin’s broader truth about the US online gambling landscape — an influx of capital is chasing a limited pool of opportunities.

The numbers paint a vivid picture: for every dollar of net revenue, Fanatics is spending over three dollars on promotions. This is akin to a retailer offering steep discounts to fill stores, banking on repeat customers to justify the loss. Such a strategy hinges on whether Fanatics can convert these costly acquisitions into loyal, revenue-generating players over time.

As Catlin noted, “It's more likely that they are burning capital with 24-month paybacks hoping to get to scale.”

We Get Numbers, But Not the Right Numbers

According to Catlin, the most important metrics for an online sportsbook are customer Paybacks and 12-month retention by revenue, which will give you a lifetime value for the customer relative to customer acquisition cost (CAC):

• Customer Paybacks, which Catlin’s firm defines as gross profit minus CAC, gauge the short-term return on each acquired player.

• 12-month retention, measured by revenue, indicates how much those players contribute a year later.

Here’s where things get interesting, and this is something I’ve been hinting at for quite some time in the newsletter: If companies spending like drunken sailors are achieving substantial paybacks and retention, their promotional blitzes could be a savvy investment that is building a durable user base.

However, as we continue to rely on handle numbers, a misleading narrative begins to take shape, particularly with all the promotional dollars in circulation. Handle is a seductive but deceptive figure, often inflated by promotional dollars that drive short-term betting activity without ensuring long-term profitability.