Free lunch: An idiom from economics that means getting something for nothing
Remember when Uber rides used to be cheap? For almost a decade, rideshare companies poured investor funds into subsidizing rides, sacrificing profitability for growth. The same dynamics played out more recently in food delivery. Companies trade unit economics for market share to win big.
I recently discovered — or more accurately had shoved in my face by a relentless advertising campaign — an interesting instance of this: online sports betting, recently legalized in my home state of Illinois. And by risking only thirty dollars of my own money, I walked away three hundred richer.
Let's investigate the mechanics and incentives in sports betting apps to figure out how to eat a tasty free lunch.
Joining the table
Customer acquisition cost (CAC): the price a business pays to acquire a new customer.
Businesses are willing to pay for valuable things. And the most valuable thing a business can have is customers. Businesses buy customers in different ways — a used car dealership buys radio ads while an executive consulting group buys box seats at the local NFL stadium — and well-funded startups are willing to lose money buying customers to grow faster.
A business can spend money in three ways to buy customers. It can go first-party: creating content marketing, shipping new features, commissioning a fancy landing page. It can go third-party: buying ads, sponsoring content, paying influencers. And it can go second-party: paying (part of) its CAC budget directly to its users. This usually looks like a referral program, but can also come in the form of subsidized prices or special introductory deals.
As online sports betting is legalizing state-by-state across the US, sportsbooks are competing for market share in a lucrative new market. Backed by a collective billion dollars in investor funding, companies like DraftKings, BetMGM, and FanDuel are willing to absorb massive CACs to gain popularity. While they are pouring money into first- and third-party channels, but they also have a refreshingly direct second-party channel strategy.
DraftKings, BetMGM, and FanDuel each dedicate a portion of their CAC to literally paying you to become their customer. When I signed up for each sportsbook, after a small deposit, I was given $200, $200, and $150, respectively, in site credit as free bets, along with other promotions designed to give me a temporary advantage in my first few bets.
Active User (AU): A person who engages with a platform enough to fulfill a metric
The site credit, unfortunately, cannot be withdrawn directly. It is subject to a "playthrough requirement" where you have to bet the credit, then can withdraw the winnings. This activates you as a user, and gets you used to betting hundreds of dollars.
The free money comes with a couple of other drawbacks. It has a quick expiration: one week on DraftKings, two on FanDuel. But more importantly, you only get the profit on a "free bet," not the profit plus the original wager as usually happens. Let me explain.
Say you make a bet with good odds: -200. These odds suggest that you have a 2:1 chance of winning, like betting on a decently favored team to win the game. You bet $50, you win, you get $75: your original wager back plus $25 in profit.
However, with a free bet, you only receive the $25 in profit. So starting with $200 in free bets, betting on these more likely odds would only net you $100 total, and that's if you win every bet. So instead, I bet on longer odds like +150 and +200, accepting a lower likelihood of winning for a higher potential payout.
Fortunately, you are able to split up the credit between multiple bets. DraftKings pays out the free bets as 8 $25 bets, while FanDuel lets you split up your $150 credit however you want. This gave me more chances for long odds to pay off.
With these constraints in mind, I decided to bet on one of my favorite sports, MMA, specifically across a couple of UFC events. My strategy was simple: pick the underdog fighter so that I had a chance of winning something substantial off of the free bets. In MMA, anything can happen: upsets, injuries, fouls, bad coaching, questionable decisions by the referees. I also bet on some NFL matches as I follow the sport closely.
If I had been betting real money, I would have lost about a $100 even accounting for wagers being returned. But as the bets were free, the ones that hit were pure profit. And it showed me just how unpredictable sports betting is:
- If (former) Indianapolis Colts kicker Rodrigo Blankenship had made a fairly routine 42-yard field goal to win instead of tie a game, I would be $150 richer
- If Leon Edwards had not pulled off a miraculous last-minute knockout to win the UFC welterweight belt from Kamaru Usman, I would have $60 less in winnings
After all of this volatility, I was able to successfully withdraw my winnings into my bank account from all three platforms without issue. My total profit is about $300, plus potentially a few dollars more after some one-dollar long-odds season-long NFL bets, such as if Tom Brady wins MVP or Dan Campbell wins coach of the year.
Customer lifetime value (CLV): The expected total amount of money a customer will pay over the time they use your service.
Sportsbooks are willing to absorb a remarkably high customer acquisition cost in their race for market share because of the high expected CLV per customer. I figure this CLV follows some kind of power law distribution; a few users generate a lot of revenue, the long tail generates little per user. For the free lunch CAC to work in your favor, you have to be on the extreme low end of CLV for the sportsbook. And the only way to do that is not to play.
Sportsbooks are designed to optimize an already addictive behavior, gambling. Constrained by laws protecting users, they try to build the most seamless experience to keep users playing. On average, sportsbooks make money from their edge.
Here's how the edge works. Say there is an event with even odds: a literal coin flip. Sportsbooks let you bet on whether the coin flipped at the start of the super bowl lands heads or tails. This is a 50/50 bet. However, the sportsbooks give -105 or -110 odds to each outcome, meaning you risk 100 dollars for 90 and change in profit. This makes the expected value of the bet negative. The same adjustment is made on every bet; in the long run the house always wins.
So the only way to reliably come out ahead is to withdraw your earnings as soon as you are done with the playthrough requirements. And no matter what, never deposit money again.
I expected this to be the hard part. Surprisingly, it wasn't. I should be just about the perfect customer for these sportsbooks. I am obsessed with sports and money. But not together.
Sports betting was fun as a novelty. I liked it better for MMA than football. But I don't want to do much more of it. I already care enough about sports that I don't need a financial stake to go along with the emotional one. In fact, betting rationally is no fun as it often goes against my desired outcome. And I much prefer fantasy football for that analytical experience.
I'm willing to place as many free bets as the sportsbooks want to give me, but I have gained no desire to risk my own money. I imagine they'll figure that out pretty soon.
Your table is ready
Net promoter score (NPS): The proportion of your users who would recommend your product to a friend.
It is hard to imagine someone I would recommend this whole endeavor to as a money-making activity. They would have to live in a state with legal online sportsbooks, which is a list that is only growing. But the greater limitation is that they would have to be sufficiently interested in sports and gambling to invest a good couple hours in the chance to make a couple hundred dollars, but not so interested that they become a regular customer of the sportsbooks and lose it right back.
Nothing on this blog is financial advice, and I certainly am not going to tell anyone that they should get into gambling. But in general, when venture capitalists heavily subsidize consumer products, I am in favor of collecting your fair share.