Let’s be honest – marketers lo-oove to complicate things. Coming up with dozens of new metrics to track each quarter, abbreviating them and confusing the rest of us with the end product. So to make the lives of everyone, including the said marketers, easier today we will review the hot and trendy KPI among the mobile app industry called the User Lifetime Value or LTV, for short.
To give an all-way-round inspection on the subject of the LTV metric, we’ll divide the article into answering the following questions: how to calculate the LTV metric, why is it important and how to visualize it.
What is LTV & Why it’s so important
The user lifetime value, or the customer lifetime value, as mobile app marketers also call it, signifies the amount of money you can expect to get from a single customer over the entire course of his or her lifetime. That means all the transactions the app user performs combined – all the small, medium and large purchases, subscriptions and other buying activity he conducts since when he first downloaded and opened your mobile app to the time he’ll last open it.
Okay, we get it, you’d say, it’s one of those marketing metrics they advise you to know to measure overall app success, but why is LTV so important?
And to that question, our dear reader, we’ll say that tracking lifetime value of your app is crucial for a number of reasons:
Reason to measure LTV (User Lifetime Value) №1
The first reason for quantifying app’s success using LTV is that it gives us a clear perspective on our spendings. When we have our app user’s lifetime value figured out, we can be knife-sharp when it comes to the dollars we are willing to spend on acquiring a new customer, and the money we are willing to invest to keep him.
Your LTV higher than CAC (Cost of customer acquisition) and you’re good, vice verse – and you have to be prompt as that’s a short way to bankruptcy. Having this end number of how much one customer will bring us money in his lifetime allows us to adjust our acquisition and retention strategy accordingly.
Reason to measure LTV (User Lifetime Value) №2
The second reason to calculate LTV for mobile applications is that it gives us a much broader on the value of each user. The User Lifetime Value metric, or LTV, consists of 3 main components to watch out for – retention, monetization, and virality. Retention signifies how likely our app visitors will keep using our app, monetization shows how much money they’ll spend while using it, and vitality – if they’ll recommend this app to their friends and bring new visitors to our mobile application.
So calculating LTV means you combine all of the above factors and predict their behaviour over time, while using such metrics as the ARPU, or the average revenue per user, doesn’t give you such a broad range of information.
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Reason to measure LTV (User Lifetime Value) №3
And the last reason on the list – it helps you segment your customers. Tracking LTV by acquisition source, age group, and income, for example, allows you to segment your users into the appropriate LTV group. Having segmented groups with app users that are willing to spend a fortune on upgrades for your game and those, who will only pay for a highly discounted subscription, gives you a huge advantage when it comes to your app marketing planning.
By allocating more campaign resources to those you know are willing to invest in new digital equipment, and cutting down on campaigns (or eliminating them altogether) for those who will only invest once a year, you get yourself ahead of the app market in terms of your app monetization strategy and resource allocation.
How to calculate LTV
Okay, now that we described why we need to find out our app user’s lifetime value, let’s get to find out how to determine it. There a lot of LTV formulas on the web – and spoiler alert – they’re all confusing. User Lifetime Value is one most complex metrics out there, so no wonder calculating it, like the LTV formula from the example below, requires a bottle of Tequila and someone with a Ph.D. in Mathematics. Or just one marketer really dedicated to its customers 🙂
The good news is, we don’t need to make it all that complicated when it comes to mobile apps. When you have a working mobile application, it’s way easier to track the costs you spend on acquiring a user and the ways which influenced them to finally buy that extra force shield, as opposed to the retailers, for example, whose customers can see an ad on the street or just walk in without you really being able to calculate how much it actually cost you to engage that shopper.
So there’s a small trick to tracking the lifetime value of your app users without getting lost in the equation sea. LTV for mobile apps is simply put the total number of days the player has used your app multiplied by the amount of money he spends each day. Assess your app’s engagement among users, and find a group of those who had their first game day quite a while ago and have stopped playing. Take all of these users and summarize all the income they have generated. Got it? Now divide that revenue by the number of users in the group – that is your User Lifetime Value (LTV).
But the LTV metric also predicts the future, right? – you will say. Yes, yes it does. But the difference between calculating LTV for a chain of coffee shops and a mobile app is the amount of time that can be put into the equation. A coffee shop that has been around for 7 years has a history of multiple groups of multiple customers who started with their dark roast but then never came back. An average mobile application does not have that much time on it’s back to account for.
So one of the simplest ways of calculating your future app User Lifetime Value up-to-date is to use your churn rate – the percentage of users who have abandoned the game for a time period, the longer the better. Then “find the duration in weeks or months by dividing 1 by churn in a given time period. Convert it to days, and then multiply by your average revenue per user in a one week period”, as a Chartboost points it out.
How to visualize LTV
Even though User Lifetime Value (LTV) metric is one of the trickiest KPIs to calculate and monitor, once you do, you will have a much more clear vision on your campaign budget resources allocation, in addition to a whole new approach to perfecting your acquisition and retention strategies.
Don’t forget to use tools like Google Analytics that will not only help you determine your LTV numbers, but will visualize them so you can see the lifetime value trend among your users more clearly.