You hear a lot about lifetime value of user when reading about mobile app marketing. LTV is one of the most crucial metrics for measuring an app’s success and can make the difference between an app that rakes in millions of dollars and another that doesn’t make a dime. Knowing the lifetime value of your users can help you to determine the health of your app, to estimate the loyalty of your customers, and to forecast the growth of your app over time.
Lifetime value can tell you how much each new customer is worth, and how much you’re spending to acquire each new user.
But how do you calculate the lifetime value of your users? That is a question that remains a mystery to many. Calculating the lifetime value of users can become a tedious and difficult task.
In this article, I’ll try to help you solve this riddle by breaking down its complexity into much more tangible and manageable parts which can be measured individually.
what goes into lifetime value?
At its heart, lifetime value can be obtained from the following three parameters:
Monetization is the monetary value of the customer, which means the amount they directly spend in your app, or the amount of revenue they bring in through ad impressions or other activities they don’t directly pay for.
Retention is the level of engagements users have with your app, which is usually measured in number of sessions, intervals between sessions and session lengths. Users that return to your app frequently are of higher value, while those who aren’t very active need to be re-engaged through different tactics.
Virality (which I otherwise like to call evangelism), is the number of additional users each user brings to your app. Users that encourage others to install and use your app are of higher value. However, it’s a little hard to measure, as it mostly comes from word of mouth and social media shares, and there’s no specific tool to account for all of it.
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Calculating LTV starts with estimating the average revenue per user (ARPU) in a specific period of time. ARPU is calculated by dividing the amount of revenue generated by your app divided by the number of actively engaged users during the period in question.
The most common basis for calculating ARPU is the number of monthly active users (MAU). Some firms further refine ARPU by segmenting their users and calculating the revenue per segment (e.g. unpaid users, users from specific geographical locations, specific devices…).
Retention accounts for the duration customers are retained, or engaged with your app, or their average lifespan in your app. To be able to calculate retention, you first need to calculate your churn rate, i.e. the rate at which users discontinue using your app within a given timeframe. Churn rate is obtained from dividing the number of dropped-off users during the period by the number of users at the beginning of that period. This should of course be in line with the period of time used to calculate the ARPU.
The retention value of users is obtained from the inverse of the churn rate (1/churn), which will give you the average lifespan of your users in the unit of time used for calculating the churn rate. So, for instance, if you have a 0.2 (20%) monthly churn rate, the average lifespan of your users will be (1/0.2 = 5) 5 months.
putting it all together
I haven’t mentioned virality yet, as it is an imprecise calculation, and I will tell you how to add it to the equation later. But for the moment, now that we have both the ARPU and the retention value, we can estimate the average lifetime value of an average user by multiplying the ARPU by the retention value.
LTV = ARPU * (1/churn)
This will give you the average amount of revenue produced by users during their lifespan or their base lifetime value.
adding virality to the mix
Including virality in the equation is a bit tricky, because it’s hard to measure. But for those who have tools that can track referrals given by previous users, the virality value is calculated by multiplying the average number of referrals per user by the lifetime value of a single user.
Viratliy = ARPU * (1/churn) * referrals
In order to refine your final LTV, you can update your equation as follows:
LTV = (ARPU * (1/churn)) + virality
Unless you make a relatively accurate measurement of referrals, I’d suggest you do not add it to your equation.
To see how it works, let’s go through an example:
Let’s say your average user generate $3 revenue per month and you have a 40% monthly churn rate. Not taking virality into account, the LTV equation would read as follows:
LTV = $3 * (1/0.4) = $7.5
Your average user lasts 2.5 months and will turn around $7.5 dollars.
comparing ltv with cac
Now that we know the lifetime value of our users, we can compare it with the customer acquisition cost (CAC) to determine whether we’re making profit, breaking even or incurring losses. If your LTV is higher than your CAC you’re on the right track and you’re having a positive return on investment (ROI). If not, you better start rethinking your marketing strategy.
In mobile terms, CAC is calculated as cost-per install (CPI), which is obtained from dividing the amount you spend on advertising and install campaigns by the number of installs generated. Again, you have to apply the timeframe factors you used in the previous steps.
If you’re experiencing a negative ROI, you need to improve user engagement to increase user retention rates and ARPU. Another option would be to launch campaigns to improve referrals.
I’m a big fan of numbers and analytics. Being able to measure things will help you make wise and accurate decisions.
Hopefully, with the insights given in this post, you’ll be able to better assess if your app’s users are generating the value that can help grow your business and to decide how to better steer the path of your marketing campaign to improve the lifetime value of your users and your app’s revenue in general.
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