The success of each mobile app advertising campaign can be distilled down to a single number - the value that the acquired user will bring to the app. The user lifetime value (LTV) metric can help you figure this out. It is one of the most powerful, but also the most enigmatic, metrics in the app marketing toolbox.
The Essence of LTV
LTV is a way of calculating the value of a new user. In other words, how much that user is predicted to be worth to your app, over their whole relationship with your app. LTV can serve many purposes: it can be a measure of your app’s success, a reminder of the power of user loyalty, and, a tool for forecasting growth. But at its simplest, user LTV is what underpins (or what should underpin!) your app marketing budget. It tells you how much each new user is worth – and thus provides you a cap for how much you should pay to acquire that user.
How to Calculate LTV?
LTV can be broken down into three categories of variables:
- Monetization - How much a user contributes to your app revenue (in the form of ad impressions, subscriptions, in-app transactions, etc.).
- Retention - The level of engagement a user has with your app and how often they return to your app within a certain period.
- Virality - The sum value of additional audiences a user will refer to your app.
Thus, LTV becomes a function of these three variables:
LTV = f (Monetization, Retention, Virality)
There are several different ways of breaking down this function. However, we will use the following model for calculating a user’s lifetime value:
LTV = ARPU x 1/Churn + (Referral Value)
Here, monetization is represented by ARPU (average revenue per user), and retention is represented by the churn rate (the number of users who cut ties with your app). However, the churn rate is inverted and is used as a proxy for the predicted retention value. Lastly, virality is represented by the sum of the new audience a user will bring to your app.
The virality element is left in parentheses as an optional part of the equation, because few app marketers have the means of tracking this information.
For example, your average user generates $1.35 in revenue every month and you have a monthly churn rate of 60%. Your users are “promoting” your app in the form of ratings, reviews and word-of-mouth, but without an accurate calculation, we will leave this referral value as 0.
Your formula now looks like this:
LTV = $1.35 x 1/.60 + 0 = $2.25
That means your average user has a predicted lifetime value of $2.25. It also means you should not be paying more than that amount to acquire a user.
So, why LTV is Important?
LTV can help you make the right decisions about your app marketing strategies. Continuing with the above example, if a user has an LTV of $2.25 and a user acquisition cost of $1.75, this means you should continue with the current advertising strategy. If the user acquisition cost of your app remains below $2.25, you are making profit on each new user and your return on investment (ROI) will be positive. The inverse is also true. If the user acquisition cost for a user exceeds the life time value, you should think about changing your app marketing strategy.
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