The success of each mobile app advertising campaign can be narrowed down to a single point - the value that the acquired user will bring to the app. The user lifetime value (LTV) metric can help mobile app marketers in figuring this out and optimizing for it. It is one of the most powerful and most enigmatic metrics in the app marketing toolbox.
The Essence of LTV
LTV is a function that shows the value of a new user - how much that user is worth to your app. LTV can serve many purposes - it can be an indicator 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 drives (or what should drive) your app marketing budget. It tells you how much each new user is worth – and 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 users contribute 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, how often people come back to your app, and how frequently within a certain period of time.
- 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 + 1/Churn + (Referral Value)
Here, monetization is represented by ARPU (average revenue per user) and retention is represented by the churn rate (the amount of users who cut ties with your app). However, the churn rate is inverted and is used as a proxy for the predicted amount of time a user will be actively engaged with your app. Lastly, virality is represented by the sum of new audience a user will bring to your app.
However, the virality element is left in parentheses as an optional part of the equation. This is because few app marketers have the means of tracking this information.
For example, let’s say 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 with an accurate calculation, let’s simply set referral value to 0.
Your formula now looks like this:
LTV = $1.35 + 1/60 + 0 = $2.25
That means your average user has a predicted lifetime value of $2.25. It also means you should be paying more than that amount to acquire a user.
So, why LTV is Important?
LTV can help you to make right decisions about your app marketing strategies. Let’s consider the above example. If a user has an LTV of $2.25 and a user acquisition cost of $1.75, you should continue using your current advertising strategy. As long as the user acquisition cost of your app does not exceed that $2.25, you are making profit on each new user and your return on investment (ROI) will be positive. And the vice versa, if the user acquisition cost of your app exceeds the mentioned amount, you should think about changing your app marketing strategy.