Calculating the Life Time Value (LTV) of Mobile Apps Users
Today, mobile-first businesses are in the midst of fiercest competition ever. It’s an undeniable fact. And they all have this big question lingering on their minds – how to identify profit-yielding users, retain them, and fuel business growth?
Most of the mobile-first companies fall into two broad groups. One group builds app, launches them in the market, and wait for money to fall in their laps. The other group builds app, launches, and then think about how to fuel growth to their businesses.
Both of these groups mainly focus on one thing, profit. And unfortunately many still follow this simple and customary equation while calculating profits:
Turnover – Expenses = Profit
But when they are asked about what is the true Life Time Value (LTV) of their mobile app users, they just go blank.
So, what is Customer Life Time Value (CLTV) or Life Time Value (LTV) of mobile app user?
It is a method to calculate the profit that a customer will yield to your company. It is not merely a transaction or an annual amount, but the profit you get during your continued relationship with your customer.
But understanding the real of value of customers is not so easy as it may sound. In order to make this process easy, calculating LTV comes out as one of the most important metrics (or you may call it a tool if you prefer) to both – measure your user loyalty and retention, and plan for future business growth.
“More users on your mobile app does not mean more profit from all of them. 80% percent of the profit comes from just 20% of users. And LTV helps to narrow down that 20% of valuable users”
If your are a mobile-first company looking to plan a long-term growth strategy, and are focused on exclusively targeting those valuable users, LTV method is what you need to look into.
Why you need to know about LTV?
- It lets you know who are your profit-generating users
- It helps streamline your budget
- It helps to set future goals and promotions for your valuable users
- And helps you to forecast the health of your mobile app
Factors required to calculate LTV
Before we go to the calculation part, let us understand some important factors that go into calculating LTV.
Revenue – The amount of app revenue gained from user purchases, including subscription, advertising, in-app purchases, e-commerce and other revenue generating components. While calculating LTV considering the whole revenue may not be enough, you need to figure out average revenue per user (ARPU) as well.
Measuring ARPU can turn out to be bit challenging as many users don’t use the app every single day. So, 24 hrs is a very little time-frame. Considering longer time-frame can also be problematic. For this reason, people take 30-day time-frame to measure ARPU.
Churn – Number of users lost over a specific time-frame.
Measuring churn: Churn = No of users lost in a specific time-frame divided by No of users at the beginning of the time-frame
Retention – How frequently the user engages with your app and for how long. Retention can be understood by calculating Churn.
Note: The Revenue factor and the Retention factor should be measured using identical time-frames, date and year. For example, if your revenue time-frame is measured for 30-day time-frame in Jan 2018, the retention should be measured for the same days, month, and year.
Virality – Users who installed your app after being referred by your existing users.
Note: Finding out referral value is not as easy as it may seem. Not many analytic tools produce the accurate referral value metrics. If you do not have a referral value, just use ‘0’.
Once you measure your revenue, retention and number of users (virality), you should be able to calculate the Life Time Value (LTV) of your app users.
Life Time Value calculation does not follow a single cut-and-dried method because it depends on several aspects of an app such as level, vertical and complexity.
Simple methods don’t give accurate results, while complex methods can be cumbersome, too. So, a balanced method is sufficient to get fairly accurate results.
There are two ways you can calculate your LTV, and here are they:
Approach 1: LTV = (ARPU / Churn) + Referral Value
If are you looking for a much simpler method, try this : LTV = ARPU x 1 / Churn
After you have your LTV in your hand, the very next thing you do is to compare it with Customer Acquiring Cost (CAC). Bear in mind that your LTV should be higher than your CAC.
The ratio is 3:1 (LTV:CAC)
If CAC is lesser than your LVT, you are doing fine. If not, its time to increase your LVT.
Steps to increase lvt
Here are certain strategies you can implement to increase your LTV
1. Deep linking: You can allow users to access more information from within your mobile app’s own ecosystem through Deep Linking
2. Aim for better Virality: Improve your Virality rate through social integration
3. Your LTV and CAC ratio: Maintain your LTV and Cost of Acquiring Customers (CAC) ratio. Ensure that your LTV is always higher than your CAC. Keep this ratio in mind – LTV : CAC 3 : 1
4. Referrals and Discounts: Offer discounts and referrals that matter to the users. Ensure that these offers provides them some value than merely being just an advertisement
5. Reintroduce users to your app: Find out why users left your app. See what is that gap all about and come out with a solution. Then reintroduce them to your app and talk about those interesting features you’ve added to your app
6. Push Notifications: If you haven’t considered push notification, it’s time you should. Push notifications and effective tools to bring back ex-users. There are several types of Push notifications text, images and animation. Use any of these to your advantage to advertise new updates, offers or special feature. A word of caution: do not overuse them. If your sending them too frequently, it could annoy your users