There are lots of ways to calculate it, and there are lots of ways to put it to work for you. But one thing mobile marketing experts all agree on is you have to pay attention to customer lifetime value.
Customer lifetime value, or LTV, as it’s commonly known, is all the revenue a single consumer will generate from the time he or she downloads the app or game until it’s no longer used. That’s paid downloads and in-app purchases, yes, but it can also include word of mouth and sharing via social media. It’s also much more valuable than focusing on revenue alone because, at the very least, it’s a predictive metric that helps you measure the true success of your business.
“Compared to total revenue, LTV provides more accurate information in two dimensions: First, it measures the profitability of users, which helps developers identify more lucrative customer segments. Second, it takes future profits into account, and hence is more farsighted,” according to the blog of game analytics service Gondola.
Measuring LTV also helps mobile marketers know where to concentrate and maximize their marketing dollars, says online marketing agency adQuadrant. Why waste time and money chasing after customers who won’t stick with you when you can invest in keeping loyal users?
Speaking of loyalty, predictive analytics platform Custora points out that we can’t possibly know how long a user will keep coming back, so LTV needs a “period value,” as in a 12-month LTV worth X number of dollars. With LTV, we’re talking quality, not quantity.
Drivers Used To Calculate LTV
There are three generally recognized drivers used to calculate LTV: monetization, retention, and virality. Lloyd Melnick, the senior director on the Hit It Rich! team (Zynga’s iPad and Facebook social casino app), succinctly describes each:
- Monetization is how much customers spend over their lifetime in the game; this includes ARPDAU (average revenue per daily active user), ARPPU (average revenue per paying user), and ARPU (average revenue per user).
- Retention, which also includes engagement, is how often people come back to your game, how frequently they return within a certain period of time (e.g., every day, every week, every month), and how often they stay in the game when they play.
- Virality is how many additional (free) users each user will bring in. It’s often measured over a specific period of time.
“Every company has a slightly different equation for LTV,” Melnick concludes, “but they all include variables from these macro-categories.”
Keith Petri, Vice President for Strategic Partnerships at IgnitionOne, advises focusing on that middle category, retention. On his blog, he cites a statistic that 76 percent of the average app’s new users will fall away within three months, and so the opportunity is in retaining engaged users.
Other industry experts agree. Eric Benjamin Seufert, head of marketing at Wooga, presented at the Game Developers Conference in March on how his company profitably marketed a game to No. 1 ranking in iPhone app downloads. He says definitively that retention is the most important metric.
In his presentation, Seufert describes a “retention curve,” showing that if you have 50 percent of users from day zero return on the “first” day, that app will have a 37-day total lifetime. Forty percent forecasts a 30-day lifetime.
He also gives virality its due, colorfully illustrated by Mel Gibson leading his Scottish army in “Braveheart.” Virality is important, Seufert says, because it compounds user base growth, but it is a nebulous concept that requires some assumptions.
But nailing down LTV still won’t do much for you if you don’t have anything to benchmark it against. Petri from IgnitionOne says LTV has to meet or exceed customer acquisition cost, or CAC, to sustain a business. CAC is just what it sounds like — how much money a developer or company spends to gain a customer.
Jason Cohen of A Smart Bear, a blog about startup marketing (and “geekery”), explains how LTV, CAC and a host of other acronym-condensed concepts are linked.
“Immediately upon acquiring a new customer, you have lost money on the effort. You’re ‘in the hole’ with negative profitability for that specific customer (called ‘CAC’),” Cohen writes. “But that same customer starts paying their subscription, which allows you to progressively reduce your loss each month until eventually they’ve paid enough to reach breakeven (called ‘CAC payback’). At that point, you’ve recovered the cost to acquire the customer. From that point and until they eventually decide not to renew the subscription (called ‘churn’), you progressively accumulate net profit for that customer (called ‘lifetime value’).”
Is It Really THAT Important?
Apparently, it is. Melnick goes so far as to say that while many industry professionals understand that LTV is important, they don’t realize it’s the “lifeblood” of their businesses.
“It is the primary factor in why companies fail or are sold for tens or hundreds of millions of dollars,” he wrote on his blog last year. In other words, LTV is so important because it tells you if new customers are worth more than the cost of acquiring them.
Petri gives a high-level example on his blog that shows how increasing monthly retention by 50 percent increases monthly revenue by 9.9 percent. Increase retention, increase LTV, he hypothesizes.
Why, though, is it specifically more important than just gunning for an increase in total revenue?
Well, if you work it right, LTV is going to drive your revenue anyway, according to Miles Branman, digital marketing specialist at mobile-analytics service Localytics.
“If increases in revenue are primarily driven by new user acquisition rather than by retaining users who continue to spend, you’re putting yourself at risk of experiencing a revenue bubble that will burst as soon as new user acquisition slows,” Branman wrote in a Localytics blog post. “An app monetization strategy that focuses on retaining high-value users and enabling them to spend in your app is more sustainable than a ‘churn and burn’ model that requires a consistent supply of fresh users.”
Not to mention, if there’s a hiccup in revenue flow, tracking LTV can help you address it before it becomes an actual problem.
LTV Versus CAC: A Balancing Act
As mentioned above, industry expert Keith Petri says for a business to sustain itself, LTV should equal or exceed CAC. Tech blog Platforms and Networks takes that a step further in defining just how much.
The blog posits that theoretically, CAC should be able to meet LTV for each new customer, but it doesn’t really work in practice because that equation wouldn’t generate enough money to cover fixed costs. Instead, companies use a target. LTV/CAC ratio, such as the 3:1 ratio used by many software-as-a-service businesses.
Regardless of where a company is in determining its customers’ LTV and how it relates to CAC, one concept remains constant: the need for balance between these two values.
A 2009 post on the blog For Entrepreneurs, by “serial” entrepreneur David Skok, has remained so on-point and relevant in discussing this balance that mobile marketers continue to cite it in their own blogs.
Since then, LTV might have gotten more press, but Skok’s bluntness still rings through: “It doesn’t take a genius to understand that business model failure comes when CAC (the cost to acquire customers) exceeds LTV (the ability to monetize those customers).”
“A well-balanced business model requires that CAC is significantly less than LTV.”
All LTV Is Not Created Equal
Some “rules,” like that of having a balanced business model, apply across the board to any kind of business. But much of the decision-making surrounding LTV is going to vary depending on ... well, the business. An independent app developer will have different experiences and methodology than a venture-backed startup, and both of those will be different from an existing business that’s branching out into mobile.
For independent developers and those building a business from scratch, monetization will be crucial, says Spencer Burke of Appboy, a marketing automation platform for apps. In these cases, a well-balanced business model is going to be the “key to survival.”
The key is defining who you are and where you are in your company’s lifecycle. From there, you can calculate and accurately use LTV.
But startups, at first, will be more interested in building a brand than making a lot of money, especially if it’s a social network or has network effect.
“A social network with no one in it has no value,” he says. “It’s important to show growth and become a utility for people, which will later — hopefully — translate into users who are willing to contribute financially. Depending on the maturity of the startup, goals shift over time, but growth and awareness are vital.”
Meanwhile, enterprise businesses have to ask themselves two questions before diving in, Burke says: What’s the mobile budget, and is the app a main component of the overall business strategy?
“While some apps are merely used for promotion and to increase awareness, others, like ones that offer mobile-commerce abilities, act as an extension of the brand,” he says. “At a large company, how an app can contribute to the business’ end goals is largely considered. A user’s lifetime value demonstrates the ROI (return on investment) of an app and helps determine how much should be invested.”
Computation And Tracking
While most can agree that accurate calculations for LTV, CAC and their associated metrics are crucial, there’s no one right way to derive those calculations. They can be basic or savvy. Use pencil and paper or online calculators. And the method you use will largely depend on the individual characteristics of your business.
KISSmetrics published an elaborate infographic using Starbucks as an example, based on “rough” sales figures from 2004 to illustrate how a company might arrive at an LTV estimation.
In more general terms, Appboy Success Squad member Will Crocker wrote recently about five key metrics mobile marketers should be tracking:
- Engagement helps you understand the scale and frequency of app usage. Under this umbrella are two broad metrics that will act as a barometer for your app’s overall performance — Monthly Active Users (MAU) and Stickiness.
- MAU gives you a sense of your app’s scale for regular users and acts as a baseline to measure progress in user acquisition and retention.
- Stickiness, which is the ratio of Daily Active Users to Monthly Active Users or DAU/MAU, measures the percentage of your monthly actives that come back on a daily basis.
- Retention shows how groups, or cohorts, of users perform over time, typically on a daily, weekly and monthly basis. But keep in mind that not all apps are meant to be used on a daily basis. For example, a quarterly magazine app should expect lower daily retention numbers than, say, a messaging app.
- Revenue is LTV and average revenue per user (ARPU), which provides a shorter-term view, typically the last 30 days. Comparing ARPU over different periods shows you how product decisions and marketing efforts have directly improved revenue.
The conversion optimization blog ConversionXL details a variety of ways to calculate CAC, retention rate, churn and LTV from a variety of different sources.
No, that doesn’t refer to drinks. The retention, or “bottom up” approach, is one of the many ways to calculate LTV.
Gondola writer Niklas Herriger explains one way to approach this method, although he calls it “average LTV.” He finds it by multiplying the average revenue per daily active user (ARPDAU) with the average user retention (ARPDAU x average retention). ARPDAU is a fixed dollar amount, while the second part of the equation is the percentage of players still active after the first day of installing the game or app. But Herriger brands this method with a warning: “To be fair, the average retention of all users might not necessarily be a good estimate of a particular user’s retention, which is why we are somewhat skeptical regarding this calculation method.”
In a webinar for AppLift, Wooga’s Seufert agrees that the bottom-up method is not meant to be the be-all, end-all of LTV.
“This approach is generally used in a prototyping stage of the game and it is not meant to be very accurate,” Seufert said in the webinar. “It gives a rough estimation of LTV. If you have a high LTV, you can generally spend more to acquire users, and if you have a low LTV — well … you can’t.”
In his game conference presentation, he shows graphically how to find LTV via the bottom-up method. First, plot a small sample of real retention rates, then “curve fit a power function.” Finally, integrate the power function. The mathematical formula looks like this (“segments” are just distinct user groups):
LTV= ∫ Retention Segment x ARPDAU (Average Revenue Per Daily Active User) Segment
Seufert describes it this way:
- Use a retention profile to calculate customers’ lifetime
- Use ARPDAU as a monetization component of LTV
- Multiply the two elements
The Monetization Approach
Conversely, the other main concept behind calculation is monetization, or the “top down” approach. Seufert also is the author of “Freemium Economics,” which explains how this “curve fit monetization” works:
- Break down groups of users that you are targeting by various sets of characteristics (e.g., geography, platform, device).
- Gather minimal level of historical data about monetization from that specific group.
- Project it out based on a logarithmic term.
“This is a more practical model compared to the bottom up approach,” Seufert said in the webinar. “This model enables you to make a conclusion on how much you are willing to spend to recoup money over a certain amount of time. We generally use 180 days for casual games.”
A whole year is more appropriate for longer-term games, he notes.
Putting It Into Practice
Theory, mathematical equations, formulas — it’s enough to make a spreadsheet squirm. So what does all that look like, as the kids say, IRL?
At the very base of any practical application is a great reminder from Localytics blogger Branman: These numbers allow developers to optimize their marketing budgets and acquisition campaigns by targeting high-value users.
Redirecting marketing dollars or cutting campaigns altogether that don’t yield increased LTV can reduce your overall marketing budget.
“Once you’ve defined LTV for your app, you can use it to optimize for your highest value acquisition sources, encourage more lucrative in-app behaviors, and ultimately drive more revenue,” Branman wrote. “It’s a no-brainer if you’re looking to improve your bottom line.”
According to the AppLift webinar, there are two general approaches for exploiting LTV:
- Predicting what’s the LTV, the number in dollars of the users that you acquire.
- Looking at post-install events (proxies) and compare which ones perform better than others.
“When you are starting fresh, you need to use predictive analytics to forecast without any data at hand,” said James Peng, head of user acquisition and monetization for Storm8, at the webinar. “If you are fortunate to have other titles that you are marketing and have multiple data behind it, you can quite accurately estimate users’ value curve. Thus, you can leverage the data you have and insights you have from other titles.”
Game publisher Gamehouse advises a blended marketing approach — there’s definitely no one-size-fits-all method for mobile marketers. For example: “If you notice that customers from a particular ad network tend to be particularly loyal, spend more money with that ad network. If customers who find your app through social media are more likely to make in-app purchases, look for ways to more aggressively promote your in-app purchases via social media or purchase additional installs from Facebook or Twitter.”
Such targeting, or “segmenting” used to be done via the good old U.S. mail, according to a blog post by MarketingProfs, an online professional education service. Back in the olden days — you know, about 10 years ago — a high-LTV customer might have gotten a letter offer of a 0-percent interest offer for a new car, and a low-LTV customer might have gotten 3-percent offer. Now, app developers and marketers can do the same thing within the apps or through email.
The Localytics blog post explains how such optimization might work. Segmenting your high-value users by specific actions or events in the app allows you to try to drive their LTV even higher through marketing or product changes. For example, if you observe that users who run searches within your app have a higher average LTV than those who don’t, you can hypothesize that encouraging more users to search will increase LTV.
The AppLift webinar presenters recommended tracking post-install events as a way to increase LTV, such as monetization events like the first in-app purchase and the amount of in-app purchases after one week. But they also caution that mobile marketers should not neglect other important metrics like virality and engagement, and those vary greatly among publishers.
Pricing, or choosing which methods to use to monetize consumers, is another reason why segmenting is so important, says Christopher Colosi, CEO of Gloebit, a digital currency web service. He uses an example from the gaming industry to illustrate his point.
“Many developers have transitioned from developing $60 store-bought titles to freemium apps monetized via in-app micro-transactions,” he explains. “While some users produce a higher LTV over time than the $60 fixed LTV of a user who purchased a title from a store shelf, a large revenue gain is also produced from all of the users who previously wouldn’t have purchased a title for $60 but did download the app and spend $10 or $20 over their lifetimes. The average LTV may be lower, but the overall revenue may increase.
“This is why many companies have tiered pricing models instead of a single one-size-fits-all price,” Colosi continues. “For apps, consider segmenting by users who monetize via ads, small in-app purchases, one-time app purchases, monthly subscriptions, and high-ticket in-app purchases, or ‘big fish.”
Colosi notes it can be difficult for a new app to provide all models, so it’s important to choose the best one or two for the initial target audience with the most potential for your app. From there, overall LTV can be boosted by maximizing it within each segment and also by convincing users to upgrade, which also upgrades their LTV.
“Proper segmentation and optimization within and between segments should better align your LTV and your overall revenue,” he says.
How To Pump Up The LTV
App analytics tools can help developers with the heavy lifting on many of these metrics. Myriad tools and services are available to help developers understand the hows and whys of their businesses.
These tools show how much revenue is generated, the number of purchases, how many installs an app has seen and also how many times it’s crashed. They’ll also show where you stack up against your competitors.
To help marketers and developers wade through the sea of analytics possibilities, mobile marketing exchange Mobyaffiliates compiled a list in early June of what it considered to be the best solutions out there at the time of publication.
Analytics tools can also help segment a company’s customers into high and low LTV.
Russell Glass, in the MarketingProfs post, advises businesses to start here. “LTV targeting starts with a deep understanding of your current customer base so you can develop high-LTV and low-LTV customer segments. Doing so will enable you to create a profile of the ‘personas’ that will have the most longevity and spend the most on your products,” he wrote. He offers an example using luxury vehicle advertising targeted (and retargeted) toward its ideal persona.
Once these personas are developed, marketers can create audience-specific messaging and programs. Glass wrote that this is a crucial step, and in the end, the customer is getting personalized offers and is developing a relationship with the brand. And it’s just as important to meet your high-value customers where they are, which isn’t on only one website, app, or bus-stop bench. Tracking marketing efforts will enable effective targeting of each segment in a variety of ways.
The one thing in common with these diverse channels? “Putting the customers at the center of your campaign will, once again, help improve their LTV,” he wrote.
Email remarketing can also help you pump up not the jams, but the customer LTV, according to a blog post by marketing software service Vero’s co-founder and CEO, Chris Hexton. He offers five ways to increase LTV and revenue, including using emails to upsell or cross-sell customers and straight-up asking customers to pay more for services.
“Being a developer first, it’s never been natural for me to act like a salesman, but experience has taught me: Ask and you shall receive,” Hexton wrote. “A powerful call to action can be a big motivator. People usually follow the prompts you give them.”
He also recommends giving discounts to new or loyal customers — who hasn’t gotten a “sign up for our email list and get a 10% discount!” pop-up on a retail website? — and wielding the power of social media, which he acknowledges has not yet been done terribly well but has promise. “We are in an age where we have the unprecedented ability to track connections between our customers, our product and their friends. Social recommendations are a great way to drive action, as social proof is an extremely powerful motivator. ... People trust their friends.”
Most of these tactics will be in-app or email based, but it doesn’t all have to be. The blog ConversionXL seconds the notions about using email to upsell, educate, and cross-market, but it also cites a study by Harris Interactive that found 56 percent of customers will switch brands if the alternative had more ways to easily connect with customer service. And listening to your users is important, too. ConversionXL’s founder Peep Laja advises incorporating customer feedback to improve everything from user experience to product features and design.
A blog post by Apptentive, a service dedicated to making it easier for companies to build stronger relationships with their customers, agrees. Those who are investing the most in an app are creating meaningful advantages in customer loyalty and retention, writes Ezra Seigel in the post pointedly titled “Customer Feedback Can Make or Break Your Mobile App Business.”
Additionally, new advertising products are being designed to maximize lifetime value. "Native in-feed advertising such as install ads and formats like incentivized video are now key tools being used by app developers to drive additional LTV by helping users discover new apps (install) and then convert them into paid subscribers or have them discover premium content (incentivized video)." says Martin Price, Vice President Mobile Products for OpenX.
The digital music service Spotify recently introduced these video ad experiences for their users. If Spotify Free users opt in to view a 15- or 30-second brand-sponsored video, they are given 30 minutes of uninterrupted music. “Our audience is incredibly engaged so we are delivering an advertising experience that enhances their time spent on Spotify and connects them to the music and brands they love,” Jeff Levick, Spotify’s Chief Business Officer says in a blog post on the company website.
Lloyd Melnick highlights on his blog three dimensions — recency, frequency and profitability — that can help better predict and optimize the lifetime value of specific customers and cohorts. “Recency focuses on when the customer last purchased and helps you predict if/when they will spend again. Frequency is a powerful predictor of future purchases, a customer who spends more frequently (even small amounts) is more likely to monetize in the future.”
Angela Prilliman, content marketing strategist for rewards-program creator FiveStars, notes that repeat, loyal customers generate more than 10 times more revenue in their lifetime. An infographic on the blog shows how difficult it is to get customers to come back even once after their initial visit. The baby-back ribs at Chili’s entice only 56 percent of its diners to come back in the next six months; IHOP sees 58 percent return for its breakfasts of champions.
Of course, much more than the food goes into the dining experience, from the server to the music to the rude patrons at the next table. And the same is true for making first-time app users into loyal customers. Prilliman offers five tips for improving LTV:
- Treat new customers like VIPs, with discounts, freebies, or a simple email of thanks.
- Keep in touch, with timely emails, text messages, and social media posts.
- Give customers a reason to come back soon with deals that have a quickly approaching expiration date.
- Implement a modern rewards program.
- Treat repeat customers like kings with VIP lines, photo walls, and other over-the-top experiences.
The Application Developers Alliance released a paper in June focused on how to retain customers. The paper reveals some intriguing concepts about how to motivate and engage users, including strategic “onboarding,” which is strategically sharing information about an app after users download it, and details how even in-app support has room for customer engagement. Indeed, it’s one of the best places, the paper states, because “a simple ‘Contact Us’ button can start the conversation”
The Bottom Line
How you approach defining your customers’ LTV is going to depend on myriad individual factors. There’s no one right or wrong way to go about it. But one thing all the experts can agree on is that finding LTV is necessary for a healthy business — and successful apps.