LTV: What is it and why is it important?

May, 15 2017

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One consistent challenge with freemium apps that marketing specialists will always mention is quantifying their Lifetime Value (LTV).

Focusing on lifetime value forces a marketing team to fully grasp this most important figure in unit economics and grant a comprehensive understanding of how an app is performing.

Read Part 2 and Part 3 of this LTV series

When the marketing team of a mobile app company looks to build a marketing plan and user acquisition campaign, they must wrestle with a set of metrics that will form a large part of their success or otherwise. Cost Per Install (CPI), Cost Per Action (paying for a predetermined trackable action within an app, such as making a purchase or finishing a tutorial), average revenue per daily active user (ARPDAU), retention of users, and many other metrics all impact each other as a company prepares for marketing success. Finally there is Lifetime Value (LTV), often seen as nebulous or ambiguous, that is often discussed and thought about, and one that every marketing professional in the mobile industry thinks about.

Put plainly, Lifetime Value is all revenue a single user is expected generate from the time they download the app until they stop using it. It’s quantified as a window of time in which an app is seen as turning a profit over operating costs.

app retention curve

What defines a lifetime can be very different depending on the genre of the app. Utility apps (eg a subscription to-do list) can have very long LTVs (>1yr), whereas most games have a lifetime value shorter than 180 days.

Determining LTV starts with an understanding of the underlying business model - premium, subscription, and freemium (including ad supported).

  • Premium apps typically earn from a one-time buy in from the consumer, meaning the LTV is a quantification of purchase price minus platform fees.
  • Subscription earnings-based apps tie into how long can an app convince consumers to buy in and keep buying in over time.
  • Lastly, freemium apps typically rely on in-app purchases and advertising, so their LTV is tied to getting customers to download the app, then enticing them to either view ads or pay for content or both.

While many apps can straddle the line between earning verticals (a subscription app with advertising, for example), for the sake of this article we will focus on quantifying the LTV for freemium apps, the most popular and profitable apps on Apple’s App Store and Google Play.

Quantifying LTV for Freemium Apps

Freemium LTV is a notoriously difficult metric to quantify as earnings are less predictable and the rules continuously change. It is important to step back from the sense of an individual user and observe group or cohort behaviour. It’s important to visualise the shape of the LTV curve too - how quickly you start to monetise users, and how long until they get bored and tail off. Typically earnings of a cohort come in swiftly, but as the app ages, it will begin to stagnate and retention drops off, an indicator of users getting bored and the tailing off trend begins.

The freemium LTV calculation is underpinned by the relationship between revenue and retention.

A simplification of the methodology starts with the question “how long do users stay in my app”, and is normally expressed as a retention profile, for example D1 40%, D7 20%, D30 10% etc. This is essentially what percentage of users are retained within the app over time.LTVThe other important metric involved in the calculation is ARPDAU - average revenue per daily active user. This can be easily pulled from an analytics platform or directly from the platforms. This is essentially showing the total revenues earned on a daily basis divided by the number of users in the app on a given day. Once you have these two key data points you can start to build a curve of what LTV looks like.

It is critically important for an app developer or publisher to understand their LTV when thinking about their marketing and UA strategy - and to remember that LTV will change and fluctuate as the metrics of acquisition costs, ARPDAU, organic uplift (users which were acquired without being directly attributed to a paid install), etc all shift over time as the product evolves and new functionality is introduced over time.

Over the life of an app, a change in any of those underlying metrics can impact the LTV so it requires constant monitoring on a daily basis - changes can quickly turn a profitable app into a turkey, or pivot a tired product into a revived cash cow.

To calculate LTV for freemium apps, marketers need to look at the cohort level and track their users as comprehensive group, such as 1,000 users. Do you have any quantifiable organic installs, possibly attributed to some news placements or feature support? What does your retention curve look like over time? Take the retention and revenue data (and organics if you can quantify it) and place them in your LTV formula, or you try our online calculator which we built to help you.

Through the process of calculating their LTV, a Marketing team will be required to have a fuller and more comprehensive understanding of the metrics of their app. It can be a substantial undertaking with some difficult steps, but this knowledge should provide the foundation of your marketing plans.

Written by Martin Macmillan, Co-Founder & CEO @ Pollen VC

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