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De-mystifying Lifetime value - A simplified approach to applying LTV to your app business

Posted on September 20, 2012
By Arun Pattabhiraman, VP & Global Head of MarketingVP & Global Head of Marketing

Its not surprising that the traditional marketers favourite tool has eventually found its way into an app developers life sooner than expected and with good reason. Lets face it your app is your business and you want to measure, monitor and control the value your users bring to your business. Customer Lifetime value -CLV or LTV, as different people choose to call it- is the new metric that app developers across the world gravitate towards for measuring the effectiveness of their marketing spends and in assessing the quality of users they attract for their app. Like with most other measurement models and tools, calculating and applying LTV in any real business is fairly complex, confusing and often many people misuse it. However, it can be an extremely useful tool to app developers if they attempt to discern the philosophy guiding it.

So what is LTV?

Life time value is metric that measures the monetary value of user over the lifetime through which he/she is engaged with your product. By attributing the time value of user to your business, it differentiates itself from the other common metrics such as ARPU (Average revenue per user) which measure the average quantum of revenue that users generate within defined unit of time-typically in month or so. LTV, on the other hand attempts to capture the net present value (pardon me for sounding like an investment banker) of the estimated cash flows from user over his/her lifetime. By also taking into account the future estimates of cash flow/revenue from users, LTV allows marketers to plan, justify and adjust the marketing spends made towards acquiring users today. Remove the marketing spend from the estimated LTV of the user and you start measuring real profit per user!

Applying LTV to your app business

In this section, I shall attempt to provide simplistic approach to measuring LTV, largely drawing upon common sense rather than on complex formulae. Measuring LTV for your app starts with laying out two broad components that comprise it

1. Average lifetime of your app user

The easiest way to measure this is to measure the average number of sessions that your users engage with your app in and the average length of each session. The product of these two metrics will indicate the average lifetime of your app user.

2. Revenue streams from your app users

Given that there are multiple business models to monetize your app, the LTV calculation is most accurate when you include all revenue streams for your app.

  1. Revenue from paid downloads - If your app is paid app, then this is simply the net revenue you earn from each paid download after deducting the appstores revenue share .Since this is onetime revenue , this directly equals the users lifetime contribution towards the total LTV
  2. Revenue from in-app purchases- This component can often be tricky, depending on what use cases exist for in-app purchases and how each purchase is priced- but to simplify this, you could start by measuring the following :
    1. What percentage of your total unique users makes an in-app purchase?
    2. What is the average value of an in-app purchase (net of rev-share to payment processer)?
    3. What is the average number of in-app purchases made by each user who participates in any form of in-app purchase?

These metrics should typically be available through reports from your appstores or payment processing vendors. Once you have these metrics, the users contribution towards the LTV through in-app payments is simply = X b X c

3. Revenue from ads

This component is fairly straightforward to measure and is function of the eCPM that your ads deliver and the number of ads you show to each user during their lifetime. LTV component through ads = (eCPM/1000)X Number of ads shown to the user in his lifetime = (eCPM/1000) X {Average session length per user X Average number of sessions per user /Ad refresh rate(ie no. of ads shown to user in 60 seconds)} =(eCPM/1000) X {Average session length per user X Average number of sessions per user /Ad refresh rate(ie no. of ads shown to user in 60 seconds)} X( % of traffic allocated to non-house ads) The total lifetime value of the app user then is simply the sum of 1,2 and 3. Click here to download sample calculation for your reference. Please note- that this simplified calculation does not completely capture the indirect revenue streams from your users such as the impact through social referrals, revenue from cross promotion ads and so on. But this is fairly good start if you are just starting out on your journey to adopt an LTV approach to measuring your app business. Now that you have calculated the LTV of your app user, you can measure the LTV of your app by multiplying it with the total number of unique users you have as on date. This number indicates the lifetime value of your app in monetary terms and helps you understand if you are justifying the marketing spends you may have made in acquiring these users. If your cumulative spends far outweigh your apps lifetime value as on particular date, there is definitive need to increase and sustain the LTV of your app users. There are several ways to do this and LTV maximization is as much an art as it is science. But it begins with understanding your users well and acknowledging the fact that they are heterogeneous bunch. The more you learn to address this heterogeneity by bucketing your users into manageable segments , smarter can be the actions that you can take to keep them engaged or monetize them better. This leads us to the topic of behavioural segmentation, what it means and how it can be used to improve your apps LTV. Its fairly important topic in itself, so I shall delve deeper into it on separate post. Watch this space as I share more insights into the world of app monetization and several tricks to the trade.

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