Why brands need to think about User LTV?

Posted on January 24, 2013
By Shrikant Latkar, VP of MarketingVP of Marketing

Today a companys most valuable asset is its customers, and while products and services are ripped off and duplicated in no time at all, a company with loyal and long term customers is less vulnerable to competition. But how does one measure the value of a customer? Through Customer Lifetime Value (CLV or LTV). LTV helps companies understand what a customer is really worth to its business. Broadly, LTV is a marketing formula based on the idea that sacrificing initial profits and spending money up front can help to gain loyal customers whose increased business and references will allow the company to reap profits in the long run. The best example of this is the freemium model (where gamers can play for free but can customize or improve game play by purchasing virtual goods) or by using the pay-per-download model, where gamers can lap up apps/games from any of the growing number of app stores. Zynga, GREE, Glu Mobile and GameLoft are four examples of mobile app developers who use LTV to grow and acquire new customers while retaining older ones. Gaming companies have long understood the importance of LTV, and used this principle to measure everything from cost of customer acquisition to mining of existing customers. Today, with mobile tech and mobile apps being launched by every well known consumer brand, it is not surprising that some forward thinking brands who are publishing their own apps are beginning to apply same principles of putting LTV to work for their brands as well. And no wonder in an increasingly mobile app work, it is important to be able to measure, monitor, and control the value your users bring to your business.

Rather than get into the details of how to calculate LTV, let me explain what constitutes LTV. There are two broad components that make up user LTV the average user lifetime and the user value/revenue stream and I will briefly talk about these. To measure the average lifetime of your app user, 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. It is necessary to measure all the revenue streams for the app in order to accurately calculate the LTV / user value. There are four main revenue streams:

  • Revenue from in-app purchases: (percentage of your total unique users who make an in-app purchase) X (average value of an in-app purchase) X (average number of in-app purchases per user)
  • Revenue from out-of app products e.g.: retail footfall etc.
  • Viral & word of mouth promotion to other users
  • Brand loyalty & up-selling/cross-selling of brand products

Mobile is going to be a huge influencer in next few years. A recent study by Deloitte revealed that its influence is anticipated to grow exponentially to 1721 percent of total retail sales, amounting to $628 752 billion in mobile-influenced store sales by 2016. It is therefore very important that you track the metrics of this channel by calculating and measuring LTV. An accurate measure of your user LTV will help you to out-market, out-sell, out-perform, and out-smart your competition!