Welcome to the second article in our new series “School of Ad Tech”, where we demystify the basics of ad tech for our readers. Over the years, the concept of LTV or Lifetime Value of a user has emerged as an important benchmark for mobile app marketers while assessing the success of an app. Today, we will break down the concept of LTV for our readers and explain why marketers can’t live without these three letters.
For part one of the series, click here.
For app marketers, having the right metrics in place to measure the success of their app is an important focus of the app monetization strategy. For long we have heard the term CPI (Cost Per Install) to be a sacred metric for app marketers when they measure the health of their app. This linear approach of measuring the overall revenue to directly correlate to ROI, and in turn the success of an app, has been a key metric that got the attention of app marketers.
Mobile marketers are now beginning to shift towards understanding the value of what happens after an install, all along the user lifecycle, and how this would impact the long-term ROI. The lifetime value (LTV) of app users has emerged as a more meaningful metric for evaluating the profitability of an app.
Defining and Understanding LTV
LTV can be understood as the projected revenue that a user will bring during their entire lifetime of interacting with the app, i.e., from the initial install to the final user interaction. LTV is a measure of revenue per user, just as average revenue per user (ARPU), with the major difference that ARPU is calculated over a specific period of time — say one month — while LTV spans over the entire lifetime of users. App marketers can use LTV to assess how much they can spend on one user, but can’t rely on it as a live metric to guide their acquisition efforts.
Lifetime value varies greatly across users, from those who will only open the app once to the app’s heaviest users. There are many different ways in which LTV is computed, but there are basically two ways to calculate it, using functions with aggregates of monetization and retention metrics.
In the case of retention, its conceptual equation is rather simple:
(Churn is the rate at which you lose customers in a given period, usually calculated on a month to month basis.)
How can LTV be leveraged to optimize mobile campaigns if it can’t be calculated as such? It can be approximated by tracking and analyzing specific user events happening shortly after the install. These events are usually called proxies and can be sorted along the usual categories of the user lifecycle:
1. Monetization events: eg. first purchase, amount of first purchase
2. Virality events: eg. number of Facebook invites sent. Virality boosts organic downloads, which in turn increases overall campaign ROI.
3. Engagement events: eg. tutorial completion, level 10 completion Retention event: eg. day-2 retention.
How Can LTV Help Mobile App Advertisers?
As explained above, LTV is a function of three variables and which of these impacts an app marketer’s LTV the most needs to be a their focus. Based on each of the function and how a user fulfills that, app marketers can refine, segment and re-target people. For instance, user may widely share an app on social media. While it doesn’t bring app marketers any dollars directly from that user, but the virality it brings can lead to more downloads, which in turn leads to more revenue. Once this “value” has been identified, app marketers can can optimize campaigns to find more people like them.
For app marketers, the concept of LTV can help them understand how they look at the CPI strategy and how much dollars they should be spending in acquiring users. LTV is an important metric for app marketers as it tells them if a new user is worth more than the cost of acquiring them and if their app will be ROI-positive in the long-term. Tracking LTV also puts them in a better position to predict how healthy the app’s revenue would be once the new user acquisition stops and retaining is the question.
Determining acquisition cost is one aspect, LTV is also a useful tool that can help app marketers to optimize their budget spends by comparing LTV across channels and ads within channels.
Conclusion
LTV has been an important metric, particularly for game monetization experts. Different apps can have different way of calculating LTV and as an app advertiser, the first challenge is to understand which proxies are the most relevant for your app. Having an understanding of how different channels impact your LTV, and in turn you ROI, is an intelligent way of determining where and how much you want to spend.
Stay tuned for the next parts in the series! Are there any topics you would like us to write about? Let us know in the comments!