This article originally appeared on the Pollen Insights blog.
As an app developer, you know all too well that winning in the App Economy is all about velocity. Success is all about being able to consistently move with (or ahead of) the market, drawing on data, budget and talent to deliver what it takes (app improvements, feature updates, effective UA campaigns) to make, market and monetize your app with positive results. But all your effort — and investment — is wasted if your strategy fails to factor in the performance metrics you need in order to build your audience (and your brand) with confidence.
WHY LTV IS THE MOTHER OF ALL METRICS
In its most basic form, LTV is the expected revenue a single user will generate from the time they download the app or game until they abandon the app altogether. Arriving at this important — and quite predictive — metric is key to measuring the true revenue potential of your business. But calculating your future profits with high confidence requires you to start with an equation that nails down LTV estimation with high degree of accuracy.
There are many ways to calculate LTV, but let’s keep it simple by using a method all app and game companies can apply and master.
Use your retention curve to model LTV. This approach shows you how long people are staying in the app, factors in your opt-outs and allows you to “extract the values that allow you to lay the groundwork for an advertising strategy for your app.” As Oliver Kern, Chief Commercial Officer at Lockwood Publishing, points out in his recent LTV crash course here at Pollen Insights, knowing your LTV also equips you detect and address a hiccup in the revenue flow before it becomes a real problem for your business.
Remember LTV isn’t “set it and forget it”. Be prepared to face some challenges as you develop the LTV model that is right for your app business.
Generally speaking, there are 3 main factors that influence LTV.
Retention is basically how often people return to your app. It’s a key metric that directly contributes to LTV because the longer you can count on your users to come back to your app, the more opportunities you have to extract value from them.
This is how much money a user spends in your app. An increase in consumer spend boosts your monetization, and results in an uplift in LTV.
This is the number of users that your existing users are bringing to your app through social sharing, word-of-mouth and other forms of unpaid promotion. The good news: these new users are organic, they are basically free — which is why you want to understand and calculate their contribution to LTV. The not-so-good news: virality, like all intangibles, is essentially a judgement call.
In hard numbers, virality is the ratio of your organic to paid users. But calculating the impact of this organic traffic on LTV is not so straightforward.
If, by increasing paid user acquisition activity you also increase your organic traffic, it still makes sense to invest in marketing, even if your CPI exceeds LTV. It’s a very tricky calculation, but you’re ultimately faced with two scenarios: 1) spend moderately and receive positive returns, steady growth; or 2) spend a lot on UA, have higher CPI, but also gain higher organic growth which compensates for the added cost. The appropriate route will depend on your company’s product, budget and goals.
WHAT LTV REALLY TELLS YOU
Once you have framed your model, you have to ask and face some tough questions about how much money you want to make (recoup) by when. Knowing this is the only way to realistically know when your UA efforts and spend are on the mark, or missing your targets completely.
The industry has embraced one formula to rule them all: As long as the average customer lifetime value (LTV) exceeds the cost of customer acquisition, or Cost Per Install (CPI), then you are in the clear and your marketing expenditures will have a positive return on investment.
Or will they?
As Eric Seufert points out, the equation, and the logic driving it, can be misleading (and spell disaster if you follow it blindly). “LTV is a marketing metric, not an accounting metric,” he writes. “As such, LTV describes only one aspect of an app developer’s business, not its entire revenue structure. When LTV is greater than CPI, a firm’s marketing operations exhibit positive return – which, while objectively a favorable position, does not guarantee overall profitability for the firm.”
In other words, marketing in mobile freemium is not an infinite feedback loop between LTV and CPI, and it’s not a smart move to always ramp up spending on UA as long as the spread is positive.
Other factors play a role — and how and when you recoup your money depends on your app category, business objectives and what you consider to be a realistic timeline.
If you have an app packed with all the bells and whistles that encourage engaging and addictive gameplay, then it may make sense to think in 6-month or even 1-year timeframes. However, if you have a one-trick pony app, where the novelty is sure to wear quite thin quite fast, then even a 90-day timeframe can be stretching your luck.
RED FLAGS AND GREEN LIGHTS
In any case, factor in some flexibility.
What are the signals to pull the plug on your UA spend, or double-down on marketing to take your app to new heights?
It’s always going to a tough one to call.
HARNESS LTV AS A MARKETING METRIC
Now that you grasp the math, let’s explore the consequences for your wider app advertising and marketing strategy.
Think of LTV as the mirror test for your app business. Pass it and you can spend with the confidence that you’ll get the results you want on the timeline you have to meet.
But time is a luxury you don’t have if you don’t have a clear marketing strategy. Identify clear and realistic marketing objectives that are within your reach based on your LTV calculations and predictions. Effective app marketing is data-driven and your spend must be aligned with what your performance metrics tell you about the value of your audience (and the revenue it generates).
Whether you are planning to hire influencers to promote your app to their audiences on YouTube or just gearing up to take advantage of the massive benefits offered by above the line advertising, you can’t afford to drive your business blind. A firm grasp of your LTV will give you the confidence you need to pinpoint the moments and methods that will help you advance your app business, not put it at risk.