Lifetime Value (LTV)

Lifetime value (LTV)

LTV meaning, Lifetime Value (LTV), is a performance indicator used to evaluate the total earnings generated by a customer throughout their entire tenure of using a mobile application. Historical data on user retention rates is often used to estimate the expected duration of user engagement.

Having knowledge of what is LTV and the average LTV of your customers is crucial for executing successful marketing strategies. LTV in marketing for mobile apps is normally used to optimize revenue streams such as subscriptions, in-app advertising, and in-app purchases by determining the amount of money that can be spent on user acquisition while still being profitable. From an LTV/advertising point of view, the profitability is tracked by comparing the LTV to the cost of customer acquisition (CAC). If the revenue generated by a user surpasses the cost of acquiring them, then the business is making a profit and should consider scaling their user acquisition to expand their operations.

The difference between lifetime value and retention

In mobile app metrics, LTV refers to the total amount of revenue that a user generates or spends on an app over time, whereas retention is the percentage of users who continue to use the app after a specified period, such as a month or a year.

The primary distinction between lifetime value and retention in mobile apps is that LTV measures the total revenue that a customer generates throughout their lifetime of using the app, while retention gauges the percentage of users who continue to use the app beyond a particular time frame.

LTV metric provides insight into the app’s overall profitability, while retention measures the degree of engagement and satisfaction among users.

How to calculate LTV

The calculation of LTV can vary depending on the business model, revenue streams, and objectives of your mobile app. For instance, if in-app purchases are the primary source of revenue, LTV may be determined as the sum of a user’s total purchases. If ad revenue is the primary source of revenue, LTV may be calculated as the average ad revenue per user multiplied by their lifetime. If the goal of your app is to increase brand awareness or website traffic and it is free, retention may be defined as the percentage of users who access the app or click on links monthly.

Cohort analysis can be utilized to group users based on the date they first used the app and compare their LTV and retention over time. Customer segments can also be employed to categorize users based on their characteristics, such as location, behavior, demographics, or device, and evaluate their LTV and retention patterns.

The standard formula for computing LTV is:

LTV = Average purchase size x Number of purchases x Retention period.

LTV for subscription apps

Typically, marketing requires an upfront investment while revenue is generated gradually as customers use the service. This is especially true for subscription-based business models where clients are charged on a monthly, semi-annual, or annual basis. Therefore, it’s crucial to estimate the LTV metric over a defined period, such as six months, one year, or two years. Based on your available capital, you should determine the acceptable period to break even and achieve a positive return on your advertising investment.

For apps that operate on a subscription-based model, retention can be defined as the percentage of users who renew their subscriptions after a specific period. In this case, the LTV formula can be calculated as:

LTV = (average monthly amount expected from each customer) / churn rate

Assuming a monthly subscription fee of $200 and a churn rate of 8%, the lifetime value (LTV) for a new customer can be calculated as follows:

LTV = (Monthly Subscription Fee / Churn Rate) x Expected Lifetime

LTV = ($200 / 0.08) x 20

LTV = $5,000

This means that the LTV for a new customer is $5,000, which is the estimated amount of revenue that the customer will generate over their expected lifetime of 20 months.

To calculate your LTV, you’ll need to track several key metrics. Revenue metrics like ARPPU can be found within your Analytics dashboard. In the Retention tab, you’ll find detailed data on user retention, broken down by specific steps such as the trial period, the first payment, the second payment, and so on. These retention charts show the actual consumption lifetime of your product and enable you to make long-term forecasts.

Customer Lifetime Value

CLTV (Customer Lifetime Value) is a variation of LTV that measures the total revenue a customer is expected to generate over their entire relationship with a business. To calculate CLTV, you can use the formula: Average Revenue Per User (ARPU) multiplied by the expected lifespan of a customer, and then subtract the cost of acquisition. For example, if the ARPU is $20 and the expected lifespan of a customer is 24 months, and the cost of acquiring a customer is $50, then the CLTV can be calculated as follows:

CLTV = (ARPU x Expected Lifespan) – Cost of Acquisition

CLTV = ($20 x 24) – $50

CLTV = $480 – $50

CLTV = $430

So, in this example, the CLTV of each customer is $430, which represents the estimated revenue the customer will generate over their entire relationship with the business, taking into account the cost of acquiring them.