Guest Blog: Why developers must get better grip on LTV

03 AUG 2017

Martin Macmillan (pictured), CEO and co-founder of Pollen Velocity Capital – a provider of financing to app and game developers – explains while an app’s lifetime value (LTV) is sometimes percieved as a vanity metric, it can actually help define a product’s success.

App developers are inherently clever people: creating a mobile app or game requires plenty of experience and smarts. Unfortunately they are so focused on coding a great app, they are left perplexed by the skills required in marketing and user acquisition to make their app a commercial success.

User acquisition is most often the area where developers fail. After creating a great app, they send it out into the wilderness with a wish and a hope (aka a PR campaign) and may be lucky enough to secure a feature placement on the App Store or Google Play, but then are left frustrated that their app flounders undiscovered on the app stores.

LTV
Developers have more autonomy and control over their destiny if they have an understanding of their unit economics in particular, and a good understanding of their app’s lifetime value (LTV).

The term refers to the revenue expected to be earned from a customer during the lifespan of the app. With even a basic understanding of this, developers can be better equipped to know if paid user acquisition is viable as a way to scale up their app’s installed base.

LTV is often seen as a vanity metric as it is hard to calculate and many developers find it to be a nebulous concept which is difficult to apply to their marketing plans.

The reality is that, if correctly understood, LTV is a very powerful metric that can define the success of your app, as it indicates whether or not you are are able to spend money profitably on paid user acquisition through channels like Facebook and Google.

There are many different ways in which to calculate LTV for freemium apps, but whichever method they choose, developers should have easy visibility of their customer acquisition costs – CPI (cost per install), or now more frequently CPA (cost per action) – which defines the amount they will pay for a user to install an app on a mobile device, or complete a specific “action” within your app, such as complete a tutorial or make a first purchase.

Advertising platforms are getting increasingly sophisticated at pricing against these post-install events so that marketers can pay for what makes sense for their business to maximise returns on investment (ROI) on marketing spend.

From the app stores and analytics tools developers can also easily figure out their revenue and retention metrics. For LTV calculation, developers should be most concerned with the average revenue per daily active user (ARPDAU) metric and also the retention curve – understanding how long people stay using the app before they drop off.

For example, developers may have a CPI of $1 per user which means they are looking at a marketing budget expenditure of $10,000 for 10,000 app installs.

Most apps will have an organic uplift of at least a few percentage points: users who discover your app via sharing, a feature placement, PR, or word of mouth. However, unless this uplift (also known as virality or ‘K factor’) can be established with some certainty, it may be best to leave this out of the calculation.

Stickiness
Next, developers should figure out how “sticky” their app is, as drop-off of users is to be expected and anticipated.

It is the job of a developer to make sure they create something people stick with over a window of time, from the first day, to the first week, month, quarter and half year.

If they can keep all the users they paid for (CPI), including those paying users who contribute to the all important ARPDAU number, with a quality retention rate and decent monetisation, developers will have a quality LTV metric.

In the event LTV is not good enough to acquire users profitably, then developers can work backwards and figure out what is wrong by tweaking a combination of retention and ARPDAU.

If they show an LTV in excess of the customer acquistion cost (CPI, CPA and so on), they may have an ROI positive way to acquire users for the app.

Whichever monetisation method they choose – in-app purchases, ads or subscriptions – it is important to understand how LTV is delivered and model how the acquisition costs move over time (generally the more they buy the more it costs).

An understanding of CPI/CPA and LTV calculation can instantly tell developers if they have a business that can scale up using paid user acquisition.

Marketing apps needs to be completed with as much thought and care as is put into creating them. It is wholly a matter of best understanding what metrics, figures, and tools are at developers’ disposal.

From there they can take ownership of the future and health of their app, and ability to scale up.

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.