Measuring Customer Lifetime Value: Know Your Users, Increase Revenue | 1
App Developers Guide to Measuring Customer Lifetime Value: Know Your Users, Increase Revenue There are lots of ways to calculate it, and there are lots of ways to put it to work for you. But one thing mobile marketing experts all agree on is you have to pay attention to customer lifetime value. Defining LTV Customer lifetime value, or LTV, as its commonly known, is all the revenue a single consumer will generate from the time he or she downloads the app or game until its no longer used. Thats paid downloads and in-app purchases, yes, but it can also include word of mouth and sharing via social media. Its also much more valuable than focusing on revenue alone because, at the very least, its a predictive metric that helps you measure the true success of your business. Compared to total revenue, LTV provides more accurate information in two dimensions: First, it measures the profitability of users, which helps developers identify more lucrative customer segments. Second, it takes future profits into account, and hence is more farsighted, according to the blog of game analytics service Gondola. Measuring LTV also helps mobile marketers know where to concentrate and maximize their marketing dollars, says online marketing agency adQuadrant. Why waste time and money chasing after customers who wont stick with you when you can invest in keeping loyal users? Speaking of loyalty, predictive analytics platform Custora points out that we cant possibly know how long a user will keep coming back, so LTV needs a period value, as in a 12-month LTV worth X number of dollars. With LTV, were talking quality, not quantity. Drivers used to calculate LTV There are three generally recognized drivers used to calculate LTV: monetization, retention, and virality. Lloyd Melnick, the senior director on the Hit It Rich! team (Zyngas iPad and Facebook social casino app), succinctly describes each: Monetization is how much customers spend over their lifetime in the game; this includes ARPDAU (average revenue per daily active user), ARPPU (average revenue per paying user), and ARPU (average revenue per user). Retention, which also includes engagement, is how often people come back to your game, how frequently they return within a certain period of time (e.g., every day, every week, every month), and how often they stay in the game when they play. Virality is how many additional (free) users each user will bring in. Its often measured over a specific period of time. Every company has a slightly different equation for LTV, Melnick concludes, but they all include variables from these macro-categories.
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Keith Petri, Vice President for Strategic Partnerships at IgnitionOne, advises focusing on that middle category, retention. On his blog, he cites a statistic that 76 percent of the average apps new users will fall away within three months, and so the opportunity is in retaining engaged users. Other industry experts agree. Eric Benjamin Seufert, head of marketing at Wooga, presented at the Game Developers Conference in March on how his company profitably marketed a game to No. 1 ranking in iPhone app downloads. He says definitively that retention is the most important metric. In his presentation, Seufert describes a retention curve, showing that if you have 50 percent of users from day zero return on the first day, that app will have a 37-day total lifetime. Forty percent forecasts a 30-day lifetime.
He also gives virality its due, colorfully illustrated by Mel Gibson leading his Scottish army in Braveheart. Virality is important, Seufert says, because it compounds user base growth, but it is a nebulous concept that requires some assumptions. But nailing down LTV still wont do much for you if you dont have anything to benchmark it against. Petri from IgnitionOne says LTV has to meet or exceed customer acquisition
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cost, or CAC, to sustain a business. CAC is just what it sounds like how much money a developer or company spends to gain a customer. Jason Cohen of A Smart Bear, a blog about startup marketing (and geekery), explains how LTV, CAC and a host of other acronym-condensed concepts are linked. Immediately upon acquiring a new customer, you have lost money on the effort. Youre in the hole with negative profitability for that specific customer (called CAC), Cohen writes. But that same customer starts paying their subscription, which allows you to progressively reduce your loss each month until eventually theyve paid enough to reach breakeven (called CAC payback). At that point, youve recovered the cost to acquire the customer. From that point and until they eventually decide not to renew the subscription (called churn), you progressively accumulate net profit for that customer (called lifetime value). Is it really THAT important? Apparently, it is. Melnick goes so far as to say that while many industry professionals understand that LTV is important, they dont realize its the lifeblood of their businesses. It is the primary factor in why companies fail or are sold for tens or hundreds of millions of dollars, he wrote on his blog last year. In other words, LTV is so important because it tells you if new customers are worth more than the cost of acquiring them. Petri gives a high-level example on his blog that shows how increasing monthly retention by 50 percent increases monthly revenue by 9.9 percent. Increase retention, increase LTV, he hypothesizes. Why, though, is it specifically more important than just gunning for an increase in total revenue? Well, if you work it right, LTV is going to drive your revenue anyway, according to Miles Branman, digital marketing specialist at mobile-analytics service Localytics. If increases in revenue are primarily driven by new user acquisition rather than by retaining users who continue to spend, youre putting yourself at risk of experiencing a revenue bubble that will burst as soon as new user acquisition slows, Branman wrote in a Localytics blog post. An app monetization strategy that focuses on retaining high-value users and enabling them to spend in your app is more sustainable than a churn and burn model that requires a consistent supply of fresh users. Not to mention, if theres a hiccup in revenue flow, tracking LTV can help you address it before it becomes an actual problem. LTV versus CAC: a balancing act As mentioned above, industry expert Keith Petri says for a business to sustain itself, LTV should equal or exceed CAC. Tech blog Platforms and Networks takes that a step further in defining just how much.
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The blog posits that theoretically, CAC should be able to meet LTV for each new customer, but it doesnt really work in practice because that equation wouldnt generate enough money to cover fixed costs. Instead, companies use a target. LTV/CAC ratio, such as the 3:1 ratio used by many software-as-a-service businesses. Regardless of where a company is in determining its customers LTV and how it relates to CAC, one concept remains constant: the need for balance between these two values. A 2009 post on the blog For Entrepreneurs, by serial entrepreneur David Skok, has remained so on-point and relevant in discussing this balance that mobile marketers continue to cite it in their own blogs. Since then, LTV might have gotten more press, but Skoks bluntness still rings through: It doesnt take a genius to understand that business model failure comes when CAC (the cost to acquire customers) exceeds LTV (the ability to monetize those customers).
Source: http://www.forentrepreneurs.com/startup-killer/ A well-balanced business model requires that CAC is significantly less than LTV.
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All LTV is not created equal Some rules, like that of having a balanced business model, apply across the board to any kind of business. But much of the decision-making surrounding L