Life Time Value (LTV) is the single most important metric for app developers to be tracking, yet most of them aren’t.
According to Tapdaq, in a survey of 60 developers, 100% of them said LTV is the most important metric in app marketing.
However, they also found that while 95% of developers use third-party analytics tools in their apps, only 1 in 20 actually measure LTV!
A lot of developers judge success based on download numbers or position in the app store ranks. But these numbers don’t indicate whether an app is financially successful. Downloads and rankings are great, but they don’t give an indication as to how much value particular users are actually generating over the period in which they use the app.
Others measure ARPU because it’s quicker and easier to do. But I’ll explain later in this post how LTV differs from ARPU and why ARPU on it’s own isn’t enough.
By measuring and understanding LTV you can identify your most lucrative user segments. This is the key to dramatically increasing your app revenue.
Keep reading to find out 4 different ways you can calculate LTV and how you can use that data to generate more revenue.
What Is LTV?
I think LTV is probably one of the most misunderstood terms out there so I’ll give you a quick definition before we keep going.
Life Time Value is a measure of the value provided by a single user over the period of time in which they remain a user of the app.
Note the key word here is value, not revenue. That’s because value can be defined as more than just revenue. A user can generate value in many ways including word of mouth, sharing your app via social media, and of course through revenue via In-App Purchases and Ads.
For example, a user may not spend money in your app, but they might share the app on social media. That might lead to another 2 people downloading your app who do spend money. Although the person who shared the app didn’t spend money himself or herself, they clearly provided value by bringing in 2 new users who happened to generate revenue.
LTV is calculated on different cohorts or segments of users, rather than on the entire user base. This allows us to look at users with different characteristics and usage patterns and determine their LTV.
What makes it different to ARPU?
LTV may seem a lot like Average Revenue Per User (ARPU) but it is quite different.
ARPU is a relatively simple calculation compared to LTV. As you’ve probably already noticed, ARPU considers revenue only. It doesn’t factor in value created by other means.
The simplest and most common way to measure ARPU is to simply take your total revenue and divide it by total downloads. That will tell you how much, on average, each download generated.
Unlike LTV, ARPU is calculated on the entire user base. It is not calculated on different segments/cohorts of users.
Factors Used In LTV Calculations
Here are the main factors that influence LTV. You will see these mentioned in the different LTV calculations. Increasing any of these factors will have a positive impact on LTV.
Retention is how often people return to your app. Retention directly contributes to LTV because the longer a user keeps coming back to the app, the more opportunity there is to extract value from them.
Retention is often credited as having the largest impact on LTV.
This is simply how much money a user spends in the app. Obviously an increase in monetization, or spending, will push up LTV.
This is the number of users that are brought in by each existing user. New users can be brought it by existing users via social sharing, word of mouth etc. This is a non-monetary form of value that users can provide.
Average Revenue Per User (ARPU)
This is simply the total revenue generated by the app divided by the total number of downloads.
Average Revenue Per Daily Active User (ARPDAU)
ARPDAU is similar to ARPU except it is calculated on a daily basis.
To calculate ARPDAU, simply divide Daily Revenue by Daily Active Users.
4 Methods For Calculating LTV
There are many different ways to calculate LTV, here are 4 of the most common methods:
‘Bottoms Up’ or ‘Average LTV’ Method
It is calculated by multiplying the Average Revenue Per Daily Active User (APRDAU) by the average user retention.
LTV = ARPDAU x average user retention.
Remember, ARPDAU is simply Daily Revenue / Daily Active Users.
However, because it uses ARPDAU, this calculation might give you inconsistent results unless you have a huge user base spending lots of money in your app each day.
You can smooth out the results by using this formula for calculating ARPDAU as suggested by Gurinder Singh on Gamasutra.
Avg. Daily Revenue = Last 30 Days Revenue / 30
Avg. DAU = SUM(DAU) for last 30 Days/30
ARPDAU = Avg. Daily Revenue / Avg. DAU
Now using this new ARPDAU calculation we can calculate LTV using the ‘Bottoms Up’ approach again.
LTV = ARPDAU x average user retention.
Tapdaq’s suggested approach to calculating LTV is quite different to the one above.
Tapdaq suggest using an additional metric known as ‘Churn’.
To calculate churn, you need to look at the rate at which users leave over a given period. For example, if your app has 100 users and 20 of them stop using the app over the course of a month, then your monthly churn is 20%.
You will also need to know your ARPU. This is again calculated for a given period of time. I’ll use one month because that’s what I used in the churn example.
So, once you know your ARPU and Churn for a given period. This is how you calculate LTV:
LTV = ARPU x (1/Churn)
‘Weekly Cohort’ LTV
This is another method suggested by Niklas Herriger of Gondola. Developers who use the ‘Weekly Cohort’ method segment users into groups based on the week of the year in which they download the app.
LTV is then calculated separately for each segment. For example, users who downloaded the app 50 weeks ago are placed in the 50 week segment, while users who downloaded the app 4 weeks ago are placed in the 4 week segment.
Generally only verified In-App Purchase revenue is included in ‘Weekly Cohort’ LTV.
The calculation for this method is relatively straightforward. For each weekly segment you would perform the following calculation:
LTV = Total Verified IAP revenue / No. of users in this segment
An LTV Calculation That Incorporates Virality
As mentioned earlier, social sharing is another important measure of value when calculating LTV. This method uses a virality coefficient to include sharing in the LTV equation.
To represent virality, we need a coefficient to use as a measure. In this case, k represents the viral coefficient for virality. If an app has a virality coefficient of 1 it means that for every 1 user your app has, they bring in 1 new user.
So with a virality coefficient of 1, an apps user base would be self-sustaining without requiring any other means of user acquisition. This is because each user brings in 1 new user before they churn (stop using the app).
An app with a viral coefficient greater than 1 would have an exponentially expanding user base because each user brings in more than 1 new user before they churn. Apps with a viral coefficient greater than 1 are very rare.
Once you know your viral coefficient you can feed that into this equation to determine your LTV. Here is how it is calculated:
LTV= (1+K) x ARPU.
If we have an app with an ARPU of $1.20
And a viral coefficient of 0.2 (k=0.2)
LTV = (1+0.2) x $1.20
LTV = $1.44[/text_output]
You’ve now got 4 different methods to calculate LTV. I suggest trying a few of them and making a decision on which one you think is best for you. If you aren’t tracking LTV at all yet, pick at least one and get started.
There are real benefits to doing this and once you start seeing the data and understanding your high LTV users it can be a real game changer. If you want to take your apps to the next level this is where it starts.