What is Lifetime Value (LTV)?
Lifetime Value (LTV) is a metric that estimates the average revenue that a single app user or customer generates throughout their entire lifespan as either a free or paying user or customer. LTV is closely related to Customer Lifetime Value (CLTV), and this metric is crucial for companies to make informed decisions about how much they can spend to acquire a new user or customer.
As such, LTV helps you not only understand potential profitability but also how to scale your marketing budgets, forecast revenue, and more.
Lifetime value is calculated differently based on whether your app is a paid app, an ad-supported app, or a subscription business. In all cases, however, it is key to analyzing the ROI of marketing efforts. By knowing your user or customer lifetime value and your user or customer acquisition cost (CAC), growth marketers can calculate how long it will take to pay back upfront advertising or marketing costs, and what their expected profit from each customer will be over their lifetime. Of course, each user or customer will vary based on how engaged they are, how long you retain them, and ultimately how valuable they are to the company, which is why this metric is an estimate that fluctuates over time.
Uses of Lifetime Value
Before discussing the main use cases of this marketing metric, let’s first review the various ways to calculate LTV.
How to calculate LTV
For an app with ad revenue, you’ll need a methodology for aggregating and calculating ad monetization. Once you have that, you can do a very simple calculation on number of users and average revenue per user to get a “naive” estimate of LTV. Getting an accurate one, however, requires taking into account retention/churn rates and virality rates.
Apps that monetize largely based in in-app purchases can do something very similar, of course. The key exception is that IAP revenue is generally much easier to obtain good information on immediately.
In a subscription-based business, one simple way to calculate LTV is to divide the average amount a customer spends each month, or the average MRR (monthly recurring revenue0, by the churn rate, or the rate at which customers leave each month. For example, if the average MRR is $100 per month with a churn rate of 10%, the estimated LTV is (100/0.1) $1000. Also, from this calculation we can see the average lifetime of a customer is 10 months.
In non-subscription businesses such as eCommerce, LTV refers to the average total revenue from a typical customer including all their repeat purchases and upsells over a given time period. This can be calculated as the Average Order Value times the Purchase Frequency multiplied by the estimated customer lifespan.
With eCommerce it can be particularly difficult to estimate the customer lifespan as customers may end up making a repeat purchase two or more years in the future. In this case, you can also estimate the LTV based on specific time frames, for example the monthly or annual LTV of a customer.
LTV Use Cases
Regardless if the company is subscription-based on note, LTV is key for several main use cases, including:
- Budgeting marketing expenses
- Estimating the time to recoup marketing investment
- Understanding customer acquisition costs and profitability
- Forecasting revenue
One of the main reasons why optimizing marketing expenses for LTV is summarized by Qualtrics below:
It’s an important metric as it costs less to keep existing customers than it does to acquire new ones, so increasing the value of your existing customers is a great way to drive growth.
In short, each of these use cases are centered around resource allocation, profitability, and having an accurate view of the company’s ROI on a per-customer basis.
Calculating LTV with Singular
As a leading marketing analytics and attribution provider, Singular helps mobile marketers calculate and report on their customer lifetime value. In particular, the platform provides four core solutions that facilitate accurate LTV and ROI calculations for app businesses, including:
- Marketing Analytics: Using a third-party marketing analytics provider allows businesses to take a scientific approach to growth in order to maximize campaign results. Using granular performance metrics with data visualization, marketers are able to uncover and scale their most profitable campaigns.
- Cost Aggregation: An important use case of calculating LTV is to understand how marketing costs are affecting the company’s overall ROI. By aggregating costs from various ad platforms, Singular allows you to efficiently collect, transform, and analyze cost data for better resource allocation.
- Mobile Attribution: Finally, with mobile attribution marketers are able to accurately measure and analyze the impact of their marketing efforts on the LTV and ROAS of each ad campaign.
- Ad Monetization Attribution & Analytics: Because ads are critical for the monetization of so many apps, a solution that aggregates all your ad monetization revenues and normalizes it across multiple monetization partners is critical.
In short, with an end-to-end platform that automatically collects, cleans, and prepares data for analysis, this helps marketers accurately calculate their LTV in order to optimize the profitability and performance of each campaign. And, of course, of your business as a whole.