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What is LTV?

by AppLovin on Jan 7, 2021

Lifetime value or customer lifetime value refers to the amount of money a customer or user is expected to generate in your app. It’s an important metric that helps you better understand your app’s performance and help shape future business goals and advertising strategy. 

It also provides insight for how you can better optimize to think beyond a user’s first purchase as well as hold on to those who consistently engage with your app.  

Here’s an easy way to think about LTV…

Picture a customer who walks into a department store. There are all different types of customers—from those who browse but aren’t ready to buy to the shopper who snatches up every deal and promotion offered in the store. 

Depending on the type of shopper, their spending habits, and other factors such as brand loyalty, this person may only enter the store once or could end up being a repeat customer with high LTV. 

Those with strong LTV are more likely to spend. A 2019 study showed that the top 10 percent of customers spend three times the amount per order than the normal customer base, while the top 1 percent spend about five times per order. 

High LTV and loyalty

Think about your users and how frequently they return to your app and how often they make purchases. Those who return on a regular basis and make frequent in-app purchases will have a higher LTV than those who use your app once and never buy anything. A higher overall LTV is a strong growth indicator and shows you have a loyal user base. 

You should measure your LTV in relation to your customer acquisition cost, or CAC, which indicates how long it takes to recover the investment you made to obtain that user. This usually translates into costs involved in sales and marketing. 

Because every company offers a different product or service, it’s important to define what a high LTV is for your business and how to properly measure it. 

Importance of a user’s lifetime value

When you know a user’s lifetime value, you can use it to forecast what your month, quarter, or year will look like, based on the projected time frame or “lifetime.” This also includes the success of your ad revenue, which is a part of LTV. Improving your ad monetization is another essential way to boost LTV.

This, in turn, helps you figure out what you need to focus on in order to optimize and grow your business. For example, if your LTV is weak, you work on future promotions and ad campaigns to improve retention or upsells. 

LTV helps you better understand how much of an investment should be allocated to specific parts of your overall strategy, such as customer retention, for example. 

The benefits of LTV: specific examples 

Your future campaigns and initiatives can potentially drive higher revenue for your company. These are a few examples of how a concrete grasp of LTV can further benefit your team. By understanding your user’s LTV, you can: 

  • Create more diverse strategies for long and short-term goals
  • Focus your efforts on users who spend a certain amount vs those who represent lower value
  • Establish clear management of user relationships to further drive profitability and brand loyalty
  • Estimate costs associated with producing and delivering future features and new products

LTV and customer retention

According to one report, returning customers tend to spend an average of 67 percent more than first-time customers. 

In figuring out your marketing strategy through examining your LTV, you can focus on incentivizing repeat customers to increase revenue. 

Segmenting your users based on their LTV means you can focus on high spenders, for example, and provide more resources, depending on where they are in their journey. If they are nearing the end of their cycle, perhaps there are opportunities for contract renewals and upsells.

Lifetime value of a customer formula

A customer’s lifetime value can be calculated in many ways, but here is a simple way to think about it is by finding this number: 

Average LTV of a user = Total lifetime revenue of an app / Total number of users

How LTV is used in relation to customer acquisition cost (CAC)

Because LTV is an important part of forecasting, it can be used to determine the marketing budget. Segmenting your LTV to customer personas helps you understand the value-driven by each customer. 

In particular, the customer acquisition cost, or CAC, is how much it costs to acquire a new customer. This number should always be lower than the lifetime value of a new customer. 

How to increase your LTV 

Increasing LTV means thinking through how to Improve how a user interacts with your app. These are some methods that can help increase your user’s lifetime value: 

1. Improve your onboarding

Did you know a weak onboarding experience is a leading reason why customers churn? Creating a strong start to the way users interact with your app is crucial. Focus on your app’s value and try to provide a high-quality, personalized experience. 

2. Personalize your content

Everyone likes to feel special. This helps improve engagement. Some brands regularly showcase their fans on their Facebook page. They do this through contests, letting their community know who won, further increasing engagement and promotion. 

3. Show gratitude

Have a customer appreciation day and send something to your best customers. AppLovin and Machine Zone recently launched a first-ever Player Appreciation Week, where select players were given gifts and thanked for their continued partnership. 

4. Give users a temporary upgrade

Show users what they’ve been missing and give them a taste of your premium product for a limited time and see if they decide to keep the subscription.

5. Send surveys and ask for feedback

Asking for feedback helps you understand what pain points users experience and what they’d like to see more of. It also helps strengthen relationships and makes your users feel listened to and appreciated. 

6. Upsell to expand revenue

If you have different pricing tiers or subscriptions, consider upselling, which is a simple way to increase your LTV. 

Bottom line

LTV is an opportunity for you to understand the value of your users so you can optimize future campaigns that drive business growth. A big part of that is strengthening brand loyalty and showing ways of appreciation, asking for feedback, and providing support when they need it.  

Interested in making your first game but aren’t sure where to start? Watch our App Hacks video series with AppLovin’s Head of Games, Keith Kawahata, who walks you through a checklist (part one) and user engagement and marketability (part two).

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