Tapdaq on LTV: The Most Important Equation in App Marketing
Tapdaq is a user acquisition platform for apps aimed specifically at independent developers and provides a peer-to-peer platform for exchanging traffic. All new sign-ups get 100 free installs to test out the service. Dom Bracher, co-founder and CMO, shares his thoughts below on what he considers to be the most important equation in all of app marketing: user lifetime value (LTV). Over to Dom.
The Lifetime Value of a user, often shortened to LTV, is the measure of the revenue a customer will bring during their lifetime of using your application. Amazingly, in our recent survey, 100% of the 60 developers we spoke to said LTV is the most important metric in app marketing.
In this guest post, I will talk through why the equation for calculating the LTV of your users is so important, and then give you a quick guide on how you can work out how much your users are worth.
Why LTV is so important
When marketing your application, it is essential that you know the lifetime value of your customers. If you know and understand this metric, then you are able to calculate what you can afford to pay when acquiring new users. If at any time your cost of acquisition rises above your LTV, then you are going to be in for a bumpy ride.
Another interesting statistic that arose from our recent survey was this:
85.3% of developers would be more comfortable putting together their marketing budgets if they knew the lifetime value of their customers.
With the financial health of your application being heavily reliant on a strong understanding of your customers’ LTV, you would think that this would be one of the most heavily tracked metrics in app analytics.
However, we learnt that whilst 95% of developers use third-party analytics tools in their applications, only 1 in 20 of them measure LTV.
One of the main reasons that developers gave for them not tracking the LTV of users was that they were unable to find a tool that could automate the process. Whilst we at Tapdaq are working hard to solve this problem, here’s our 5 point guide on how you can do it manually.
How do I calculate Lifetime Value?
Step 1: Gather your Data
There are several data points which you need to know any understand in order to calculate the LTV of your users. These are:
Customer Churn: This is the rate at which you lose customers during a given period, normally measured monthly.
For example: If your app has 100 users, then 100 people could have left/stopped using your app this month, but only 18 did. This means you have 18% churn.
Income: You will need to know exactly how much money your app is generating, and this means evaluating all your sources of income. This could include data from IAPs, subscriptions, ad networks and more.
Number of active users: This is the number of active users your app has. If you have a mix of users where some generate income and some don’t, include them all.
Average Revenue Per User (ARPU): This is the revenue you generate, on average, from each user of your application. At Tapdaq, we are actually working on a tool that will automatically calculate your ARPU, and this is due for release in December 2014.
Step 2: The Equation
That’s all there is to it! Let’s use this in an actual example…
ABC Apps has 1,000 users of its popular application. From advertising and selling some simple In-App Purchase items, it makes $500 per month. Each month it loses 300 users of its application from the pool of people who were using it the month before.
Knowing the above numbers enables us to calculate ARPU and Churn, and therefore work out your LTV.
ARPU = Monthly Revenue from Users / Monthly Number of Users = $500 / 1,000 = $0.50
Churn = Percentage of people who could leave and did leave = 300 out of 1000 = 30%
We can pipe this information into this formula:
So, the LTV of an ABC Apps customer is $1.67.
ABC Apps now have a clear understanding of how much they can spend on acquiring users for their application before a campaign becomes non profitable.
However, acquisition costs are not the only factor that needs to be considered here. In order to retain users and keep churn low, developers need to actively iterate their application. If your application becomes outdated, or if bugs and feature requests go unanswered, then users often lose patience with and search for an alternative. With users being so expensive to acquire on the current ad networks, it’s essential that developers set aside enough budget for user retention. Downloading an alternative is all too easy for users to do.
Whilst calculating the LTV of your users might not be fastest or most fun of activities, it is certainly worth it. With the exception of product strategies which rely on gaining traction and engagement rather than improving user monetisation, the rate and risk at which you invest into growing your product hinges on your LTV.