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Lifetime value (LTV)

Lifetime value, or LTV, is an estimate of the average revenue a customer will generate over the time that they use a given product or service.

What is LTV?

LTV is a core metric in mobile business growth, often used to determine how valuable a user is over the span of time that they’re using an app. 

LTV is instrumental in growing a mobile app business. It helps marketers properly optimize revenue streams like in-app purchases, in-app advertising, and subscriptions, by pinpointing exactly how much money they can afford to spend on user acquisition while remaining profitable.

How to calculate LTV

LTV formula

There are lots of formulas around for calculating LTV. Here are four steps to help you determine your users’ LTV, including a simple and useful formula you can put to use:

  1. Determine your average purchase value – If you haven’t been measuring your average purchase data for a while, consider looking at a one- or three-month period as a proxy for the full year.
  2. Calculate the average number of purchases during a defined period – The frequency of app usage is a major driver of LTV.
  3. Measure your user retention – Figure out how long the average user sticks with your brand. Some brands manage to inspire lifelong loyalty, but most struggle to maintain user fidelity because of a poor user experience (UX) or a brutally competitive landscape.
  4. Calculate away – Now that you have the inputs, it’s time to multiply the three numbers together and put all that goodness into a formula:

LTV = Average purchase size x Number of purchases x Retention period

Or try this one instead:

LTV = Total revenue generated since install date or during a defined period / Total # of users who installed on that date or during mentioned period

Why is LTV important?

LTV benefits

Combined with the average revenue per user, LTV is a golden metric to determine the total prospective revenue or value of your users. In the free-to-install app economy, it’s an essential metric to measure business health.

Here are a few key benefits for measuring LTV:

  1. You can’t improve what you don’t measure – Once you begin measuring LTV and breaking down the various components, you’ll be able to employ more targeted strategies around pricing, advertising and user retention with a goal of continuously improving your UX and increasing profit.
  2. Make better user acquisition decisions – When you know what to expect in terms of average earnings per user, you can increase or decrease spending to ensure you maximize profitability and continue to attract the right audience.
  3. Improve forecasting – LTV predictions can help you make forward-looking decisions around ad spend. LTV forecasting minimizes the risk of underspending and missing out on potential business or wasting money by overspending.
  4. Boost customer loyalty and retention – When a company consistently provides value — in the form of a great, intuitive app, excellent customer support, or an excellent loyalty program — customer loyalty and retention tend to soar. 

Targeting users with higher LTV will enable you to drive retention. More loyal users means lower churn rate, as well as an increase in referrals, and positive reviews.

  1. Drive recurring purchases – LTV allows you to measure web visits or app usage per year or over your users’ lifetime, and use that data to strategize ways to increase repeat business.
  2. Charge up profitability – Overall, higher LTV leads to bigger profits. By keeping users for longer stretches of time and building a model that encourages them to spend more, you should see the benefit show up on your bottom line.

LTV reports vs. activity reports

Data reports sit at the heart of the mobile marketing operation. Without them, it’s simply impossible to make data-informed decisions that are vital to the success of your business. 

That said, and much like other elements of the mobile landscape, data is multi-faceted. In our case, data reports come in two main forms:

Lifetime vs. activity data

Let’s explore the two main methods for analyzing your users’ events data, which relates to any actions performed by users post-installation, such as in-app purchases, registrations, level completions etc. Install data, on the other hand, is considered to be neither activity nor LTV data.

  • Lifetime – includes all events performed throughout the lifetime of users that installed during a specific date range. Good campaign optimization depends on LTV data, as it allows you to keep measure of the quality of users coming from different media sources. 
  • Activity – includes all events performed by all active app users during a specific date range, and shows an accurate breakdown of chronological events. 

It’s a solid business metric that allows you to keep a finger on the pulse of trends like — how many app sales took place in Black Friday 2021 vs. Black Friday 2020. But marketers usually look at LTV data because they can isolate specific cohorts. 

The train analogy can help explain the difference between the two: 

LTV vs activity data

Imagine a person called Sam standing next to a railway watching a train go by. During a single moment in time – Sam sees only the current actions performed by ALL of the passengers. This is activity data.

LTV data

Another person called David is standing inside one of the railroad cars. David sees ALL the actions performed only by the passengers that boarded the train with her, from their arrival (i.e. install) until departure (i.e. uninstalling). He can’t see any action performed by passengers on other railroad cars, since they boarded either before or after him. This is LTV data.

LTV in the age of consumer privacy

While we can all agree that privacy is a blessing for both consumers and the mobile ecosystem, the recent iOS 14-led changes do bring their unique set of challenges. 

First and foremost, there are several limitations to SKAdNetwork which greatly reduce the quantity and quantity of data available to app marketers. And one of the top challenges is — lack of LTV data.

SKAdNetwork only delivers one postback based on data signals from early on in the funnel, such as installs. There is little or no postback data from in-app events. And since the majority of LTV data is derived from in-app activity, app marketers end up losing several indicators that help measure the LTV value of their campaigns.

LTV in the age of consumer privacy

But not all is lost. By harnessing machine learning algorithms, digital marketers are able to make more sense of user behavior trends, and apply these to predictions of how valuable a user may become over time. 

The ability to be able to predict the success of a campaign early on and optimize accordingly — makes Predictive Modeling an invaluable tool.  

How to improve LTV?

How to boost lifetime value

There are loads of different strategies that can help you boost your LTV. Here are the top 10 to consider:

  1. CX – Customer experience is everything

Your app, website, customer care and all other touchpoints are all part of your unique CX. If your customers enjoy a smooth, low-stress digital experience every time, they’re much more likely to come back again, spread the good word about your brand, ramp up your App store ranking, and boost your organic growth.

  1. Improve your onboarding

Some consumers buy a product or service but then have no idea what to do next. Successful brands chart a path for their customers’ journey, which starts by investing in an intuitive, smooth and interactive onboarding experience. 

This helps to ensure optimal usage, frequency of use, and improves the likelihood for future upgrades or higher in-app spend.

  1. Connect LTV to your attribution data 

Doing so will allow you to pinpoint the best channels, media sources, campaigns, and creatives to focus on.

  1. Offer better value

By focusing on value and giving customers something they can’t get elsewhere, you’re much more likely to increase your LTV — and even pricing — while minimizing churn. Just be sure to consider your competitors’ pricing before determining your own. 

  1. Invest in customer loyalty or rewards programs

Rewarding your customers’ frequent purchases or long-lasting subscription will keep them feeling valued and engaged. Look for creative ways to Incentivize your customers to return, increase their purchase frequency, and share the love with their friends.

  1. Offer outstanding customer care

Poor customer service is a quick way to see your LTV drop and churn rates soar. Focusing on making every customer care interaction a delightful one — will further enhance your customer loyalty and help you ramp up your LTV. 

Also, don’t forget to loop in your customer feedback. In addition to relying on customer care to fix the problem, brands need to continuously ask for customer feedback to be able to link it into their regular product or service iterations, and enhance their CX. 

  1. Encourage upsells and cross-sells

It’s often easier (and cheaper) to reengage or upsell an existing customer than bring in a new one. Find creative ways to encourage your customers to buy higher end or additional products / services, by clearly clarifying their added value for your customers.

  1. Be present on social media

One of the best places to get your customers’ attention is to reach them in places where they’re already spending most of their time. Social media platforms like TikTok, Instagram, Twitter or Facebook, are impactful channels for both advertising and interacting with your customers.

  1. Ensure your purchasing experience is smooth

Cart or checkout abandonment is a real and painful problem for most businesses. Building a short and simple purchase experience will help you capture every possible sale.

  1. Offer relevant, targeted content on your owned media channels

Your owned media — i.e. your website, blog posts, e-books, videos, podcasts and social media content — are all popular forms of targeted content that can speak to particular segments of your audience, introduce them to new products or encourage optimized usage.

Key takeaways

  • LTV is instrumental in growing a mobile app business. It helps marketers properly optimize campaigns by pinpointing exactly how much money they can afford to spend on user acquisition while remaining profitable.
  • Among the key benefits for measuring LTV are: being able to employ more targeted strategies around pricing, advertising and user retention, make better UA decisions, improve forecasting, boost customer loyalty, drive recurring purchases, and charge up profitability.
  • By harnessing machine learning algorithms, digital marketers are able to overcome some of the privacy limitations posed by Apple’s SKAdNetwork, make more sense of user behavior trends, and apply these to predictions of how valuable a user may become over time. 
  • There are countless ways to improve LTV, but the most efficient methods include: 

Offering more value to your app users, investing in customer loyalty, connecting LTV with your attribution data, maintaining outstanding customer care, leveraging social media, and extending relevant content through your owned media channels.

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