LTV of your app: how it works and why is it so important?

Retention is one of the great drivers of business growth, it is estimated that 65% of the revenue of an average company comes from customers already activated.

That is why it is so important to develop strategies for thinking about improving the retention of our app. Taking into account that it is more expensive to acquire new leads than to keep existing ones, expanding the Lifetime Value of your users is essential for a healthy business model and a customer retention strategy.

There are several actions that we can take to maximize the life of customers in our app. Loyalty programs, upselling, cross-selling, email marketing campaigns, content marketing, special offers, activations for users in the churn rate state, etc.

To carry out these tactics in a holistic strategy, it is necessary to identify behavior patterns, segment customers and implement actions to improve ROI. For this, we must take into account the Customer's Lifetime Value (CLTV). That is why we say that it is so important to know this value for your app to succeed. 

What is Customer Lifetime Value (CLTV)?

In a few words, the LTV (Life Time Value) is the net value of the income generated by a user from the time he installs an app until he abandons it.

Why is it important to calculate the LTV of your app?

This metric is of vital importance since it allows you to know how much you can invest to acquire a user. If you invest more resources in a potential customer than they will spend in the future, you will not have a profitable business. This is why the LTV of customers is a fundamental metric for planning marketing resources and budgets.

These are 3 reasons why you should take the Lifetime Value as a central metric in your strategy to increase the profitability and retention of your app.

Generate real ROI in customer acquisition

Focusing on LTV can help you fine-tune your customer acquisition strategy

Improve your retention strategy

The value of a marketing campaign (for example, aimed at converting your one-time buyers into repeat customers) should be judged by the impact it had on the average LTV of the customer segment you are targeting, and not by a single purchase. This way you will be able to know with greater accuracy what the real value of each client is and think of strategies to increase the average LTV value of each segment.

How to calculate the LTV?

Although there are different formulas, the three main variables are:

Monetization

Users generate income in your app, either through subscriptions or purchases. Here we talk about monetization.

Retention

The period that a user interacts with your app is what defines retention.

Virality

The virality is related to the references that users make about your app. This occurs when a user recommends another to use your app because they had a good experience. Organic growth is naturally desired, and to achieve this we need to improve various aspects of our app based on design thinking, user experience, and the problem our app is going to solve.

These three points, when calculated all together, define the total value of a user in your app.

These are some of the most used formulas:

Option 1

CLTV = Average spend per week x Number of weeks in the year x Number of years

Option 2

CLTV = (Average Customer Purchase Value x Resale Rate) x Customer Lifetime – Customer Acquisition Costs

CLTV = Total Revenue - Acquisition Cost (CAC)

To calculate the Customer Lifetime Value we have to be clear about what we want to measure with this KPI. First, we need to select a time window. As for how to calculate this metric, it depends on what we want to analyze, what parameters make up the profitability of our campaigns, and what time we want to take.

What is CAC?

The customer acquisition cost (CAC) is what it costs to acquire a new user, download the app, and start using it. It is important to keep this cost as low as possible. This metric can be calculated simply by dividing all expenses by the number of customers acquired during the same period.

There is a close relationship between LTV and CAC, which allows us to know if the value of a user is worth more than the money spent to acquire that user.

The LTV and CAC ratio offers a better and clearer vision of the future business: it shows the profitability of acquiring new customers and whether the growth of the app is healthy. This information helps us make important decisions, such as investing more or less in certain channels. A clear red flag in an app is when the CAC of an app is higher than the LTV. In these cases, we will have to review which are the steps of the strategy that are failing.

How to predict CLTV?

It is advisable to observe which clients historically have a high negative or positive value, to take actions with an impact on the business, based on a behavior pattern anticipating what type of potential clients will convert in the same way, to capture it, or not depending on its LTV. This is one of the reasons why it is important to predict the future of CLTV with machine learning.

Users are usually grouped into 3 segments: Low LTV, Medium LTV, and High LTV, depending on the characteristics of the business.

At Rocket Lab you can implement retargeting campaigns to increase the Lifetime Value of your app users. Using our growth platform, Space, it is possible to impact users who fall within the High LTV segment.

How to improve the LTV of your app users

In-app events must be measured. Understanding the actions that users perform within the app is essential. It is of little use in attracting users if the abandonment rate is high. Installation is only the first step in the conversion funnel.

The real objective of an app that intends to have solid and sustained growth has to be to acquire or attract quality users who have a high level of engagement with the app.

Measuring the events or actions within the app is basic to understanding how the users behave. In addition to measuring income, we have to enrich the data with multiple parameters that can provide us with much more information.

Knowing which step of the funnel each user is on allows us to communicate with them with messages according to their actions. For example, if an active user becomes inactive, we can activate them again with an offer or discount. Depending on each app, you can be re-impacted with an email, a notification, or a personalized remarketing. If there is a point in the funnel where we lose many users, it is a good place to optimize and improve.

For this reason, retargeting ad campaigns are very effective, managing to return users who entered the churn phase to active status.

Rocket Lab has successful campaigns with different apps that managed to improve the LTV of their users by finding them thanks to the impact of digital ads.

Conclusion

How to calculate the LTV depends on the characteristics of each company and business.

What will always be very important for the success of your app is to keep your users happy, so that they love your app and do not stop using it. When your users leave your app, your LTV will be negatively affected. For this not to happen, you have to learn to take care of your users, get to know them well, and research what they think of your app.

An accurate LTV prediction allows UA administrators to predict how successful a campaign will be in attracting users. It also helps identify the best post-install event to optimize for cost-per-action (CPA) campaigns. Today, most high-quality traffic on ad networks like Facebook and Google comes not from cost-per-install campaigns, but from CPA campaigns that drive users who are most likely to complete the desired event.

A good strategy to grow your app needs to:

• Meet the needs of a target audience.

• Get to know the users.

• Measure the LTV of each of them.

• Apply strategies to improve this value.