How to calculate user lifetime value

Do you know the lifetime value of your app’s users? You should! Keep reading to learn all about customer lifetime value, why it’s important, and how to calculate it.

What is customer lifetime value?

The lifetime value (LTV) metric reveals the amount of revenue earned from all transactions that occur during the lifetime of an average customer, with lifetime referring to the typical span of time (whether days, months, or years) that a customer makes purchases from your business.

LTV is a general business metric that can also be applied specifically to your app. This article will explain how to calculate the LTV of app users.

But first, it’s important to understand why LTV is so important. Here are some reasons why it should matter to you:

  • Helps predict future success;
  • Reminds you of how important it is to earn customer loyalty;
  • Helps you to stay in your marketing budget, keeping you aware of costs that are getting too high;
  • Enables you to decide the next steps in your mobile marketing plan.

How to calculate customer lifetime value

Before you can calculate customer lifetime value, there are a few other formulas that must be dealt with. The results of those calculations will be plugged into the LTV formula.

Average Revenue Per User (ARPU)

First, you must figure out how much revenue is earned from the average user. See the formula below:

Total Revenue/Total Number of Active Users = ARPU

There are a few things to determine before calculating ARPU:

  • Will this calculation be done on a monthly basis, weekly basis, or daily basis?
  • What defines an active user? Are you only going to count daily active users, or will you include all users?

Predicting average customer lifespan

The next calculation will help you predict the average lifespan of your app’s users. There are two steps involved:

1 – Calculate churn rate – This is the percentage of users who stopped using your app.

Total Number Of Users Lost/Total Number Of Users At The Start Of A Period = Churn

2 – Predict the average lifespan of a user.

1/Churn = Average User Lifespan

Virality

Virality is the average number of referrals a customer makes. But this step is optional.

In fact, most marketers don’t even have access to the data that would enable them to measure virality. Such access requires referral programs that are built into your app.

So don’t worry if you aren’t able to complete this step. It’s not necessary for calculating user lifetime value.

Putting it all together in the customer lifetime value calculation

Once you have completed the previous steps you can put the results into the customer lifetime value calculation. See the formula below:

[ARPU x (1/Churn)] + Referral Value = LTV

Remember, adding the referral value is optional. You can take it out of the formula if you don’t have this information.
How to use the LTV metric
Once you have completed the customer lifetime value calculation, you should put this metric to good use. Here is what you need to do next:

  1. Calculate customer acquisition cost (CAC).
  2. Make sure that LTV is greater than CAC.

If LTV is greater than CAC, you can continue with your current marketing plan. But if LTV is lower than CAC something needs to change.

  • You can reduce paid user acquisition costs;
  • Or you could encourage customers to make more purchases;
  • You could also try increasing user retention or referrals.

If you really want your app to make a profit you need to calculate user lifetime value. If you don’t, you won’t be able to keep track of your app’s ability to generate revenue.

For more help with making your app successful, check out the other articles at AppRankCorner.

Comments