Life Time Value - what is it and what method of LTV counting to choose?

It so happened that Life Time Value (LTV) is one of the most important metrics that must be considered by developers of commercial applications. The problem is that just the developers use this indicator not so often. According to a survey by Tapdaq , almost 100% of application creators agree that LTV is the most important metric for commercial applications.

At the same time, 95% of authors use third-party analytics tools for their programs, but only 1 out of 20 such tools calculates LTV! Now, most developers evaluate the success of their applications by the number of downloads or by the position in the catalog ranking. But in fact, these figures do not reflect the financial success of the application. Downloads and rankings are great, but how much money does an individual user “invest” in a program for a certain time? Let's see.

In general, some developers do not use LTV, but they calculate ARPU, since it is possible to calculate ARPU faster and easier than LTV. But the figures are still different, and ARPU is not self-sufficient.
')
Let's take a look at four ways to calculate LTV, and then look at the experience of some companies in terms of increasing LTV.

What is LTV?

Yes, you should immediately clarify the meaning of this term. Otherwise there may be a misunderstanding of the essence of the metric. LTV, or Life Time Value, is the amount that a person spends in the application for the entire time the program is used or for a certain period. The key word is “sum”, not “income” or “profit”. The fact is that the "amount" can be defined as something other than revenue. LTV can depend not only on a purely monetary value, but also on the actions that the user takes in relation to the application, and these actions are important for the promotion of the program. For example, this is a “wireless telegraph” when a user shares information about an application in a social network. This may be the money that the user spends on In-App-purchases or brings with a click on advertising.

As for social networks, everything is simple. The user shares information about the program, and this information attracts two more users who already spend real money. Despite the fact that the first user did not spend anything, his “work” can be estimated by the amount of income that was provided by the users attracted by him.

LTV is best measured by taking individual categories of users, rather than immediately the entire base. This allows you to evaluate patterns of user behavior, which can be useful.

What is the difference between LTV and ARPU?

Sometimes LTV seems to be analogous to ARPU (Average Revenue Per User), but still these are different metrics.

ARPU is a relatively simple indicator. And yes, when calculating ARPU, it is the revenues brought by a single user that are taken into account.

The easiest way to calculate ARPU can be this method: take the total income and divide it by the total number of downloads. This will allow you to understand how much on average each application download brings.



ARPU is calculated across the entire user base; there is no need to take individual categories or segments.

Factors used when calculating LTV

There are several factors to consider when calculating LTV. Strengthening each of them allows you to increase LTV.

User retention

Well known to developers factor. What is meant here is how often users work with the application. Hold is an important component of LTV, because the more often a user returns, the more likely that a user will make a certain “contribution” - either money, or, as we wrote above, something else. It can be said that retention is the most important factor that influences LTV.

Monetization

This is a simple indicator, which is expressed in how much money the user invests in the application. Obviously, the more a single user spends, the higher the LTV.

Virality

This indicator reflects the number of new users brought by the existing user of the application. This may be a personal conversation, and the publication of information about the program on the Web, and everything else.

Average Revenue Per User (ARPU)

As mentioned above, this indicator is calculated simply: we take the total amount of income of the application and divide by the total number of downloads.

Average Revenue Per Daily Active User (ARPDAU)

The same as ARPU, only here the indicator is calculated daily. Take daily income and divide by the number of users per day.

4 ways to count LTV

There are several methods for calculating LTV, we suggest to consider the four main ones that are used most often.

Average LTV

This is a fairly simple (honestly very simple) way of calculating LTV. Take the APRDAU (Average Revenue Per Daily Active User), multiply by the average value of retention.

LTV = APRDAU × cf. retention

Remember that APRDAU is obtained by dividing the daily income by the daily number of users. This method is suitable for applications with a significant user base and revenue. If the application does not have so many users and a minimum income, this method of counting is not very suitable.

Tapdaq

The second method is quite significantly different from the first. Here an additional metric is introduced - Churn.

To calculate this metric, you need to know how many people stop using the application for a certain time. For example, if an application has 100 users and 20 of them stop working with the program within a month, then the monthly churn is 20%.

You also need to know ARPU. How to calculate this figure, we already know.

Well, now we use the following formula:

LTV = ARPU × (1 ÷ Churn)

Weekly cohort

Another interesting method where the division of the entire user base into groups with a period of a week or a year is applied.

LTV is calculated separately for each segment. For example, users who downloaded the application 50 weeks ago are recorded in a separate group. And those who downloaded the application 4 weeks ago, respectively, to another group.

The formula here is pretty simple. For each weekly segment we calculate this:

LTV = total in-app purchase revenue ÷ number of users in a segment

Virus counting method

As mentioned earlier, user dissemination of application information is important when calculating LTV. And in this method just the “wireless telegraph” is used.

In order to take this factor into account, you need to enter a certain coefficient, for example k. It will be equal to one if each user of the application has led another person. In this case, the formula will be very simple, since the coefficient can be ignored.

In a program where this ratio is greater than one, the user base will rapidly increase as they are constantly added. True, programs with k> 1 are quite rare.

In general, here you need to know which coefficient is in your application. Then you can use the following formula:

LTV = (1 + K) × ARPU

Example:

If you have an application with ARPU = $ 1.2 and a virus coefficient of 0.2, then the LTV value will be as follows:

LTV = (1 + 0,2) × $ 1.20

Conclusion

Each of the methods for calculating LTV is different in its own way. We at Appodeal suggest trying several methods at once and choosing the one that best suits you. If you have not yet tracked LTV, it's time to do it.

Once you determine what your LTV is, you can figure out what to do to take the application to a new level.

An example of an increase in LTV is the case of the application of the company Secret Escapes, which is engaged in tourism. The company wanted to understand whether the application will work effectively if you enter a mandatory registration.

Opinions of the team are divided here. On the one hand, the mandatory registration in the application introduces a kind of exclusivity into the game, an element of involvement in the community of the elect. On the other hand, mandatory registration can scare new users, and this happens quite often.

To find out how the mandatory registration will affect the behavior of users, it was decided to conduct an experiment, divided into two parts. The first allowed users to skip the registration screen. The second made registration in the application mandatory.

As it turned out, the fears were in vain: the mandatory registration had a positive effect on the popularity of the application. And we managed to find out by calculating LTV in one of the ways described above. The LTV application with mandatory registration significantly exceeded the LTV application, where the registration screen could be skipped.

And, of course, we expect that on the way to the successful monetization of your applications, you decide to connect our service , because optimal advertising can be one of the components of high LTV.