Marketers fancy tonnes of abbreviations to pinpoint the effectiveness of their app marketing campaigns, with metrics like Retention Rate (RR), Daily Active Users (DAU), and Cost Per Acquisition (CPA). These metrics are indicators of how these campaigns bring value to the app business.
Out of all these, a particular metric, the Customer Lifetime Value (CLV), has more prominence than the others and ultimately adds more value and meaning to app promotion efforts. In this article, we will quickly cover the meaning, importance, and components of the CLV, and above all, look at how it can be calculated and improved.
What Is Customer Lifetime Value for Mobile Apps?
The Customer Lifetime Value, also known as the Lifetime Customer Value or the user Lifetime Value, is the total amount of revenue you can expect from a single app user over the entire period of the relationship with them.
This means it will include any and all transactions a user conducts from the moment they first opened your app, till the last time they would do so. These transactions can be anything from in-app purchases, subscriptions, or even the ad impressions, if your app follows an in-app advertising monetization model.
Isn’t the average revenue per user (ARPU) enough to calculate the worth of a user? This metric sees only the direct revenue a user generates. Even if a user doesn’t pay a single cent, they can help in bringing in high-value users. We will get to that in a while. Before that, let’s look at why calculating the CLV is essential.
Why Is Customer Lifetime Value (CLV) Important?
By calculating the CLV, you get to know the value of a new user. This will help you analyse your app’s success, forecast its growth and determine whether you are receiving the return on investment (ROI) you anticipated.
Out of all this, the most critical role of CLV is bringing more meaning to your app marketing budget. By knowing how much a user is worth, you get to place a limit on how much you can spend to acquire users, which is determined by another metric called Customer Acquisition Cost (CAC).
As expected, the CLV of a user must always be higher than CAC. Having an CLV higher than the CAC means your marketing strategies will have a positive ROI. Such comparisons will help marketers streamline their marketing efforts like app install ads, and invest only in promising acquisition methods.
Of course, acquiring users alone won’t do the trick. Instead, you need to make efforts to retain users with the help of engagement campaigns like push notifications, email marketing, and in-app messages. While calculating the CAC, all these costs must be considered.
For example, if a user has an CLV of $5 and a CAC of $2, then your app marketing strategies are working to bring a positive ROI, and more importantly, you are making a profit from each new user.
But if the customer acquisition cost exceeds the lifetime value of a user, then it means you need a major relook on your acquisition strategies or maybe, those users aren’t worth acquiring.
However, CLV is a forecasting metric, unlike ARPU, which is the average revenue per user. It keeps on changing as user behaviour evolves, and can also provide insights on what stage of the user lifecycle will a user bring the highest value.
Three Deciding Components of CLV
The lifetime value of a user is dependent on and is calculated based on three crucial components – Monetization, Retention and Virality.
It determines how much a user contributes to your app revenue in the form of ad impressions / clicks, in-app purchases, subscriptions or anything else that constitutes your app monetization model.
This component is estimated by calculating the average revenue per user (ARPU). The ARPU is calculated by dividing the amount of revenue generated in a specific time with the total number of active users of your app in that period.
However, marketers will have a different say on who the active users are. While calculating the number of active users, marketers may filter out the users who just opened the app, but didn’t make any in-app purchases, or click any of the ads displayed to them.
To make the comparison between lifetime value and customer acquisition cost more precise, it is best advised to consider all users who launched your app, and if you are calculating the ARPU of a month, then this will be the monthly active users (MAU).
This will make sure the ARPU is calculated for all active users, including the ones who just opened your app, but didn’t contribute to any revenue. Otherwise, if you take into account only those users who contributed revenue, the ARPU will be on the higher side, which will ultimately lead to unrealistic expectations.
It refers to the level of engagement and loyalty a user exhibits with your app over the course of the average customer lifecycle.
There are two ways you can calculate this, depending on the metrics you have access to.
You can directly calculate the retention rate (RR) which is the total number of users who used the app in a specific period divided by the total number of users who used the app in a previous period.
Or you can calculate the churn rate (which is predominantly used in the CLV calculation), which is the total number of lost users in a specific period divided by the total number of users in the start of that period. Also, churn = 1 – retention.
Once you have calculated the churn, you can predict the amount of time a customer will remain engaged with your app, known as predicted lifespan / lifetime, by taking the inverse of churn.
So, if the monthly churn rate is 40%, then the expected lifespan of a user is two and a half months.
It is the total number of potential users to whom your existing users refer the app to. It can be performed through numerous mediums starting from social media, referral links and even by word of mouth.
If your app has a referral program that rewards users for bringing in new users, then virality is measurable. But anything beyond that like referrals via social media or by word of mouth are nearly impossible to track.
As a result, the measure of virality is often removed from the customer lifetime value formula. However, it is a crucial component as the users who bring in new users always reduces the cost of acquisition.
How Is CLV Calculated?
Generally speaking, the CLV is a function of three variables and can be represented as:
Calculating CLV is much more complicated than any other metrics. This is because the lifetime value of different cohorts and segments must be calculated separately to analyse patterns in user behaviour.
Do note that while calculating the lifetime value of a user, the time considered used in calculating the ARPU and Churn must be the same.
There are three primary methods used to calculate the CLV, depending on the metrics your app analytics tools measure and the category of the app.
1. Tapdaq’s Approach
Tapdaq’s Approach uses the churn rate and ARPU to calculate lifetime value.
2. Weekly Cohort
In this method of lifetime value calculation, you need to segment users into cohorts, according to the week they installed the app. The CLV is then calculated by considering the total in-app purchase revenue and the number of users in specific cohorts.
3. Average CLV
In this method, the CLV is calculated by considering the average revenue generated and the average number of users retained. This method is useful if you have a larger user base that spends a considerable amount on your app.
4. Customer Lifetime Value Example
Let’s look at an example of calculating the lifetime value using Tapdaq’s Approach. Suppose the average revenue by a user is $1 every month, and you have a monthly churn rate of 20%. Of course, the measure of virality must be taken into account, but if you can’t measure it accurately, you can set its value as 0.
This means the lifetime value of a user can be predicted as $5, and if the CAC is $3, it means your acquisition efforts are worthwhile.
How Do You Increase CLV?
1. Experiment With User Acquisition Strategies
You can’t set and forget your user acquisition strategies. Instead, you need to continually tweak it, and also experiment with multiple app advertising channels. Perform A/B testing to find the marketing campaigns that work the best for your app.
If you are keen to know about how to acquire more app users with the least resources, we recommend you to read our guide on app user acquisition.
2. Enhance UI and UX
Both the UI and UX of your app have vital roles in engaging and retaining users. If you are capable of making users go “wow”, then they will engage more and bring in more friends.
Also, incomprehensible UI is one other reason why users drop off. Make sure the user interface is intuitive and goes in harmony with your target audience’s technical exposure.
3. Craft a Better User Onboarding Process
App user retention rates are known to increase by 50% with the help of a memorable onboarding campaign. From explaining how each feature works to demonstrating reasons why a user should engage with your app, there’s a lot you have to do with onboarding.
Depending on the nature of your app, make sure you tweak the onboarding flow and help users quickly start with using your app.
4. Offer Deep Links
A deep link is used to send users directly to an app’s section or content, even if they haven’t installed the app. It can help users instantly recognise the value of your app by redirecting them to the very feature found in the app.
5. Offer Referral Programs
There are two ways referral programs can help with improving the lifetime value.
First, a rewarded referral program will excite users to spread the word of your app to as many users as possible, which will eventually increase the user base. Next, offering incentives will boost a user’s loyalty.
6. Use Push Notifications Wisely
Push notifications are an excellent method to engage and retain users, and more importantly, to remind dormant users of your existence. But if you overdo it, you will annoy users. Use personalization and segmentation to send out only useful notifications that users will appreciate.
To know more about how to send out notifications effectively, read our detailed guide on push notifications.
7. Leverage Targeted Marketing Campaigns
Many of your users may have long forgotten about installing your app, especially those iPhone users who opted-out of notifications. To re-engage them, as well as those users who are about to churn, run multiple marketing campaigns to boost engagement and ultimately, the lifetime value.
8. Know the Needs and Desires of Users
Your users’ needs and preferences continually evolve. As a result, you need to be available to listen to and serve their needs consistently. Knowing that their desires are met will help in increasing retention rates and loyalty to a whole new level. Always respond to app store reviews and ensure you have an in-app feedback option.
9. Integrate Social Share Buttons
Your users can be your most prominent evangelists and to help them spread the word of your app, you need to make sharing easier. For that, include easy-to-access social sharing buttons.
Evaluate Your Acquisition Strategies With the CLV
An app’s success is heavily dependent on the number of users it acquires, engages and retains, and the lifetime value is indeed a measure that oversees all of them. Even though the CLV is one of the trickiest metrics to measure, continually monitoring it will help in reassuring you that your marketing strategies are in the right direction.
Calculating the CLV will easily reveal whether you are paying too much to acquire users or not. Use any of the three different formulas discussed in the article, depending on your app’s type, and also perform the minor tweaks to increase CLV. Most importantly, make sure you stick to using a single method to calculate the CLV for consistent results.