The difference between apps that sell and apps that don’t, can often be narrowed down to a single point: how well their developers and marketers understand the value of a customer. Learn how to calculate the value of your customer and how to approach it as you grow your business in new markets.
The lifetime value of a customer
Acquiring the customer is the difficult part, but a happy customer doesn’t simply buy once and leave – they buy more and stay longer. On this basis, customer lifetime value (CLTV) is what drives (or what should drive) your mobile marketing budget. It tells you how much each new customer is worth – and how much you can pay to acquire that customer. CLTV can serve many purposes: an indicator of your success, a reminder of the power of customer loyalty, and a tool for forecasting growth.
How to determine CLTV
CLTV can be broken down into three categories of variables:
Monetization – How much customers contribute to your mobile revenue (in the form of ad impressions, subscriptions, or in-app transactions). Monetization is represented by average revenue per user (ARPU).
Retention – The level of engagement a customer has with your app, looking particularly at the length of the average customer lifecycle. Retention is represented by the inverse of your churn rate (the percentage of customers who stop using your app within a given timeframe).
Virality – The sum value of additional users a customer will refer to your app.
Think of CLTV as the calculated profit that a customer will provide to your company. It’s not limited to a transaction or annual amount, but includes the profit achieved for the duration of your relationship with the customer. That’s why each of these components play an important part in determining your CLTV.
Success in the app business often comes down to simply knowing your numbers – and a firm grasp on CLTV is what will ultimately differentiate your app from the apps not considered financially successful. So have a look at this formula for calculating your CLTV:
CLTV = ARPU x 1/churn rate
ARPU: average revenue per user Churn rate: the percentage of customers who stop using your app within a given timeframe
Once you’ve calculated the lifetime value of your customer, you’ll understand the investment you’re making and the average return on that investment. You can then make adjustments to any one or all of the variables. For example, you may need to increase the cost of your service to maintain a healthy profit. You may need to invest more in customer service to retain your customers for a longer period of time and increase in-app or long-term revenues. You may need to work to reduce customer acquisition costs through organic and advocacy strategies. Or you may find that it's actually more beneficial to spend additional money on paid acquisition strategies.
Strategies for increasing CLTV
The main rule to follow once you’ve calculated your CLTV is – as long as the average CLTV exceeds the cost of customer acquisition, your marketing spend will have a positive return on investment. To ensure you make a profit, look for a CLTV greater than the cost of customer acquisition ratio of at least 3.1 or higher.
There’s a few simple ways you can make sure your app is working hard to retain users and thereby increase CLTV:
- Allowing users to access more content from within the app using deep linking. Deep linking consists of using an identifier that links to a specific location within a mobile app rather than simply launching the app.
- Using social networks to increase virality and advertisements to new users.
- Offering discounts and referrals to boost loyalty.
- Keeping users informed about changes to your app.
- Using product iteration to create new opportunities for engagement with your users.
- Using push notifications to advertise changes.
Now you know these metrics, you can not only control your marketing budget more carefully, but also focus on boosting one of CLTV’s three components: ARPU, retention, and virality.