Do You Know Your App’s Customer Lifetime Value?
This post is part of my ongoing series on App Monetization Strategies.
If you’re looking to make more money and get more downloads, knowing your app’s customer lifetime value (CLV) is critical. Without knowing your app’s CLV, you’re unable to make informed decisions regarding marketing and monetization.
At the very least, knowing your app’s CLV allows you to forecast your revenue and approximate how much you can afford to spend to acquire new users and forecast how much money you can expect to make based on your app’s install rates. If you’re aware of your CLV’s components and how they vary across user acquisition channels, you’re able to analyze the data and iterate to both increase your userbase and increase the CLV. That means more money and more downloads to help your business thrive.
Want to learn more about this essential app metric? Read on!
What is Customer Lifetime Value and why does it matter?
Your app’s customer lifetime value is simply the amount of profit one average incremental user brings in over the lifetime of your app. For apps with no in-app purchases, ads, or crosspromotions, the CLV is roughly the App Store purchase price less Apple’s take. For apps with in-app purchases, ads, or crosspromotions, the CLV is more difficult to calculate. The easiest way to calculate an app’s customer lifetime value is to look at the key components that drive the app’s CLV.
Key components of Customer Lifetime Value
Customer Lifetime Value is made up of two types of components: direct revenue sources and indirect revenue sources. Direct revenue sources are revenue-generating actions a user takes within your app. Indirect revenue sources are actions either a user takes outside of your app or actions taken by other users as a consequence of one user installing and using your app.
Direct revenue sources
Direct revenue sources make up the lion’s share of an app’s Customer Lifetime Value. In fact, for most purposes, calculating CLV off of direct revenue sources only is enough to make informed business decisions.
- App Store purchase revenue. This CLV component’s value is easy to calculate. It’s simply the app’s App Store price net of Apple’s 30% cut. So, for example, for a free app, this component’s value towards the CLV is $0. For a $0.99 app, it’s $0.70.
- Ad revenue. Ad revenue’s contribution to CLV is a bit more difficult to calculate. You must capture the total ad revenue for an average user across the lifetime of the app. A way to do this is to approximate the total number of sessions per user & your average session length (from an analytics provider, such as Flurry), look at your ad refresh rate, and then use your average eCPM (from your ad network reports) to calculate the expected ad revenue per user: Ad Revenue / User = Sessions/User * Session Length (seconds) / Ad Refresh Rate (seconds) * Average eCPM.
- In-app purchase revenue. As with ad revenue, in-app purchase revenue is more difficult to calculate due to its ongoing nature. For apps with just one in-app purchase to upgrade from lite to full, you can simply calculate in-app purchase revenue from the lite-to-full upsell conversion rate (an easy way to estimate this is to purely divide the number of in-app purchases by the number of downloads from your iTunes Connect reports) and the revenue per in-app purchase net of Apple’s 30% cut: In-App Purchase Revenue / User = Lite-to-Full Upsell Conversion Rate * Net Revenue per In-App Purchase. For apps with multiple in-app purchases, a more complicated equation that captures a user’s propensity to consume over the universe of in-app purchases is necessary.
Indirect revenue sources
Indirect revenue sources make up a small percentage of an app’s Customer Lifetime Value. Unless your app has a very large userbase (think hundreds of thousands of active users) or is ranked highly either in a popular category (e.g. Games and Entertainment) or overall in the App Store, optimizing across indirect revenue sources will likely result in an immaterial increase in total revenue.
- Crosspromotions. Measuring the contribution crosspromotions make to your app’s CLV requires download tracking. Once you can track the number of downloads directly attributable to your crosspromotion efforts, you can estimate an eCPM for the crosspromotions and calculate crosspromotions’ value contribution: Crosspromotion Revenue / User = Sessions/User * Crosspromotion Ads/Session * Average Crosspromotion eCPM.
- Rank network effect. The rank network effect measures the number of downloads (and thus additional revenue) received when an app is ranked highly in the App Store charts. Although this effect is very hard to measure, it can be a very strong driver of user growth, and subsequently revenue, if an app is ranked highly. Regression analysis of total downloads versus confirmed download sources (e.g. a pay-per-install campaign) can be used to approximate the value of the rank network effect. For example, you can regress your number of downloads versus your ranking using an exponential regression equation.
- Virality. As with the rank network effect, virality is very difficult to measure. For apps with social sharing features, virality can be approximated by including tracking codes in each posted message, photo, etc. and then using regression analysis.
A sample CLV calculation – Attention Free
Let’s take a look at a hypothetical developer with three apps – Attention Free (Free with ads), Attention Paid ($0.99), and Bam ($0.99) – and calculate the CLV for Attention!! Free using the four easiest components to measure – App Store purchase revenue, ad revenue, in-app purchase revenue, and crosspromotions. In Attention Free, the developer is running both ad network ads, ads for an in-app purchase to upgrade to the full version, and ads to cross-promote to Bam. Note that all the figures below are to demonstrate the calculation of CLV and may not reflect your actual metrics.
- App Store purchase revenue. As a free app, Attention Free sees no contribution to CLV from App Store purchase revenue. The total contribution to CLV is $0.00.
- Ad revenue. Looking at ad network reports, we’re able to determine that the average ad network eCPM for Attention Free is $1.50. From our analytics provider, we see that the average user uses the app 15 times (Sessions / User) with an average session length of 60 seconds. The ad refresh rate in Attention Free is set at one ad per 30 seconds, but ad inventory in Attention is split 50%/50% between house ads to crosspromote and ad network ads. This means that an average user sees 3 ads (60 second Session Length / 2 second Ad Refresh Rate) per session, but only 1 ad network ad per session (50% of ads are ad network ads). Since an average user uses the app 15 times, the average user sees 15 ad network ads through the app’s lifetime (1 ad network ad per session * 15 sessions per user). Given the average ad network eCPM of $1.50, the total contribution to CLV is $0.0225.
- In-app purchase revenue. Since there’s an in-app purchase in Attention Free to upgrade to the full version of Attention for $0.99, in-app purchase revenue contributes to CLV. Roughly 3% of people who download Attention Free upgrade to the full version via in-app purchase (this figure comes from iTunes Connect reports – it’s just in-app purchases / total downloads). That implies that an average user has a 3% likelihood of contributing $0.70 ($0.99 less Apple’s cut) to CLV, so the total contribution to CLV is 3% * $0.70 = $0.021.
- Crosspromotions. Looking back at the ad revenue metrics, we know that the average user sees 15 house ads for crosspromotion through the app’s lifetime. Using Burstly’s house ad download tracking feature, we know that house ads for crosspromotion have an average eCPM of $4.50. This implies that the total contribution to CLV is $0.0675.
Once you’ve calculated the values for these CLV components, just sum them together to calculate your estimated customer lifetime value: $0.00 + $0.0225 + $0.021 + $0.0675 = $0.111. It’s very important to note that ad network revenue isn’t the largest driver of CLV. Instead, crosspromotions and then in-app purchase revenue contribute the most to CLV.
If you’re curious about your app’s Customer Lifetime Value, just e-mail me at alex [at] burstly.com and I can help you calculate your CLV.