Understanding LTV Formulas

Starting off I’m going to focus on a few important formulas when calculating the lifetime value of your customers.

Definitions:
LTV = Life Time Value
ARPA = Average Revenue Per Acquisition
ARPU = Average Revenue Per User
CLTV = Customer Lifetime Value

  1. LTV = (ARPA x GROSS MARGIN%) / Customer Churn Rate
  2. Basic Lifetime Value = ARPU (average revenue per user) / Revenue.
  3. ARPU = Revenue in Time Period / # of Users in Time Period.
  4. Churn Rate = 1 – Retention Rate.
  5. CLTV = Customer Value x Average Customer Lifespan
  6. Retention Rate (Customers) = Non new users this period / total users last period.
  7. Retention Rate (Revenue) = Non new user Revenue this period / Total Revenue Last Period

Why Focus on Customer LTV?

Focusing on your LTV helps you understand the channels giving you the most profitable customers. You should be focusing on the overall lifetime value of the customer than just the first time purchase. You want a process that continues to function regardless of advertising and focusing only on that first time purchase means you won’t be retaining customers that add to your overall life time value.

Factors such as retention rate, churn rate all have an impact on the value a customer provides.

Take the calculation: LTV = (ARPA x GROSS MARGIN%) / Customer Churn Rate

The higher my Churn Rate, the lower my overall lifetime value. That means if my customers are dropping off quickly, the LTV will suffer.

Challenges in Calculating the LTV

Nothing stays the same and neither will your LTV. Your value will shift as your overall user behavior evolves. Competition, trends, and App burnout can all make calculating LTV for the long term challenging.

Referral value of customers: This does provide additional value to your overall revenue base. If your customer is constantly referring others this can provide additional value as well. Consider that if the LTV of a new customer is $10 and the target LTV:CAC (customer acquisition cost ratio is 3:1, then a referral is worth around $3.

Strategies to Improve Customer LTV

When it comes to improving your strategies there are a few things to focus on.

Segmenting: Make sure you segment your target base by customer lifetime value in order to improve your marketing campaigns and personalize the messaging per the user base. Split your users into different user types in order to establish various LTVs for each user type rather than just as all the users as a whole. This will help in establishing better LTV strategies.

Identify the Most Valuable Customers: As we know by the 80/20 rule. Generally 20% of your customers will generate around 80% of your total revenue, meaning they provide the most lifetime value. Identifying these customers will help you focus further on improving the 80% of your revenue and the customers that provide the highest LTV.

Value Over Volume: Getting lots of traffic doesn’t always mean getting the most lifetime value. Improving engagement and reengaging your best users is one of the best ways to make the most out of your current users while focus on activities that will enhance the overall lifetime value of your customers.

Maximizing LTV Within Facebook Advertising

Utilizing lookalike audiences within Facebook, you can target your best customers you currently have. Utilizing these lookalike audiences, you have the ability to target the audience size by % of the country/area targeted.

I would recommend reading this case study by Andrew Hubbard. In the study he shows how he generated a 876% return on his investment utilizing Facebook as his acquisition channel.

Additional Resources

App flyer report on LTV

Industry Performance Benchmarks

Leave a Reply

Your email address will not be published.