Marketing, Tips and Advice

Who Should Calculate LTV and Who Shouldn’t

Who should calculate ltv header image with different kpi highlighted, cvr, ctr, cpm

Many companies in the mobile app ecosystem today try to figure out the LTV of a customer also known as CLTV or CLV. In fact, some of them probably shouldn’t. In the past companies simply focused on the value generated in a single session and count page views and conversions and for many situations this method is the right one to chose.

The choice between these 2 distinct methods often impact the choice of analytics platforms, attribution methods and many other things. If you are developing a new application, you should figure out which method suits your application.

Services should calcualte LTV

The industries that have traditionally focused on revenue per user calculations and user life time value were the service companies: phone carriers, utility companies providing electricity and cable companies. The models were later adopted by SAAS companies and these days, freemium games started the trend of “Games as a Service” and are using the same models as well. At the heart of these models there is an assumption that the customer will stay for a long time. This usually happens when the cutomer relies on the service for a basic need or when the service becomes part of the user daily routine and habits.

Companies who sell products should use atransactional measurement model

On the flip side, eCommerce sites are relaying more on transactional models where each purchase is measured separately even if performed by the same user. When games started, the Premium model was popular and games were considered products so the transactional measurement model was the standard. Users go to the app-store and buy an app for one or two dollars and that’s it. There is no retention measurement, no LTV analysis, ARPDAU, nothing like that. Transactional models are much simpler.

Habit creation is the deciding factor

The main question you should ask yourself when you are coming to chose between a transactional measurement philosophy or the LTV one is whether or not you are creating a usage habit. We are all used to turning the lights on as we walk into our house. We all flip on the TV as soon as we sit on the couch and many of us open the candy crush app when they wait for the subway. These are habits, they indicate the service became a part of the user life and there is a real chance he will stay for a long time.

Apps that monetize over time but don’t have a habbit

Let’s think about the example of Kayak. It’s an app that helps you compare travel deals: flights, hotles and car rentals. The customer might install the app and use it once but the next time he will use the app is only when he is booking another vacation. By that time, it’s very possible that he will have another phone. There is no habit being created that is attached to a daily or weekly routine. Every purchase is a stand alone transaction and should be thought of it that way. The value of acquiring a user through a CPI campaign is pretty low. And the LTV vs. CAC formula doesn’t really apply here. From this reason, companies like Kayak focus most of their marketing efforts on users that are booking travel in the near future. They might try to promote their app or entice user to bookmark their site but this should be considered more as a way to put an ad banner for free in front of the user’s eyes. There are other models that can be applied to assess the business merits of banner advertising.

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