ARPU vs LTV: How to increase the Lifetime Value of your app users
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At the center of every successful app, there is a successful marketing and retention strategy. The results of this strategy can be further distilled into a metric - the user lifetime value (LTV). This figure indicates the future value that an acquired user will bring to the app.
Understanding LTV is key for product manager wanting to increase app usage. Here’s where to start.
What is LTV?
User lifetime value (LTV) is a calculated prediction of the net profit attributed to the result of a relationship between customer and product.
In a wider marketing sense it is often referred to as customer lifetime value. However, as we’re applying this to an app - which has users - we’ll be calling it user lifetime value.
The calculation is used across marketing sectors, due to its effectiveness at measuring the value of each customer across their time as a consumer of the product. This makes LTV a great way to work out the value of a new user to your app, enabling you to predict their net worth throughout the time that they will be a user.
Why is LTV important?
LTV should be important to you because it can be a measure of growth and success. It enables you to move from short-term, transaction-based thinking, to focusing on the long-term value of repeat business and user retention.
Not only that, it can also remind you of the power of user loyalty and be a tool for forecasting growth in the future.
This means you should consider using LTV to underpin your app marketing budget. By knowing how much each new user is worth, it will provide you with a cap of how much it should cost to acquire that user.
Overall, this will stop you from overspending when trying to acquire new users, meaning that budget can be better spent elsewhere.
How to calculate LTV
LTV is calculated by working out the average user churn, the rate at which customers stop doing business with a company over a given period of time. This is then used to divide the average spend of a user over a specific period to predict the overall spend in an app.
In order to calculate LTV, you first need to understand two other metrics - ARPU and churn:
What is average revenue per user (ARPU)?
This will be the total revenue of your business, divided by the total number of paying users you had during a given time period.
What is user churn?
To calculate user churn, divide the number of customers lost during a given time period by the total number of customers at the start of that period.
Once you have these figures, you can calculate your users’ lifetime value. A simple equation for calculating LTV is as follows:
LTV = ARPU/User Churn
This formula will calculate the user’s lifetime value by predicting how much money they’ll make in a set period, the average revenue per user (ARPU), and how likely they are to return (User Churn).
With this calculation, you can begin to see how much a user is worth throughout the time they spend in the app.
Another way you can do this, if you have the right numbers to hand is:
LTV = ARPU (average monthly recurring revenue per user) × Customer Lifetime
For this one you’ll need the Customer Lifetime numbers to hand. If you do, this is a much easier calculation. However, if you don’t have this number, use the initial calculation instead.
Essentially LTV develops ARPU into a much more usable figure.
ARPU vs LTV: What’s the difference?
By itself, ARPU, which stands for the average revenue per user, tells you how much a user is worth over a given set of time. But by combining it with retention (churn), the resulting LTV will help you create a model that can be used to predict the user's future value.
In a market where user behaviour defines the financial performance of your app, knowing as much information as possible about your users is critical.
This is what makes ARPU so useful to your business, because it can break down what is driving your user/revenue growth. It can also give an insight into what is driving the growth.
When compared with LTV, which enables you to predict the net worth of a user for a set period of time, ARPU tells you how much they are worth in the present. By using them both together, you can become more informed of how your app is doing and what you need to do to make it grow.
So, when you're thinking about ARPU vs LTV, remember that ARPU measures the current performance (your business health), while LTV helps you predict the future performance of your app.
How to increase your user LTV
Increasing your user or customer LTV is heavily linked to user retention, so many of those principles will apply. However, there are some differences, as you’ll see.
1. Using push notifications correctly
As LTV is linked to user retention, one of the key things behind developing it is the use of push notifications.
Push notifications are critical for user retention and user re-interaction. Not only can they help maintain regular app usage - think about DuoLingo’s “just 5 minutes a day” notification - they can also help users return after a hiatus.
But be careful in how you send your push notifications. You want to send users custom notifications that feel personal to them.
Nobody wants a message sent that is not related to fulfilling their needs. Period.
2. Giving users rewards
Another way to keep users engaged with an app, and in-turn, increasing their LTV, is to provide in-app rewards.
In-app rewards and discounts will help keep users coming back for more, while offering referral programs will help encourage users to share your app with their friends. Not only will they be spreading the good word, they will also be saving you money on your marketing budget.
3. Easy onboarding
Make your onboarding process as seamless as possible. An easy and trouble free process is one of the most important ways to improve user retention and, in turn, increase LTV.
This is because an easy login is less likely to put a user off logging into the app on future occasions. Think about including quick login options and options to sign in through Gmail, Facebook and Instagram.
It’s always worth remembering that users may forget their password from time to time and don’t want to go through a lengthy process to renew the details. These quick options can often circumvent that issue.
4. Deep linking
Deep linking is a great user experience-boosting design option. Deep links send users directly to an app, or a specific point in an app, rather than a website or online store. This saves users time and energy leaving their web browser and moving to their app and then finding the location.
Deep links produce a seamless user journey that reduces churn and increases the likelihood of install.
5. Measure everything
Measure and track everything you can.
- Downloads and returns from deep links - track it.
- How long people spend in your app - track it.
- How many new users - track it.
Put simply, to ensure the longevity and retention of your users, you should be taking measurements frequently.
By identifying how your users are behaving, especially at what points they tend to be leaving, you can tackle pain points and increase your LTV.
6. Listen to your audience (review monitoring)
Another way you can find these pain points is listening to the voice of your customers through user review monitoring. Reviews can be a goldmine for user feedback and will often give you the narrative behind a low retention rate.
Your user feedback will also provide you with important insights for your own app’s product development. This, when listened to, can create happier users.
Happier users are great, because they are more likely to keep returning to your app. And the consequence of having a large group of happy users returning your app, is an increase in your LTV.
To make the most of your audience, encourage reviews and learn from where users are having the most difficulty. This can easily be done with AppFollow’s user engagement tools — which lets you translate, tag, and easily reply to all of your reviews.