Lifetime Value (LTV) is the amount of revenue a customer generates a business over the life of his/her relationship with it.
LTV is especially critical for subscription businesses since the revenue is not a one time affair for them. To know if a subscription business is profitable on a customer basis, one must compare the Customer Acquisition Cost (CAC) to LTV. The LTV:CAC ratio measures the return on investment for each dollar your brand spends to acquire a new customer.
There are a variety of ways to calculate LTV spanning from simple ones that use a wide range of assumptions to more complicated ones that try to take into account smaller details.
For our intents and purposes we use a custom calculation for AppStore. There are four major components in AppStore LTV calculation that need to be taken into account:
- Price: The price of the package you are selling
- Lifetime: The average lifetime of a user buying that package.
- Refund Rate: The percentage of users that ask for a refund
- Apple Commission: The 30% or 15% commission that Apple takes from each transaction.
It is important to note that every package has a different LTV based on its pricing and the number of average renewals and any LTV calculation should be done by weighing user numbers to be accurate. These differences in package LTVs can then be leveraged to select the optimum package for any given country.
The same phenomenon is also valid for different countries: looking at a global LTV can give a basic idea about the app but shouldn’t be used to make country based marketing decisions. To illustrate, Customer Acquisition Cost (CAC) in India can be very low and one could be inclined to be more than happy to drive customer growth at low cost in India. However, a deeper analysis might show that India’s LTV is much lower than the global average and one is acquiring customers at a loss.
Please note that different countries might have different preferences for package types. For example, while customers in the USA might prefer monthly packages because they don’t want to make long term commitments, Japanese customers might be more inclined to buy yearly packages. It is therefore imperative to make constant package and price optimization tests across countries to drive growth and revenue.
One of the main appeals of LTV is its “incorruptibility” as opposed to revenue. Revenue is corruptible because by sacrificing LTV, one can inflate it. Let’s compare a yearly package of 50$ with an LTV of 60$ and a monthly package of 3.99$ with an LTV of 65$. Choosing the yearly package will drive revenue immediately and make a great impression, while the monthly package will drive more value in the long term. Adding a Customer Acquisition Cost (CAC) of 62$ in the mix will result in the yearly package making a loss while the monthly one turning a profit.
Please note that inflation rates and NPV (Net Present Value) calculations are not taken into account for the above example on purpose for simplicity’s sake).
To summarize, LTV is the holy grail of the subscription business and can be constantly improved, package by package, country by country. If you feel overwhelmed by the concept or not sure how to do it, please don’t hesitate to contact our publishing team who offer turnkey solutions to mobile subscription businesses.
