Why Tracking Customer Lifetime Value Is Key to Monetizing Apps

Shawn Parrotte
April 11, 2017

Getting an install base is the first step in Monetizing your application… but to be truly successful, you need to learn the value of the customer.

The investment you’ve made in marketing is paying off, with new traffic pouring in and new installs at an all-time high. Your cost-per-install’CPI’is beating even your most optimistic projections and the news couldn’t be better.


Well, maybe. As more than one app developer has learned the hard way, the road from that initial install to effectively monetizing your app can be a long and rocky one, or just a complete dead end.

The trouble is, the fact that a user has installed an app is no insurance that they are going to use it at all, let alone use it in a way that puts money in your pocket. In fact, the odds are always against it, if you simply sit back and wait for the money to flow after an ad buy, say, generates a large number of new installs.

Don’t let your CPI outpace your ROI

Success in monetizing apps doesn’t come from taking a passive approach, and it doesn’t necessarily equate to the number of users you manage to acquire, whatever the cost of acquisition might be.

Instead, it comes from strategies and tactics grounded in a recognition that an app installation is only the first step on what you hope will be a long and growing relationship featuring multiple opportunities to generate revenue. Without that, you are likely to find, as so many others have before you, that your CPI is higher than the revenue the user will yield.

That’s no way to succeed in business, but it’s the reality for many apps. In fact, statistics show that a little more than a quarter of those new users will only open the app one time, generating little or no income and not even offsetting the cost of bringing them into the fold.

That leaves the remaining three-quarters to carry the weight.

CLTV spells maximum revenue

One way companies try determining monetizing is happening is by calculating and tracking the average revenue per user, or ARPU. ARPU is undeniably a valuable metric to monitor, but it can only tell a portion of the story, in part because of that one-quarter of users, your churn rate, who skew the numbers. Given that, a better metric for gauging the financial health of the app and the long-term prospects for revenue is customer lifetime value, or CLTV.

Calculating CLTV is more complicated than arriving at a simple average. But it can also provide important insights into not only how much a user can be expected to spend over the course of a given period, but also which users are most lucrative and which revenue channels they are most responsive to.

At its simplest and as a starting point, CLTV integrates three key variables’monetizing, retention, and virality. Monetization is an expression of how much money users contribute overall, through in-app purchases, subscriptions, ad impressions, or other revenue generators.

Retention, at its most basic, is the flip side of churn rate, the percentage of users who continue using the app after installing it. Equally important in measuring retention, however, is understanding how the user actually engages with the app and how long the customer life cycle typically is. Virality attempts to put a price on the sometimes overlooked value a user brings’the revenue that derives from their sharing the app and taking it upon themselves to acquire new users. Since those new users come at no cost to you and are heavily influenced to engage with the app by trusted friends, virality can be a hidden goldmine.

It probably won’t come as a surprise to anyone that assigning mathematical values to each of the variables and fitting them into a useful formula to arrive at CLTV can be a complex exercise. But that shouldn’t be a deterrent either because there are numerous CLTV calculators available for free and only a web search away.

Increase CLTV by increasing app usage

Knowing the lifetime value of a user is important, but it’s not in itself the brass ring. Ultimately, it’s just more information that can lead to insights that enable you to maximize that value, and that’s where the true goal lies.

The key to increasing CLTV, of course, is increasing app usage, especially by those who are already the most active users, and the key to doing that is optimizing everything from the onboarding experience to the continuing user experience order to encourage active and frequent engagement.

One of the most effective ways to do that is by using push notifications’but using them very judiciously. There’s a fine line between offering users welcome information and just adding more clutter to their lives, and there’s a price to pay for crossing that line. That said, push notifications can offer a unique opportunity for everything from reawakening inactive users to nudging users toward more in-app engagements and encouraging them to become word-of-mouth brand ambassadors, with the help of in-app sharing options.

Your fastest route to failure

CLTV can give you the tools to enhance the user experience, increase revenue, save on acquisition costs, and even predict future revenues. But that doesn’t mean it’s not still possible to miss the mark badly by losing sight of one essential fact:

Not every app user is created equal

Keep that in mind and tell it to yourself often. As much as 80 percent of any business’ future revenues will come from just 20 percent of its current customers, as numerous studies have shown, and that figure can be even higher in some app categories. Identifying those high-value users and crafting a user experience that keeps them engaged is the single most rewarding thing you can do, because they are the ones who will determine whether your app will sink or swim in the long run.

The metrics you use to arrive at CLTV will also lead you to an understanding of just who those prized users are, and open the way for you to segment them and personalize the messages they receive. That’s critical, because there is no better way to build trust and loyalty in a user than by treating them as the individual they are.

About the Author

Shawn Parrotte

Shawn Parrotte is the marketing manager of Designli, a mobile development firm specializing in bringing certainty to the world of custom software development. Designli guarantees fixed price points, fixed scope of work 'deliverables,' and fixed timeframes for its clients as they build iPhone, Android, and web apps for startups and businesses wanting to scale.

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