Both iOS and Android markets today are highly competitive environments where one mistake can cost you not only valuable downloads, but also your profit. Recently, I’ve been consulting many marketing strategies for different types of mobile apps from kids games to business solutions and almost all of them shared one critical mistake – those people didn’t know LTV of their customers.
LTV stands for Customer Lifetime Value, which in my opinion is one of the most important factors not only in mobile app marketing, but in whole business. LTV basically says how much money will a customer bring you on average. There are various methods to determine this number and you can find them all over the internet. But why is this so important?
At first, LTV helps you to determine a threshold for your user acquisition activities. There is a simple logic behind it – your acquisition costs need to be lower than your earnings. If you can keep up with this equation, you will be profitable. Many people complain about high user acquisition costs on traditional performance advertising networks like iAds, AdMob or Facebook and they actually tend to forget the basic principle of profit – you need to buy cheaper than you sell.
Doesn’t matter if your monetization mechanism is inside your app or somewhere completely else, you just need to know how much money you can expect from one user. Maybe you have a mobile game with in-app purchases or maybe your app serves as a search mechanism for real estate trading. It really doesn’t matter until you can somehow monetize your customers. Also, you can clearly see that premium apps with no in app purchases have a slight disadvantage here – their LTV is limited to the price of an app itself if there is no up-sell mechanism inside.
For a better illustration, let’s say your customer LTV is $5 – which means that your average customer brings you 5 dollars. Yes, many of them won’t ever pay you a cent (especially if you have a freemium mobile app), but also many of them will pay you $10, $50 or maybe $100.
So when your LTV is $5, all you need to do is buy new users under that value – and profit is yours. Cost of a new user is called CPI, which stands for Cost Per Install. Of course, it’s good to set some reasonable threshold for your CPI, since $4,99 will keep you profitable, but it’s going to be a painful journey. Let’s say you are willing to spend $3 per install, therefore every new user should bring you $2 profit on average.
Now try finding all possible ways to acquire users for 3 dollars. For example, you can test various ad networks and keep the bids in your limit. Also, don’t mistake average Cost Per Click (CPC) on these networks with your CPI. CPI is always higher than CPC, since not everybody that clicks on your advertisement will also install your mobile application. This is called conversion rate. For example, when 100 people clicked on your ad and you’ve obtained 10 installs, your conversion rate is 10%. Of course, you need to spend some money just to discover what’s your LTV. But after that, you will be able to run profitable campaigns practically everywhere.
There are plenty of ways how to decrease your CPI – by improving your conversion rate or adding some viral mechanics into your app, for example Facebook invites or Game Center integration. Some of your existing users will then invite new people which will lower your overall user acquisition costs. Virality of your mobile app is called k-factor and this number describes how many new (and free) installs will one paid user from marketing bring into your app. Therefore, if you can expect one viral install from two users from marketing, your k-factor is 0.5. Beware and don’t mistake “natural” app installs (like App Store search results) with your viral installs (like invites from user to user).
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