How to Easily Calculate Customer Lifetime Value for Mobile
June 11, 2014
We know that customers can range from the “here today, gone tomorrow,” to the lifelong cash cow. But how much is your customer actually worth? You will need to be able to put a number value to your customer before you make any other plans. Besides, if you don’t know how much your customer is worth, then how will you know how much you should pay to acquire them?
This is known as determining the lifetime value of your customer (abbreviated
to LTV). In other words, calculating how much revenue your average user is projected to generate throughout their “lifetime” – be it long or short – as a customer.
The simplest way to think about LTV is this: if your customer visits your online store once, makes a $10 purchase, and never returns again, their LTV is $10. Or, if the customer returns to your online store twice a year for three years, each time spending $10, the lifetime value of this customer would be $60.
There are numerous ways to think about LTV depending on how precise you want to get and the amount of data you have available. An accurate, but not overly complex, calculation of LTV which we recommend using is the sum of the present value of future expected cash flows, known as the “net present value.”
In other words, a $1 purchase made today is worth more than a $1 purchase
made three months from now. Why? Because the one dollar you earn today can be immediately invested so that it accrues additional value in three months time. Therefore, when calculating LTV, the future value needs to be taken into account.
Here’s a visual representation of what “net present value” means:
Once you have this number, you can properly set customer acquisition budgets that will keep you in the black and effectively match action-based bidding to potential customer value. If you’re not sure what action-based bidding is (known more widely as cost per action or CPA bidding), check out our comprehensive post, “.”
Now you’re ready to start creating your campaign and intelligently bidding to reach customers based on their long term value to your business. Be sure to revisit this calculation every so often as your audience or product line changes – customer LTV isn’t likely to vary greatly, but it’s always good to stay informed.