Don’t we all wish we could accurately predict exactly how much revenue each app user will bring in over the course of their relationship with our product? Well, if you get the calculations right, Customer Lifetime Value (LTV) is about as close as you can get to a crystal ball when it comes to customer spending. But first, you need to understand the intricacies of calculating LTV and how to apply that knowledge to your growth strategies. That’s why we talked to Ajay Sampat, Senior Engineering Manager at Lyft, to get his thoughts on calculating LTV and how to put that knowledge to good use.
Ajay is a seasoned engineering professional with expertise in scaling businesses with state of the art growth teams and technology stacks. He is an occasional keynote speaker and blogger sharing best practices on all aspects of engineering including acquisition strategy, life cycle messaging, subscription growth, experimentation, and infusing machine learning and automation into your growth stack.
Q: Since we’re going to be talking about LTV today, can you put it into simple to understand terms that even the most inexperienced marketer can understand? And tell us why it’s an important metric?
A: LTV stands for Customer Lifetime Value which is a predicted monetary value that signifies how much value (i.e: revenue) users will generate for the business over a lifetime. Understanding the potential value of a customer is critical to every business. Most companies break the prediction by years—one, two, or three so they can learn when they will break even for that user. LTV is used to develop guardrails for marketing investments. This value can be used for various use cases like acquisition budgets, incentive optimization, onboarding personalization, lifecycle messaging, product experiences, etc.
Below is a simple example of how it can be calculated for a ride-sharing business.
Q: LTV will vary between different apps and app categories. For instance, an e-commerce app will have different expectations than a casual gaming app. But are there some common denominators apps should be looking at when analyzing the LTV of their users?
A: The common denominators for any business to calculate LTV are the key features that lead to sticky and high user behavior—conversion and engagement. ARPU (Average Revenue Per User) and Retention are strong denominators into calculating LTV—these are absolutely business agnostic and should be well understood before building an LTV model. You can start by calculating this on an install cohort and campaign level and then move on to the user level.
Q: Can you impact LTV with your growth strategies, or is LTV a relatively fixed metric?
A: Yes, you can absolutely impact LTV using your growth strategies. That is exactly the mission of a growth team. Highly-effective growth teams thrive on identifying key parts of the funnel where users are engaging and churning.
Below is a classic AARRR Growth funnel—the goal is to identify campaigns, techniques, strategies to move users to high tier LTVs—maybe through personalized experiences that generates an emotional response from the user through feelings like scarcity, urgency, levity, authenticity, exclusivity, high relevance, etc.
Q: LTV predicts a user’s future value—at least theoretically—so how do you use this information when planning growth strategies?
A: The key purpose LTV is to get a read on the value of a user or channel with a certain level of confidence before the actual data comes in. This helps you make the correct strategic decisions before waiting for a year or more for the LTV to be realized. LTV helps you invest in the right customers that add more value to the business than the cost they generate. Understanding customer value and your break-even point help you deter low LTV users that are costly to your business.
One example is Segmented Lifecycle messaging for product upsell. Based on the knowledge of user LTV, businesses can create segmented upsell campaigns deep-linked to different price and service points: Silver, Gold, Platinum. This guarantees that the user is being recommended the right package based on their current behavior on the platform.
Q: Are there other metrics you use in conjunction with LTV to create a fuller picture of your customers that help you build more thoughtful campaigns?
A: Yes, churn & customer acquisition cost.
Churn: When is the user likely to churn from the platform and no longer be an active user? Recognizing the users or cohorts that are likely to leave the platform and key signals causing churn can help you influence their behavior and safeguard and elevate their LTV.
Customer Acquisition Cost (CAC): LTV divided by CAC gives you ROI. Customer Acquisition Cost here encompasses marketing cost, incentives, that are required to acquire a user. CAC along with LTV helps you figure out how much fuel you can put in your customer acquisition engine while still remaining profitable.
LTV / CAC = ROI
Q: Can you give us an example of how you’ve personally used LTV in your career?
A: In all companies I have worked at we have used LTV in various parts of the business—from user acquisition budgeting, financial forecasting, personalized onboarding, highly-relevant upsell, customized re-engagement messaging.
It is one of the most critical investments for a Growth team and I always recommend building it in-house before investing in more sophisticated growth automation.
Q: If you could give app marketers any piece of advice regarding LTV, what would it be?
A: Perfection is the enemy of good. Measuring LTV helps to set, execute, and prioritize mid- to long- term objectives. Start simple with a heuristic approach with large confidence bands, then based on needs move to a machine learning model like xgboost and then move to Deep Neural Networks if you require higher precision and can afford the technical effort. Machine Learning is now available as a service with a plethora of open source libraries and technologies.
Regardless of the size of your company—early-stage startup, mid-size, or public company—having the ability to calculate your LTV & CAC shows maturity you need to scale your business with the right growth investments.