As a game developer, it is very important to understand the value of your users. You will have one-time users, and, if you’re lucky, you will also have users that will keep coming back for more. The latter, obviously, are more valuable, so it only makes sense to invest more to acquire these users. 99,99% of mobile games are not financially successful. If you want your game to be part of the 0, 01% that is, it is of vital importance to get a firm grasp on the lifetime value (LTV) of your users. In this article we will take a look at what exactly this lifetime value is, how to calculate it, and what you can do to improve it.
What is LTV?
Simply said, user LTV is a prediction of the value your business will get out of your relationship with a user. It indicates how much each one of your users is worth, and how much you can afford to spend on those users. LTV is an indicator of the success of your game(s), and a valuable tool for forecasting growth. It is what should drive your marketing budget. To get a better understanding of LTV, we’re going to dive in a little deeper.
The 3 drivers of LTV
LTV can be broken down into three variables: monetization, retention and virality. For the game industry, we can define these variables as follows:
Monetization: How much do your users contribute to your revenue in the form of clicks, downloads, subscriptions, and in-game purchases?
Retention: How engaged are your users with your game? What is the length of the average user lifecycle?
Virality: The sum value of new users that a current user will refer to your game.
In order to improve your LTV, you will first need to calculate these three variables separately.
First, you will need to calculate how much revenue your average user generates within a specific timeframe, in other words, the Average Revenue Per User (ARPU). ARPU is calculated by the total amount of revenue generated within a specific period of time, divided by the number of users actively engaged with your game in that period:
ARPU = Total revenue generated in period Y ÷ Total number of active users in period Y
Usually ARPU is reported on a monthly basis, but you can of course also report on a weekly of even a daily basis. The definition of an ‘active’ user is up to you; depending on your game, you can only look at the daily active users, or only at paying users, or at all the users who have launched your game within period Y.
For step number two we’re going to predict the lifespan of your average user: how long are your users engaged with your game? In order to measure this, you will first need to know your churn rate, or in other words, the percentage of users that stop playing your game within period Y.
Churn = number of users lost in period Y ÷ number of users at the start of period Y
Let’s say you have a monthly churn rate of 50%. This means that your retention, or the predicted lifespan of your average user, is two months.
Virality is the hardest variable to measure. It identifies the average number of referrals from a user, multiplies by the individual revenue contribution [ARPU X (1/churn)] of an average user. If you have access to the needed data for measuring referrals, you can g ahead and check out Branch Metrics. For the rest of you, you can leave virality out of the equation.
Calculating your LTV
Now that you have calculated ARPU and churn, you can calculate your LTV:
LTV = ARPU X (1 ÷ churn) + (referral value)
If you have not calculated your referral value, simply set it to zero.
Now you have you LTV!
Improving your LTV
Now that you know your LTV, it’s time to figure out if it makes sense to invest in advertisements or other ways to acquire more users. For this, there is only one thing to keep in mind: as long als your LTV exceeds the costs you put in to acquiring new users (your so-called Customer Acquisition Costs or CAC), you will have a positive Return on Investment (ROI).
When it comes to mobile games, you’re dealing with Costs Per Install (CPI). You can use the following formula:
CPI = ad spend ÷ number of new installs directly tied to the ad spend
If the costs to acquire one user (or one download) are less than the amount of revenue that user is likely to generate, this is a good way to advertise. If not, you will first need to find ways to increase your ARPU, boost your retention, or get more referrals before you start investing in advertisements.
One of the best examples of games with a long lifetime is Clash of Clans. This game, which was released in june 2012, has over 3,9 million users and around 78,000 daily installs. With an all-time ARPD (Average Revenue Per Download) of $4,66 and a LTV of $5,19, Clash of Clans is the top ranking game in the mobile industry. If you want to even get close to these numbers, getting a good grasp on your LTV is the first step!