The importance of — and how to calculate — lifetime customer value

4 minute read

Team Localytics

Lifetime customer value, also called customer lifetime value (CLV), is one of the most important metrics out there. The logic is self-explanatory, so we won’t belabor it because you’re all smart people, but the bouncing ball goes like this:

  • You spend money to acquire new customers.
  • You also spend money to retain existing ones.
  • The acquisition of new customers typically costs 4-5x more than retention.
  • CLV gives you a baseline for how much revenue you can expect from a customer over time.
  • Understanding CLV helps you increase both revenue and profitability.

Forbes has even called it “the only metric that matters.” And while it’s a few years old by now, we actually did a “Whiteboard Wednesday” on the CLV topic back in the day.

How do you calculate CLV for mobile?

This can vary by organization and app monetization models, but here’s a general formula to consider:

Screenshot 2019-05-31 at 6.42.40 AM

Here’s what everything represents:

  • CLTV: Customer lifetime value
  • ARPU: Average revenue per user (a representation of monetization)
  • 1/Churn: The inverse of your churn rate (a representation of retention)
  • Referral value: The sum value of new users that a customer refers to your app

To get each of the inputs, you’d do this:

  • ARPU: Take the total app revenue generated in a given period and divide it by the number of users in that same period.
  • Churn: Take the number of customers lost in a given period and divide that by the number of customers at the start of the period.
  • 1/Churn: Let’s say the churn rate is 25%, or .25. 1 divided by .25 is 4, meaning the predicted lifespan for users on a 25% churn rate is 4 months.
  • Referrals: This is harder to track because it involves insanely specific math, but you can look for the average amount of referrals that an app user has brought in, then multiply that by the individual revenue contribution, which is ARPU x {1/Churn}. This math can get tricky for most mobile marketers, so you can also plug “zero” into the formula above and work the system that way.

OK, so now we know how to calculate it … how do we improve it?

At the most basic level, you’d improve customer lifetime value by having an app user stick around longer and do more with the app. In order to get a customer to that point and not on a four-month churn, you would need:

  • Personalization
  • A moderate to high degree of relevant content
  • Intuitive onboarding so they don’t just immediately abandon the app
  • Relevant push content

Of these, personalization is the most important. While many brands still operate on broadcast messaging or broadcast with some degree of A/B work, customers are increasingly frustrated by that. If you’ve already bought a pair of jeans or a hotel in Cincinnati, who wants to get a push notification about that? It shows the app doesn’t know you and that can lead to disengagement, which kills customer lifetime value.

Also to consider: an omnichannel strategy. We talk about this with clients all the time, and one of the easiest ways to conceptualize it is this: Let’s say you buy a pair of jeans on the web, then you get a push notification to buy those jeans on mobile. Are you frustrated right now? Yes. You just bought those jeans! Each functional silo of your business needs to be speaking to the other ones.

There’s another mathematical rub here, and we need to bring in more acronyms:

  • CAC: Customer Acquisition Cost
  • CPI: Cost Per Install, or Ad Spend divided by the number of new users tied to ad spend

As a general rule of thumb, this is how you want CLV and CAC to interact:

  • If CLV is higher, invest more in marketing, including app install ads.
  • If CLV is lower, do not invest in marketing right now and work to better your CLV first.

Makes sense. If the lifetime value of a customer is below that of the cost to acquire the customer, your app will lose money — and maybe even by the boatload. But if lifetime value is higher, it’s totally logical to spend on campaigns to drive install awareness.

What else have you seen done successfully around mobile CLV?

Reliable products. Real results.

Every day, thousands of companies rely on Upland to get their jobs done simply and effectively. See how brands are putting Upland to work.

View Success Stories