If you’re a mobile marketer, chances are you’ve seen at some point in the past year the phrase “LTV > CPI” (that’s Life Time Value and Cost Per Install, just to make sure we’re all up to speed). A mathematical formulation that has proven ubiquitous enough to have an entire event series named after it, it has become something of a mantra for the industry.
But what does LTV is greater than CPI actually mean for app developers?
The answer is quite simple.
LTV allows you to spend more on advertising and do so more intelligently than someone who simply looks at a CPI cost. Sophisticated, sustainable and, in the long run, more affordable, an LTV-focused marketing team can ensure a greater chance for ROI in the long term.
The heyday of CPI
Before we look at why LTV is now considered king in the app marketing metrics stake, it’s worth examining the rise of CPI to quickly see its strengths and limitations. Because, despite the fact it has perhaps had its day in the sun, it remains an important metric in the app economy for a number of reasons.
First, it was simple to set up tracking for. Even with analytics and attribution in its early days, it was relatively easy for two developers to engage in server-to-server matching or using a tracking link to run campaigns.
Second, it offered greater security for advertisers than CPC (cost per click) and CPM (cost per mille) advertising, as it ensured that payment was only forthcoming when a user installed after interacting with an ad.
And third, and most importantly, the prevailing winds of the app economy at the time allowed CPI to become central to a low cost, volume-driven promotional approach. With the charts the dominant way of discovering a game, low-cost CPI installs were really useful for a time.
But slowly and steadily, that numbers game changed and it was largely because the app and mobile gaming economy forced it to. By the middle of 2013, expensive volume-driven games were made increasingly difficult to play for a number of reasons.
The emergence of companies such as Supercell and King with their all-conquering free-to-play titles built an app economy that allowed 25 developers to have 50% of all App Store revenues, according to TechCrunch in December 2012. AppGratis’ public removal from the store in April 2013 for bursting apps to the top of the chart showed Apple was serious about stopping volume dominating all. And with increasing rivalry in the market forcing developers to spend $96,000 in a single day to guarantee a slot at the top of the US store, the CPI volume game became unsustainable for many.
The unsustainable CPI market explains why the ground has been so fertile for LTV to become the dominant metric in mobile marketing. Taking inspiration from a number of game monetization experts such as Eric Seufert and the vast improvement in app analytics and tracking, game developers have been emboldened to take a quality- and sustainability-first approach to app installs.
But why does LTV create this approach to mobile games marketing efforts? The reason is that it acts as something of a forecast for how much a user will be worth in the future, not just a reflection of what they’re worth now. That means when you calculate it, you’ll see you have more room to market than you might think.
To explain this, it’s worth taking a look at the most basic formulation of the LTV equation, which goes a little something like this:
LTV = Average Revenue Per User (ARPU) x 1/Churn
This means it is relatively simple to work out the LTV of a general user in your app. If you know across your whole user base that Average Revenue Per Monthly User is $5 and that 40% of your users stop using your app after a month then you get the following LTV calculation:
$5 X 1/0.4 = $12.5
As a result of this, it can quite fundamentally change the way you look at your CPI strategy. Instead of worrying about bulk buying installs at as cheap a rate as possible, you could theoretically buy $2 installs from a provider in the future without losing money – so long as more than 20 percentof those users convert and go on to become $5 customers.
And better than that, if you can segment your users with the help of cohort analysis, then you can really start to get to the heart of how much a user is really worth. Knowing the exact value of a user who, say, purchases IAP regularly versus someone who comes in for a month, watches loads of ads and then churns, will help you craft a sensible long term acquisition strategy.
LTV > CPI
Now of course, LTV doesn’t come without problems.
The deeper you go into calculating cohorts, the more complicated it gets and the more infrastructure you need to do it effectively. If your churn increases or revenue decreases then you have to make sure your LTV number changes with it. And while the simple formula we used above is a starting point for forecasting the value of a user, it’s worth noting that the biggest companies hire applied mathematicians to ensure their forecasting model mitigates against change as much as possible.
But when compared to the volume-driven mind set of a CPI marketing approach, it is clear that LTV, for all its potential complexity, is the sensible long-term bet. Giving deeper insight into the value of a user from a marketing perspective and encouraging an approach driven in the pursuit of high-quality users, it fits perfectly into the maturing mind set of the mobile gaming market.
Shai Gottesdiener is General Manager of Perion Lightspeed, the leading provider of effective mobile advertising products.