Your App’s Next Steps — Calculate How Much Your Customers Are Worth to You
Whether you are taking those all important first steps towards making a business out of your apps, or have been living off your app income for some time now, it can never hurt to take a moment to review your revenue stream. Some of the more important factors affecting your revenue can be determined fairly simply with just a few minutes of your time and some calculations.
The two most important figures to consider when your apps are central to your income are your Cost per Install (CPI) or Cost of Customer Acquisition (CAC) and your Customer Lifetime Value (CLTV), as long as the former is lower than the latter you will be turning a profit. The greater the difference the more profit you are making.
This is the cost of generating a new customer. Is synonymous with Customer Acquisition Cost (CAC).
Average Revenue Per User – This is the average amount of money you will receive due to each customer. Does not take into account length of customer usage, virality, churn, or indirect revenue.
The number of users who abandon your app.
Customer Lifetime value – The average amount of revenue each user will generate over the duration of their use of your app
Cost per Install
Your CPI/CAC is the total cost it takes to generate a new customer, this can include marketing costs such as advertising, promotional work including competitions and giveaways, and any other expenditures you make in order to bring in new customers. This is incredibly easy to calculate once you know how much you spend on bringing in users.
Cost per install = Expenditure / number of installs
Your CPI is vital to your success: if you are spending $100 each month on marketing your app and only receive 75 app purchases of $1 as a result, with no other source of revenue generation, then your current method clearly isn’t working for you. So to calculate your CPI simply take the amount you pay out and divide it by the total number of installs you receive in the same time frame. The longer the time frame you can use then the more accurate your final number will be.
Over the first month your app is available you spend the following:
$100 – facebook advertising
$50 – Promoting tweets
$25 – Google play giveaway
$325 – Cost of travel to and attending Android event to market your app direct to customers
For a total of $500
Over the period that these adverts and the such were influencing, you sold your $1 app 5000 times. This means therefore that your app’s CPI is $500/5000 = 0.1, which means that for every $0.10 you spend you receive on average one additional install and therefore generate an additional $0.90 which will hopefully be divided between funding your cash flow and reinvestment (development costs, such as test devices) and profit (your new income). In the above example presuming that there are no adverts or IAPs you may think that your customers are worth just $1 but that is not the case. Some users will (hopefully) recommend your app to others which is known as a referral or on a larger scale virality and that is why we calculate our …
Customer Lifetime Value
This is where the math becomes a little more complex, this isn’t an incredibly hard figure to calculate but it will take a little while to wrap your head around. Your customer’s value is primarily based on three things, which are monetization, retention, and referrals/virality. So how much are users worth to you in the long run? Let’s start with measuring our monetization, to do so we will have to understand how much revenue your average user will generate for you over a set timeframe. This is known as Average Revenue Per User or your ARPU.
ARPU = Total revenue generated / Total number of active users in that period
During June your app generated $2000 through sales, IAPs or ads,
During this same time you had 1,000 active users,
Ergo your ARPU for June is $2
from here you can move on to measuring your retention or how long you will keep your users engaged for after they install your app. This calculation relies on your churn rate which is the number of users who uninstall your app in the set time frame you used to gain your ARPU, so therefore we will use one month again.
Churn = # of customer lost in a given period / # of customers at start of the period
During June you lost 100 users,
At the start of June you had 1,000 users
Ergo your churn rate is 0.1 or 10%
To calculate the amount of time each customer will interact with your app (their predicted lifespan) you can simply divide 1/churn which will give you the answer in terms of months in this example.
Predicted lifespan of app use per customer = 1/Churn
Your churn rate is 0.1,
Your app therefore, is predicted to retain users for 10 months.
Referrals and virality are easily the hardest part of the calculation, while it can be aided by incentives such as Lastpass’ one month free per referral or Uber’s free ride. As measuring this can be a nightmare and often impossible. By offering referral incentives you are far more likely to gather this data. The two above companies both likely know the exact CLTV for each of their users.
Focussing on those users categorized as “influencers” is also a useful method of generating referrals. These influences are generally high profile users that are more likely to recommend your app to many people. The most easily accessible influencers are usually journalists, bloggers or the larger social media accounts.
If you have a referral system in place you can calculate the average number of users each user brings with them which will give you your referral value (RV). If you do not have a way of calculating your RV you can leave it as 0 in the final equation, here we will assume that every other user invites another giving us a RV of 0.5 or 50%. Without further ado you are now ready to calculate your CLTV.
CLTV = ARPU * 1/Churn * (1 + referral value)
ARPU = $2
1/churn = 10 months
Referral Value = 0.5
CLTV = $2 * 10 months * (1+0.5) = $30
And there you have it, you now know that each of your users will on average generate $30 in revenue. As we calculated earlier our theoretical app can gain an additional user for a $0.10 expenditure, leaving us with a phenomenal $29.90 per user to split between reinvestment in marketing in order to generate more users, running costs and your new salary. Of course, you should not be alarmed if you run your own numbers and find your CPI to significantly higher, or your CLTV to be much lower. As long as the former is lower than the latter you are turning a profit before reinvestment costs. I took the opportunity to create a spreadsheet that will work out all the above calculations for you if you enter a few figures into column B, grab it from Google Drive below!