How to Master the LTV Metric for your Mobile Game
The following post is from guest author Eric Seufert. Eric is currently the VP of User Acquisition and Engagement at Rovio and is a quantitative marketer with years of experience in mobile marketing for games. In 2014, Eric released the book Freemium Economics through Elsevier, and he maintains the website Mobile Dev Memo.
Pop quiz: How much can you spend on marketing for each user in your mobile game?
If you’re overwhelmed, you’re not alone. This question keeps many mobile gaming developers, even those with decades of experience, up at night. The marketing paradigms from console and boxed PC gaming simply don’t work for free-to-play mobile games, and countless developers struggle to understand this new model.
First, the basics: Lifetime Customer Value (LTV) is the expected contribution of a single player to a game, and it’s at the heart of the mobile gaming industry. From a commercial standpoint, LTV essentially determines the marketability of a title and can often be the single most important factor in deciding whether to cancel a project (for more background, check out these sources about the LTV metric and how it can be calculated).
As significant as LTV is, though, it doesn’t immediately communicate the quality of a game or its ability to achieve commercial success. LTV is a component of these things, to be sure, but it’s merely the nucleus of a set of data points that indicates whether a game is commercially viable.
Context is important. Ultimately, a studio’s goal should be to generate some level of profit. Whether that level of profit is related to paying staff and keeping the lights on or to satisfying investors is a function of the studio’s size, but either way — the LTV metric alone can’t reveal whether that goal will be met.
Building a decision framework around LTV — that is, establishing a set of questions to ask and answers to seek when evaluating a game through the lens of LTV — is as important as building the necessary analytical tools to calculate it.
- Define LTV for your game — in plain English
The definition of LTV above may seem straightforward and painless, but it masks an incredible amount of nuance. For instance, is LTV calculated exclusively around cash contributions? And, if so, does that include only in-app purchase revenues or does it also include ad revenues? If it includes ad revenues, how will those be adjusted as CPMs fluctuate? Is LTV adjusted for virality? Over what time horizon is it calculated?
These questions are difficult to answer, and their answers will necessarily differ from title to title (especially with respect to time horizons for calculating LTV). So the first step in using LTV to make hard, important decisions is to formalize the definition of the metric within the studio, in plain language, to ensure that everyone understands what LTV is.
For example, a studio might define LTV for its casual puzzle game as, “the estimated amount of revenues we expect a user to spend over 180 days, plus the amount of money we expect to earn from that user from advertising in the same period, plus a virality supplement that the analytics team updates each month.”
- Be clear about how it will — and will not — impact your decisions
Once you’ve established an official definition, you should define some scope within which LTV is allowed to impact decisions. More than anything, LTV is a marketing metric: It establishes a maximum threshold on acquisition spending for a single user.
Metrics such as Day One retention and ARPDAU (Average Revenue Per Daily Active User) — that is, metrics that are tied directly to user behavior within the game — are usually used to make game design decisions. LTV can’t be used this way; it’s a metric that is derived from other metrics and isn’t as immediately actionable as, say, some specific daily retention percentage.
For this reason, LTV should be mostly left out of game design discussions. It’s simply not a good means of evaluating whether users like individual elements of the game. Although LTV is essentially the intersection of retention and monetization, it speaks to those aspects of the game at such a high level that it can’t really be used to improve either of them.
- Develop a common standard
Once you’ve identified what LTV is and when it should be used, develop some common standard for using LTV to evaluate the viability of a title. The metric really only represents inflows of revenues; it says nothing about marketing expenses.
Since LTV should be used to optimize toward a title’s total aggregate profit — in other words, how much money it will make — it should always be considered relative to marketing costs and the total scale a game can be expected to reach. For instance, if a studio can expect effective CPIs for a niche core game of $5 in a certain market and estimates that game’s LTV to be $5.50 in that same market, the game’s commercial potential is fairly limited — even with an LTV that might be multiples of a casual game, given the limited size of the core game’s appeal.
For these reasons, it’s also important to remember that LTVs between titles across different genres aren’t really comparable. Small, niche games with high LTVs but limited market appeal and exorbitant per-user marketing costs could very well make less aggregate profit than broadly appealing games with lower LTVs and marketing costs. Again, LTV is too dependent on context to be the sole determinant of a decision. When comparing one prototype to another and deciding which to put through a global launch, market size is just as important as LTV; large margins between LTV and CPI don’t matter if the game can’t reach a large audience.
Creating a decision framework around LTV is an important step in using a data-oriented feedback loop to drive product development. Although LTV is a somewhat sophisticated concept, a mobile game development company can simplify the way it is used across the organization by formalizing a process for defining and interpreting the metric.