Here’s a simple way to figure out if paid ads are worth it for your indie game…

I get asked this a lot, so I thought I’d share my take on the math:

In short, paid ads will work when the average Lifetime Value of your players exceed your Customer Acquisition Cost.

LTV > CAC

Remember that lifetime value is calculated by multiplying Average Revenue Per Paying User by Expected Life.

LTV = ARPPU x EL

For example, if your average customer spends $5 a month and they average five months playtime, your product’s LTV is $25.

If your game is freemium, you’ll then have to further differentiate between non-paying customers and customers who will actually spend money.

If your game is on Steam and you don’t have any DLC or in-game purchases, your customer’s LTV is usually just the upfront cost of the game.

To calculate this in terms of optimal Customer Acquisition Cost, you can use the following formula:

CAC = (Cost Per Conversion / Percentage of Paying Customers ) x 100

For example, if your Cost Per Conversion is $1 (getting someone to download your Freemium app), and your percentage of paying customers is 5 percent:

CAC = ($1.00 / 5) x 100

The Customer Acquisition Cost would be cost would be $20.

So, how do we make the model work? In order to maximize your leverage, you’ll have to decrease your Cost Per Conversion, increase your Percentage of Paying Customers, or increase your customer’s Lifetime Value.

You can quickly get an idea of whether it’s worth it to spend on paid ads based on the examples above. Doing this will help you determine whether or not it’s really worth it to use paid ads as a source for user acquisition.

One oftentimes overlooked aspect though is taking into account your working capital and calculating churn when it comes to figuring out your customer’s average Lifetime Value. In order to be safe you should try to cap your LTV calculation at a fixed point — perhaps somewhere around 6–12 months. Remember, if it takes too long for customers to pay you, at some point you might run into an issue where you won’t have enough working capital to continue running your paid ads.

It’s all about the math, really. Once you launch your game or app and get a sense of what the conversion rates are, it honestly might be that the math doesn’t work out in your favor.

If you’re not too far off though, you might do well to pursue landing page optimization to try to lower your Cost Per Conversion, or tweak around your financial model in order to raise your Percentage of Paying Customers. If the market is way too competitive or saturated though, paid acquisition might not be a good strategy.

Anyway, hope this helps!

If you enjoyed reading this post, please like and share it to help others find it!

About The Author

Daniel Doan is the Co-Founder & CGO of Black Shell Media and the developer of SanctuaryRPG and Overture, among dozens of unfinished game prototypes. You can connect with him on Twitter, Facebook, LinkedIn and Instagram.