How to calculate the LTV of your app’s users (Rules of thumb included)

User lifetime value (LTV) is one of the most important measures for every business. It is even more important when you are a startup seeking funding. Yes, all startups do make business plans, revenue projections and SWAT analysis. But very few actually take the time to look at the big picture. Very few take a step back and ask themselves “How much revenue do I expect for each user I bring on?”. Yet, most investors will ask for it.

When calculating the LTV you don’t have to stress over every number. A good LTV will stand out immediately despite any individual assumption. A good LTV will have “safety zone”, a “buffer” within which it lies. If it is good, you’ll immediately know it.

That being said, LTV differs greatly based on the type of your startup. For example, it is much easier to calculate the LTV of SaaS platforms and Market places than Game Apps and Social Apps. Fortunately, there are some basic formulas and rules of thumb that will make your life easier.

Let’s look at them one by one:

SAAS
Most SaaS operate under the freemium model, meaning that they offer part of their service for free while charging a fee for the full service.
When calculating the LTV of a SaaS platform you need to take into account the following:

• Free-to-paying users conversion rate (CR): This one applies only to freemium SaaS. How many users can you expect to convert from free to paying? As a rule of thumb 2–6% is quite accurate. I know what you are saying, 2% and 6% is a huge range. Well, welcome to the world of startups.
• Duration: How many months will each paying user use your platform? (assuming monthly billing). What are the benchmarks in your industry? Are you solving a very specific one-time need? Will your users use your platform for 2 months and then leave? Or do you offer a solution to a highly recurring problem that your users will need month after month?
• Average monthly fee: A great rule of thumb to calculate your average monthly fee is to give a 15% discount on your main price. This, from my experience, has proven to be pretty accurate.

Formula: [(Total # of users x CR x duration x fee)/(Total # of users)]

Example: If you bring in 100 users, have 10% free-to-paying CR, each paying user stays for 5 months and your average monthly fee is €10, then your LTV is: [(100users x 10%CR x 5months x €10fee)/(100users)] = €500/100users = €5/user. So your LTV is €5.

MARKETPLACES
Marketplaces usually make money by charging a commission for each transaction that occurs on the platform.

When calculating the LTV of a Market Place you need to take into account the following:

• Idle-to-active users conversion rate (CR): One of the main issues the marketplaces face is to convert idle users (users the install the app but don’t engage in any transaction) to active users (users that engage in transactions). A good rule of thumb is between 20% and 50% but this can vary even greater. (Again, I know, big range)
• Duration: Similarly to the SaaS platforms, you need to have a benchmark for how long you expect each user to stay in your platform. Is it going to be 3 months or 10 months?
• Transactions per active user per month: How many transactions do you expect each active user to make? Do you offer a recurring service (i.e. food delivery) or a much rarer one (like house renting).
• Average transaction value: What is the expected average transaction value? Is it €15 or €900?
• Average commission: What is the level of commission will you charge? A good rule of thumb is 10%-20% on each transaction.

Formula: [(Total # of users x CR x duration x transactions x value x commission)/(Total # of users)]

Example: If you bring in 100 users, have a 10% idle-to-active CR, each active user stays for 10 months, each active user makes 5 transactions per month, each transaction has a €10 value and your commission is 10%, then your LTV is: [(100users x 10%CR x 10months x 5transactions x €10value x 10%commission)/(100users)] = €500/100users = €5/user. So your LTV is €5.

GAME APPS
Game apps have two major distinctions. Paid apps and free apps. Today we will focus on free apps as they have a more interesting business model and α harder to calculate LTV. Game apps have a much shorter life cycle but way higher virality effect.

When calculating the LTV of a Game App you need to take into account the following:

• Duration: How many days will the customer play your game (yes days). From my experience, most game apps have a life cycle of 5–30 days.
• Play time: How much time is the user expected to spend on your game each day. A good rule of thumb is 1–2 hours per day.
• Ad frequency: You have to decide how often you will show ads to your users. Most commonly, you can show an ad every 5 minutes (6 per hour) without interfering with the user’s experience.
• Ad RPM: Return-per-mille (RPM) shows the revenue per 1,000 ad impressions. Roughly speaking, if you are operating in the general game industry, you can expect an average RPM of 1–5€
• Free-to-paying users conversion rate (CR): Most game apps offer in-app purchases. From my experience, you can expect a 0.5–3% CR from free to paying users.
• Transactions per paying customer: In the short time period that the user will enjoy your app, you can expect between 1 and 10 purchases depending on your in-app packages value
• Average package value: What is the expected average package value? €1? €10?

Formula: [(duration x play time x ad frequency x ad RPM) + (Total # of users x CR x transactions x value)/(Total # of users)]

Example: If you bring in 100 users, that stay for 15 days, play 60 minutes per day, you show them 6 ads per hour with an RPM of €2, you have 1% free-to-paying CR, each paying user makes 3 transactions and the average transaction is €3, then your LTV is: [(15days x 60mins/day x 6ads/hr x €0.002/ad) + (100users x 1%CR x 3transactions x €3value)/(100users)] = €0.018 + €0.09 = €0.108. So your LTV is €0.108.

SOCIAL APPS
Social apps operate in a very similar way to the Game Apps but they have much longer life cycle and don’t offer in-app purchases.

When calculating the LTV of a Game App you need to take into account the following:

• Duration: How many months will the customer use your app. Although this metric can very significantly, practically you can not expect more than 24 months for your app.
• View time: How much time is he expected to spend on your game each day? 30 minutes per day is a good estimation taking into consideration that it is a much longer period of time were the user will miss some days (i.e. work days, holidays etc).
• Ad frequency: How often will you show him ads? Social Apps have a much higher ad frequency that can reach up to 1 ad every 2 minutes (30 per hour).
• Ad RPM: You can expect an average RPM of 1–5€ similarly to the game apps.

Formula: (duration x view time x ad frequency x ad RPM)

Example: If you bring in 100 users, that stay for 12 months, use the app for 30 minutes per day, you show them 30 ads per hour with an RPM of €2, then your LTV is: [(360days x 30mins/day x 30ads/hr x €0.002/ad) = €10. So your LTV is €10.

As you can see, the LTV can vary vastly depending on the type of startup you have (SaaS, Marketplace, Game, Social), the combination of business models you use (Subscription, Ads, freemium) and the geographic area you are targeting (heavily Impacts the RPM). User LTV gives you a clear overview of your startup. It is the foundation upon which the rest of your plans. Knowing this will help you build a greater case when you seek funding. But as I stated above, you don’t have to stress over numbers. If it’s clear, it’s clear. If not, it won’t.

There are countless more metrics you should take into consideration before evaluating a project. Some of them are:

• Cost per user acquisition (CPA): How much it costs you to bring in one additional user
• Virality effect: how many new users will each user bring
• Cashflow: how long will it take you to receive the users LTV

If you are you facing difficulties calculating your startup’s LTV, we might be able to help you! Email us with some information about what drives you to make a difference, and your slidedeck, and we will get back to you soon!

Chris Tsounis is a Digital Transformation & Knowledge Transfer Expert @ Found.ation and a member of the Value Creation team @ Velocity.Partners. Before that, he served as CEO of mobile-quiz app Quizdom.