In previous posts, I discussed the importance of customer lifetime value (LTV), its key elements (monetization, retention and virality) and how to calculate LTV; but it is important to also understand that there is not a monolithic LTV for your game (or product). You may remember that the practical value of LTV is to use it as a metric to determine whether or not an ad spend has a positive return. If the LTV is higher than the cost per install (CPI), it is profitable to advertise (and vice versa).
The key to success, though, is understanding the LTV of the customer you will be acquiring as opposed to the general LTV for the game. Some low cost user acquisition channels may bring in players who are effectively worthless (they leave your game right after they click on the ad) even in a game that has a high overall LTV, so understanding the lifetime value of these users would save you from wasting your money. Conversely, there may be a very expensive advertising channel that brings in great players who all monetize well and have a much higher lifetime value than their CPI.
There are four factors that you should use to calculate separate LTVs (and in different combinations):
- Cohorts. A cohort is a group of people who are acquired within a defined period. For example, players acquired the second week after you launch your game would represent a cohort. You are likely to find significant variance between players acquired at different stages of a game’s life. Often, players acquired the first month a game is live will have a much higher LTV than players acquired later, even if the game is subsequently improved. Analyzing the LTVs of different cohorts can help you determine whether or not to continue to advertising (is it profitable) as well as predict future revenue.
- Segments. A consumer segment involves creating groups of players who have common needs. Some different segments you may use include geographic (e.g., blue state vs red state, urban vs rural), sex, age, income levels or even tastes (in Facebook you can do this by correlating with Likes). By understanding the relative LTVs of different segments, you can target your user acquisition to those segments with the greatest delta between LTV and CPI.
- Sources. Different advertising channels and providers will deliver customers who have significantly different LTVs. It is not simply about finding the lowest CPI, if those players monetize worse or are less viral than more expensive players. You must understand which ad providers give you the best users at the lowest cost (by the way, every user acquisition firm I met promises this to you).
- User behavior. You can also divide your players by how they interact with your game. You create groups of first-time visitors, repeat visitors, players who log-in via Facebook Connect (or GameCenter or Twitter Connect), paying users who monetized in the last week, paying users who monetized more than once, etc. By understanding the relative values of these different groups, you can focus your re-engagement marketing where it will have the greatest impact.
Calculate, calculate, calculate
To compete effectively, you must constantly analyze LTV using all four factors above. It is crucial to be testing virtually all combinations of the above factors so you can direct your ad dollars where they will generate the most revenue. You may want to look at male users acquired during month two of your game through Millenial and see if it is a better spend than 35+ women acquired during month two through Tapjoy. As the cost of users continues to increase, optimizing the users you acquire and where you get them is crucial to success.