The Practical Guide to Calculating Mobile Subscription LTV

Michael Stysin avatar
Michael Stysin

Mobile Subscription LTV

The lifetime value of your client, or LTV, is how much revenue a customer provides you while using your service.  It’s essential to know your average client LTV to run effective marketing campaigns. The key is comparing LTV to customer acquisition cost (CAC). If a user provides more revenue than you spend to acquire him, you are earning money and should be looking into scaling your user acquisition to grow your business. 

Usually, you have to pay for marketing up front, but you collect revenue gradually when a client uses your service — and even more so with a subscription business model where you charge clients on a monthly, semiannual, or even annual basis. That’s why it’s also essential to look at LTV estimate over a set time period. What are your users’ six-month LTV, one-year LTV, or two-year LTV? Depending on the capital you have, you need to decide what time period is acceptable for you to break even and have a positive return on advertising spend.

Calculating LTV for a subscription business is fairly simple. The most important metric you need to know is your users’ retention.

Let’s say that your app offers a monthly subscription. You can calculate how much you will earn in one year if you know precisely how many users will stay with the service each month after the initial subscription started, for the next 11 months.

Hypothetical Example 

Let’s assume that the monthly price of your app’s subscription is $10, and you have acquired 100 users in the first month. And let’s assume that the user retention and the number of subscribers accordingly match the data in the table below:

With the monthly price of $10 dollars, you get to the following monthly revenue values:

The total revenue for one year is $2,740. Your one-year LTV is the total revenue divided by the total number of users in the cohort: $2,740 / 100 = $27.

Now that you know a user brings you $27 in one year, you can compare it with your user acquisition cost. Let’s assume you can acquire subscribers for $20 with Facebook advertising campaigns. In this case, you earn $7 per subscriber in one year. It’s a profitable business: You earn $7 on $20 invested, so you should scale this acquisition channel.

Mobile Subscription Retention

From the calculation above, the real question is this: How do you get the retention numbers? With the fixed subscription price and the fixed subscription duration period, you have only one variable, and that’s retention. 

You can assume, for example, that 20% of your users churn every month, allowing you to easily calculate the retention for each month. The LTV formula is really simple in that case:

LTV = Subscription Price / Churn Rate

The problem is that the actual mobile subscription churn is not linear. In reality, users leave at a higher rate in the first months, and the more time passes, the slower the unsubscribe rate is. Usually, the retention curve has a steep decline at the beginning, flattens in the later months, and looks approximately like this: 

You have two main options to get to the retention numbers to approximate this curve.

Retention Based on Actual App Store Data

The first option is to plug in the percentage of users that will stay with the service each month. This is a really good option if you have the actual historical data for your app. You can get the actual retention numbers from the App Store Connect Account for your iOS app. Here is how: 

1) Go to your Sales and Trends section in the App Store Connect. 

2) Navigate to the Retention tab on the left. 

3) Choose a duration. 

4) And there you are: You have the table with the aggregated actual retention figures for the monthly subscription.

App Store Connect Retention

All that is left is to multiply the price of your monthly subscription by the monthly retention to get the LTV. See the spreadsheet attached for more information (LTV_based_on_App_Store sheet). You can plug in the retention data from App Store and the subscription price into the file and get your one-year LTV for the monthly subscription plan immediately.

Retention Curve Extrapolation

The second option is for if you do not have the actual retention numbers or have just a few data points and want to forecast the retention into the future. In this case, you need to extrapolate the retention curve.

Some more-complicated math happens here. The retention curve, as already mentioned, looks like this:

This curve can be described by the following equation:

y = axb 

Here, x is a point in time (two months, three months, and so on), and y is the retention value you get at a given point in time. The variables a and b are constants for this curve. If you have actual data points on this curve, then Excel can solve this equation for you to get the a and b values.

With a and b calculated, you have the equation, and by feeding x into the equation, you get the retention values. Once you have the retention numbers, you can easily get to the LTV.

See the spreadsheet attached for more information (LTV_Retention_Curve sheet). You can plug in the actual retention for three months and get a full-year forecast, or you can adjust the calculations to your needs based on your available data.

Summary

This is a quick overview of the subscription LTV and retention calculations. But note that LTV and retention curves differ based on different user acquisition channels, geographies, and other factors. If you really feel like diving deep into your marketing performance and ways to improve it, you might need to slice the data into a large number of segments to analyze separately. 

The last thing I would like to mention is that one of the reasons I and my co-founders have started Qonversion.io was to make a life of mobile entrepreneurs easier and allow them to get rid of the Excel spreadsheets altogether.

Qonversion.io is the mobile subscription analytics that gets the data both from SDK on the devices and through integrations with the App Stores. Qonversion handles the subscription revenue data, interprets it, and uses out-of-the-box integrations to send that information to marketing and analytical platforms like Facebook Ads, Appsflyer, or Amplitude.

We are on a journey to help mobile app entrepreneurs, and we are building the tools that can solve their pain points, with accurate LTV forecasting being one of those. 

If you are interested in the mobile app business and would like to join us on this journey, please sign up with Qonverision.io. You can reach me at [email protected]

Download the spreadsheet with the calculations here:

https://drive.google.com/open?id=15_2k3fQHyuCkpTN1V1sOsK–bGibPmi6