In gaming, lifetime value, or LTV, is the average revenue earned per user. It’s made up of two components: retention (measured in days) and average revenue per daily active user (measured in dollars).
Why is LTV important?
There are many reasons why LTV is a critical metric for game developers to track.
First, LTV is one half of the ROAS equation - and ROAS is the absolute most important metric for game developers, because it measures profit of user acquisition campaigns. The other half of the ROAS equation is CPI, or cost per install. That means that LTV/CPI=ROAS. So, understanding LTV and making sure it’s strong, is key for having a strong ROAS as well.
Second, LTV tells you what your user acquisition payback period is - in other words, how many days it takes you to reach 100% ROAS and break even on your advertising spend. That happens once LTV (the money you’re generating) equals CPI (the money you’re spending).
How to calculate your game’s LTV
There are a few ways to calculate your game’s LTV. It’s important to note that LTV is notoriously difficult to calculate for free-to-play games - so use the below strategies carefully.
Historical data: The first method for calculating LTV is the simplest and uses historical data. Here, you divide the number of installs on a specific day by the amount of revenue generated on that day. However, because this LTV formula relies on historical data, it’s quite a crude calculation and not particularly useful for game developers looking to understand how ongoing in-game changes affect monetization and revenue.
(installs on Dx / revenue on Dx) * 100 = LTV
Predictive: The second method is more nuanced. It maps out future LTV by taking the two variables that make up lifetime value (retention and ARPDAU) into consideration. This way, you can better gauge how changes you make to your monetization or retention strategy affect LTV far out in the future, like day 180.
Eric Seufert’s Mobile Dev Memo has a good explanation for calculating it this way with formulas and spreadsheets.
Machine learning: The final method for calculating LTV is arguably the most accurate - and that’s using machine learning technology. You can build an algorithm in-house that takes all your game data into consideration and updates lifetime value in real time for you.
How to analyze your LTV curve
Here are a few key considerations when analyzing your lifetime value:
1. Exponential pacing: The important thing to look out for when analyzing LTV is the pacing of your LTV curve, meaning you want to see exponential growth over time rather than a tapering off.
2. Uptick in payer LTV: As you scale a game, you may see your general LTV decline. That’s not uncommon - because though you’re improving monetization as you scale, you’re also acquiring fewer “perfect” users as targeting gets harder. So in the equation of revenue/installs the install denominator goes way up, making the lifetime value smaller and smaller over time.
That said, you should see your payer LTV increase - in other words, users who convert and make in-app purchases.
3. Your genre: It’s also important to note that both the shape and the absolute value of lifetime value differ per genre and studio. For example, for hyper-casual games, lifetime value may drop off after day 7. Meanwhile, midcore games have higher LTVs - partly because they have fewer users who are known for making large purchases.
4. Your cash flow: The amount of cash a game studio has also impacts LTV curves. Large companies can operate on 3 year paybacks (ie, the 3 years to recoup their investment) because they know they’ll exist in 3 years. But many startups make the mistake of operating on year-long paybacks when they only have enough cash to run the company for, let’s say, 9 months. In this case, the startup either needs more funding or a shorter payback period.
How to increase your game’s LTV
There are many strategies for increasing your game’s LTV. Because lifetime value is a function of retention and monetization - increasing one of these variables will ultimately lead to an increase in LTV overall.
But getting into actionable tips and best practices, it’s important to keep these two points in mind:
Balance is key: Remember that LTV is made up of two variables: retention and ARPDAU - and it requires a delicate balance. If your ARPDAU increases, you’re likely getting more aggressive with your monetization strategy - which means retention might take a hit (maybe users don’t want to be bombarded with offers and ads and leave). But low retention isn’t all bad as long as your monetization strategy is generating good revenue. Ultimately, you want to assess where the retention decrease outweighs the monetization increase. If, for example, you make a change to the game that decreases retention by 10% but increases ARPDAU by 20%, keep that change.
Timing is key: What should you focus on first, monetization or retention? Many developers choose to focus on retention before monetization. That’s because if a player is retained for long enough, it’s likely you’ll eventually monetize them - but if they churn because your monetization was too aggressive, the install was wasted. If you choose to roll out monetization later in the journey, remember monetization updates you make in-game affects all users at the same time - while retention updates (like redoing the FTUE) only affects new users.
1. Increase retention
It’s hard to increase retention across the board - but it’s much easier to pinpoint which retention day needs work and start there.
D1 retention: To increase early retention, you need to improve your game’s
- onboarding: make sure it isn’t too easy or too hard depending on your game genre. Puzzle and strategy games generally have long onboarding so players don’t churn out of confusion, while slot games have short onboarding so players don’t drop from boredom.
- core gameplay: If fixing the onboarding doesn’t give a retention boost here, analyze drop off moments during the moment-to-moment gameplay - and see how well it’s engaging your users.
D7-14 retention: If your D7-14 retention needs help, it’s likely players enjoy your core gameplay but don’t have enough content or reasons to keep playing. If that’s the case, you can
- add more levels - just take a look at which levels, challenges, and even in-app purchases players enjoy most and add more of the same
- add more meta systems like social systems, progression mechanics, and live ops
D30+ retention: There are a few strategies you can take to improve long-term retention. For example, you can create status and loyalty programs, add more meaning to the game like
- add skill-based gameplay or a narrative metagame progression
- introduce social systems and teams
- run an active liveops calendar.
2. Increase monetization
There are two main approaches to increasing monetization
- focusing on conversions: getting more players to spend
- focusing on spend depth: getting players to spend more
Conversions: By focusing on in-app purchase conversions, you’re working on getting more players to spend - or in other words, turning non-payers into payers. Here, your job is to make purchasing attractive and accessible. For example, you can:
- lower pricing, especially for early purchases
- offer a broader selection of first time deals
- be more sophisticated with segmentation, curating offers based on gameplay patterns
Spend depth: By focusing on spend depth, you’re working on getting the average payer to spend more. To do that, you need to look at the two main drivers of your game economy: supply and demand. Your goal here is to either tighten the supply or increase the demand.
Think of supply as how players acquire resources like energy and gold. By tightening the supply, you’re making it harder for players to get resources. You can do that by increasing prices, reducing the frequency of free resource drops, or increasing the difficulty of earning them through gameplay. This creates resource scarcity, with players finding themselves running out of these resources more quickly than usual. Because players still want to progress in the game, they’re more inclined to purchase more resources with real money to make up for the shortfall.
Demand is how players then spend those resources. By increasing the demand, you’re making it easier for players to spend resources, giving them more opportunities or necessities to do so. For example, you can introduce new features, content, or items that require resources; make existing game mechanics more resource-intensive (upgrading a character requires more gems than usual); run special events, limited-time challenges, or exclusive items that create a sense of urgency and encourage players to spend their resources quickly. This way, the game encourages players to use their resources more frequently and in larger quantities - and when players deplete their resources faster, they’re inclined to purchase additional resources with real money to keep up with the game's demands.
3. Build a direct-to-consumer channel
You can also increase LTV without changing the game itself, for example by creating a direct-to-consumer channel like a web shop. Here, you effectively sell your game items on a game website - which many developers find to be an easier and more cost effective strategy than constantly adding new content to the game.
In fact, most of the top grossing mobile games already have web shops up and running. Playtika, for example, generates over 25% of its total revenue from its web shop. Meanwhile, Huuuge, said in its April 2023 investors presentation that its web-based Huuuge Rewards Program led to a 3% increase in ARPDAU QoQ.
There are a few reasons why web shops increase lifetime value:
- Increased margins: The major app stores take a 30% cut of every microtransaction. But using a web shop keeps transactions between you and the player - so there’s no money to a middleman and more revenue in your pocket. That means you’re increasing LTV just by saving on Apple and Google’s fees. (You can use this interactive calculator to see how much you can actually save).
- Deals and discounts: Because you’re saving on margins, you can offer better deals and discounts on the web shop than you do in-app - like BOGO offers, volume-based offers, discount codes, sitewide discounts, and more. Players are more inclined to spend more if they’re getting a good deal that makes it worthwhile for them, effectively boosting LTV.
- Loyalty programs: The best web shops go beyond simple purchases to also include loyalty and rewards programs. For example, players can earn loyalty points through gameplay, which they can track on the web shop. More gameplay, means more loyalty points, higher loyalty tiers, and better bonuses - like exclusive and early access content. Because the loyalty program encourages players to play more, effectively increasing their retention, it also goes to increase their LTV.
- Rewards programs: Rewards points programs slightly differ from loyalty programs in that these are points players gather through spend and can redeem for certain offers in the shop. This encourages players to spend more (effectively increasing spend depth!).
- Brand affinity: In addition to the “shop” itself, web shops can also offer content and hobby hubs that host web series, strategy guides, and forums. The idea here is to deepen the player relationship with the game IP and the brand, by expanding the universe around the game. Doing so builds up player loyalty, which translates to more time spent in-game and higher LTVs.
Let’s increase your game’s lifetime value
You can significantly boost your game’s LTV with a direct-to-consumer channel. Get in touch to start building your D2C channel with Stash.