For subscription apps, what lifetime should be used in calculating LTV?

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Posted by unknown (Questions: 5, Answers: 2)
Asked on September 12, 2019 3:38 am
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I'm working on a project for a subscription app that only has a 1-year option, and we are buying against the 1-year LTV. The logic behind this is pretty straightforward:

  1. We don't have any data on cohorts that are older than one year, and we don't want to make any big assumptions around renewal rates absent any data;
  2. When you start thinking about multi-year LTV, you need to think about discounting, which in general overcomplicates things. See: Should Lifetime Customer Value (LTV) be Discounted?;
  3. In general I'm a fan of bidding up conservatively and iteratively expanding the frontier of my LTV projection. See: It’s time to retire the LTV metric and Optimizing campaign spend with the Blended Same-Month Return metric;
  4. The market can change dramatically in a year -- do we really want to take large financial bets on discrete actions (renewing a purchase) that customers will make in a year's time? That feels like irresponsible risk to assume.

In general, I think this is a great question, and teams don't spend enough time thinking about it. An imprudent decision I see companies make is extending out their payback window for long-term subscriptions after raising a huge round of financing because they need to hit aggressive growth targets. A better way to manage that necessity, in my opinion, is to expand the product catalogue and create new opportunities to monetize that can drive top-line growth in ways that aren't tied to a one year cadence.

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Posted by (Questions: 42, Answers: 111)
Answered on September 12, 2019 2:25 pm
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Working on a mobile product with a subscription-based model.

For our 6m auto-renewable subscription, we're taking only 1 renewal after the first payment. So, LTV is calculated for 6m + 1 day. For shorter subscriptions, LTV is calculated for 6m. Anything earned beyond that period will be an additional plus.

Pretty conservative approach I would say, but allows us to be on the safer side and more rigorously control our CAC, improve LTV and ensure LTV > CAC.

Worth to mention that it really depends on your business targets and limitations, product peculiarities and the niche you're working in.

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Posted by Eugene K (Questions: 1, Answers: 2)
Answered on September 12, 2019 6:55 am