Deconstructing unit economics of paid user acquisition
Editor's note: The following is a guest post from Martin Macmillan, CEO of fintech firm Pollen Velocity Capital.
Mobile app developers live in a sea of metrics, and many are struggling to make sense of them. Soft launching an app creates a tidal wave of metrics that can be difficult to parse and even more difficult to tangibly use. For many, it all just becomes a jumble of performance marketing acronyms with no clear signals telling marketers to double down on something or go back to the drawing board.
Here I aim to provide a basic overview of the unit economics of paid user acquisition, and how to figure out whether paid channels will work for a particular app. In layman’s terms, the intention is to guide developers to an understanding of how much to spend on marketing to acquire new users and how to see whether you’re making a profit. A clear understanding of metrics can illuminate a path to financial success in app stores.
Diving into those aforementioned acronyms, some of the most tossed-around ones for "freemium" apps include CPI and LTV.
- CPI (cost per install): the amount developers need to spend to acquire an app user via paid channels like Facebook or Google.
- LTV (lifetime value): the expected revenue a single user will generate from the time he or she downloads the app or game until the app is abandoned altogether.
If LTVs exceed CPIs, then a paid marketing strategy will likely work for an app, but the complexity comes in estimating an LTV — not an easy task if you're looking at freemium apps where you need to model the behavior of a cohort of users, rather than the behavior of a single user.
In order to figure out LTV, some additional metrics are required. Fortunately, these are readily available from analytics and ad attribution software that most developers integrate into their apps early on in development.
- Retention: how long users generally stay in your app, measured as a percentage.
- ARPDAU (average revenue per daily active user): an aggregate daily revenue figure across the whole range of an app's active users.
- Virality: the idea that each paid user will attract a halo effect of an “organic” user acquired through word-of-mouth, sharing or some other social dynamic built into the app.
These three key metrics are just a small slice of what marketers deal with in promoting an app. Understanding the relationship of what you spend versus the amount you earn back is essential. When a marketing team can lock down their metrics, it’s simply a matter of then figuring out a budget and constantly monitoring the metrics for each cohort to ensure goals are being reached and improved upon.
When all the jargon is stripped away, investment into paid marketing is nothing more than an investment formula. If you have a $1 CPI and a $1.50 LTV recouped in 90 days, you’re able to make a 50% ROI every three months. Compound this and your annual ROI begins to look pretty healthy.
There are many factors that can disrupt this formula as marketers begin to scale up. Typically, CPIs will rise over time as you'll eventually need to pay more to reach an ever scarcer audience. At the same time LTV may fall, as you have exhausted the pool of the highest likely spenders and user quality starts to diminish over time. As the margin from ad spend starts to shrink, it’s important to set clear goals like minimum ROI and to not spend beyond a level of certainty that makes economic sense — another reason why marketers must stay hyper-focused on the metrics every day.
With a great app, careful planning and the right user acquisition partner, it's possible to use paid acquisition to great effect, as the global nature of the app economy allows you to achieve near limitless scale. However, a constant focus on the unit economics and ongoing metrics is essential to achieve true success.