Conversion: how much money to pay

As some businessmen might say, “show strangers the money if you want cooperation!”

This is how Advertisers gain valuable help from Publishers to promote their offers: by showing the offer’s Payout!

But wait! Don’t you think about how they know how much money to pay for that help?

Or even how they actually make money?

It’s well known that most advertisers prefer to pay on a CPA basis when they wanna acquire users for subscription offers or on a CPI basis when they wanna acquire users for an app.

Nonetheless, in order for you to understand how they know how much to pay for one user of their offer, we need to refer to the user’s LTV (LifeTime Value) and also the ARPU (Average Revenue per User).

The LTV is the most important metric used by Advertisers to measure the Return On the Investment (ROI) made on the offers promoted by publishers.

In general terms, the LTV can be perceived as the value Advertisers got from the users who were acquired by the traffic sent by publishers.

It’s usually a projection of the revenue a user will generate during their lifetime inside the Advertiser’s product/service.

Advertisers often need some time to get the final LTV metric.

That’s why metrics such as the Average Revenue Per User (ARPU) are also used as an indicator to define how much money the Advertiser will be able to pay to the Publisher for a new user for the product/service being promoted.

Getting dizzy? Let’s simplify it.

The Advertiser needs to know how much it can pay for a new user, meaning the offer’s payout.

In order to do this, the Advertiser needs to forecast the total revenue generated by the users acquired during the promotion phase of the campaign.

Then, they need to divide it by the predicted amount of users the campaign was able to attract. That’s how they get the average revenue per new user.

Then, this average value is multiplied for the average time the user remains subscribed to the offer or active on an app.

Then it’s done! The advertiser gets the amount of money they’ll be able to pay to the Publisher for each new user brought to the product!

Wait! How do they earn money, then?

The payout (either CPA or CPI) needs to be lower than the LTV, because this difference is the advertiser’s margin.

That’s why advertisers are always concerned with quality and not only volumes!

Don’t get us wrong: the higher the volume of quality users, the higher the ARPU, the higher the LTV and the more money the advertisers will get to spend on the advertisement.

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