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Idan Waller17 min readThe mobile applications business has not stopped growing, as is confirmed by Statista, who assured that by 2023 profits will exceed 900 million dollars worldwide.
Along the same lines, the MCRO portal acknowledges in its article "How much money can an app make you in 2022?" that an application ranked in the first 200 places in an app store generates around $82,500 per day.
For this reason, you must be aware of the importance of accurately assessing an application’s value.
In this article, we will review and shed light on several of the fundamental factors that you will have to take into account if you want to sell your application and obtain the highest possible profit margin.
In an article published in 2017, Forbes claimed that the 5 factors people took into account when rating a mobile app positively were: an enriching user experience, easy to use and intuitive, user-friendly checkout, personalized experience, and simplicity.
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These 5 keys must still be present today in your application since it will be the user who will determine the real value that this app will bring to his daily life.
On February 19, 2014, Facebook announced the purchase of Whatsapp for $19 billion.
Why did Mark Zuckerberg decide to pay so much for an application?
We are going to use this specific fact to contextualize each of the points that we will develop below.
Market demand, trends, and product-market fit (PMF) status
Whatsapp perfectly fulfills these 3 points.
First of all, it is an application with high market demand.
Even today, almost 15 years after it launched, Whatsapp is still trending in every area of daily life and belongs to a constantly growing industry.
Lastly, its PMF status is one of the highest thanks to the service it provides and its importance within the ecosystem of the digital world.
Another factor which made Facebook pay so much money for Whatsapp is because of its active users.
According to Verloop.io, Whatsapp has 2 billion monthly active users.
This is undoubtedly a very important statistic that increases the value of an application.
At the same time, it is a constantly growing app with a high user retention rate.
How many people do you observe interacting with it during the day?
That alone will give you the answer.
Despite not being the best example in this regard, the strength of Whatsapp's database allows Meta (Facebook's parent company), to take full advantage of user information to exploit its ad sales platform.
In another sense, a game app can monetize perfectly well through the purchase of accessories or character upgrades within the same application (In-App Purchases).
For example, Fortnite has earned $1.1 billion through its mobile app.
Finally, a subscription to certain services or memberships is also a way to make money with a mobile application.
This aspect is very important when evaluating an app since it includes two key points:
This point refers to the added value of the app.
That is, what different features and benefits can my application offer to differentiate it from the rest in such a competitive market.
For example, the portal Brainhub.eu has ranked 10 of the most innovative apps created in recent years.
Why have they been chosen?
We will take as an example the 3 best-ranked apps.
Calm: Helps users to be more mindful and supports restful sleep and lowers stress. Includes guided meditations, sleep stories and breathing programs.
Faceapp: It was one of the first apps in which through artificial intelligence you could see how you would look as an adult. It has undoubtedly been a before and after in the world of mobile apps. There is a curious story behind this app: it was said that it stole users' photos and sent them to the Russian government.
Kinemaster: This Korean app has been chosen as the best video editing app by Google Play Store. One of its great features is that it is user-friendly and has tools such as multiple layers, blending modes, voiceovers, speed control, adding subtitles, transitions, or special effects.
The legal considerations represents one of the most important factors when establishing the value of an app.
As confirmed by the portal Igexsolutions.com, there are 3 types of protection:
Patents: guarantees its creator exclusive use and design rights for up to 20 years.
Trademark: protects the name, logo, symbol, or any combination of them.
Copyright: protects artistic work such as texts, music, software, or videos and gives its owner the right to reproduce copies of his own work.
As the Appbooster blog explains, to calculate the profit of an app we must establish the following formula:
Profit = Net Revenue - Costs
This formula establishes 3 connection points: Revenue Streams, Costs and expenses and Profit calculation.
| Revenue Streams | Costs and expenses | Profit calculation |
| The 3 main sources of income for an app are the ones we have mentioned and explained above: In-App purchases. Advertising and sponsorships. Subscription models. | In this regard, we can highlight different types of costs: Development and maintenance costs: these involve the hiring of designers, creators, or developers who are in charge of the application. Marketing and user acquisition expenses: refers to any advertising expenses for the purpose of making the app known or acquiring new customers. Operational costs: includes the operational costs of the app such as server infrastructure or support. | In this case, we will apply the formula explained at the beginning of this section to establish the total profit we have obtained with our app. |
Let's go with the specific example explained in the same article about a calorie counting app that offers two types of subscriptions:
To calculate Net Revenue: Users x ARPU x (1 - Commission)
ARPU is calculated as follows: Average Price x Conversion x Lifetime.
How are each of these 3 factors calculated?
Lifetime: This is the lifetime of the application. In this case, the example has set a value of 7 months.
Conversion: It is calculated by dividing the number of people who have purchased the subscription against the total number of users.
Assuming that the app has 20,000 users and 1,700 have subscribed, the formula would be 1,700 / 20,000 = 8.5%.
Average Price: Continuing with the app example, Appbooster sets the scenario that of the total 1,700 users who have purchased the subscription, 1,200 have taken the basic program and 500 the premium.
So, the average price would be: (1200 x $7) + (500 x $10) / 1700 = $7.90
Now that we have the numbers of the 3 variants, we can apply the formula to calculate ARPU.
Average Price x Conversion x Lifetime.
7.9 x 8.5 x 7 = $4.7
The last step is to calculate the commission. For this example, we will say that the commission will be 30%.
Establishing then the formula:
Net Revenue
Users x ARPU x (100%-Commission) = Users x ARPU x 70%.
20,000 x $4.7 x 70% = $65,800
To calculate the costs, we must apply the formula: Users x CPU.
CPU (Cost Per User) = (CPM/1000) / CTR / CTI
Using the same example as above, let's assume that the CPM is $0.008, the CTR is 2.8% and the CTI is 5.6%.
CPU = $0.008 / 2.8% / 5.6% = $5.1
Applying the formula:
Costs
Users x CPU
20.000 x $5.1 = $102.000
Finally, we have been able to calculate the profit of our app.
Profit = Net Revenue - Costs
$65.800 - $102.000 = - $36.200
In this example, our app has made a loss of $36,200, so we need to adjust the metrics and improve the app in order to be profitable next month.
Let’s delve deep into each valuation method, explaining when to use them, how to execute them, and their benefits and limitations. By understanding these methods, you'll be better equipped to choose the right approach for your app and make informed decisions.
The cost approach is suitable for early-stage apps or apps with minimal financial history. It is also relevant when the app is unique and there's a lack of comparable apps in the market.
a. Estimate the costs of developing a similar app, including app design, app development, app testing, and marketing expenses.
b. Add the opportunity cost of the development team's time, which could be spent on other projects.
c. Sum the costs to arrive at the app's value.
Straightforward and relatively easy to calculate.
Does not consider the app's future potential or the value of its intellectual property.
The market approach is suitable for apps with a strong presence in the market and comparable apps or transactions available for analysis.
a. Identify comparable apps or transactions in the market.
b. Analyze relevant metrics such as user base, revenue streams, and growth rates.
c. Determine the appropriate valuation multiple (e.g., price-to-sales, price-to-earnings) based on industry standards or historical transactions.
d. Apply the multiple to your app's metrics to estimate its value.
Reflects current market conditions and is easily understandable by investors.
Limited by the availability of comparable data and may not account for unique features or growth potential.
The income approach is suitable for apps with a history of revenue generation and predictable future cash flows.
a. Project future revenues and costs for a certain period (usually 5-10 years).
b. Determine the appropriate discount rate, which represents the risk associated with the app's future cash flows.
c. Discount the projected cash flows back to the present value using the discount rate.
d. Sum the present values of the cash flows to arrive at the app's value.
Focuses on the app's future earning potential and accounts for risk.
Requires numerous assumptions and projections, which may be subjective or inaccurate.
The user-based valuation method is suitable for apps with a large user base and significant engagement metrics.
a. Determine the key user metrics, such as active users, ARPU, and user retention and engagement.
b. Assign a monetary value to each user based on industry benchmarks or historical data.
c. Multiply the monetary value by the total number of users to estimate the app's value.
Directly links the app's value to its user base and engagement.
May not account for future growth or changes in user behavior.
Hybrid valuation methods are suitable for apps with complex business models or when a single valuation method does not provide a comprehensive assessment.
a. Combine elements of different valuation methods, such as income and market approaches or income approach adjusted with user-based metrics.
b. Determine the appropriate weights for each method based on the app's characteristics and the availability of data.
c. Apply the weighted average to arrive at the app's value.
Provides a more comprehensive and accurate valuation by considering multiple aspects.
May require additional data and assumptions, making the process more complex and time-consuming.
Do you want to know the estimated price of your app?
Here is a step-by-step guide so you can do it with the Bluethrone app.
Enter the Bluethrone APP by entering bluethrone.io/valuation
1- Search for the name of your app.
2- Complete the traffic and revenue options.
3- Confirm your email and receive the evaluation.
Setting up the pricing scenario for an App can be a very stressful job for the developer.
Although there is no established method to determine exactly at what price you can sell an app, we can confirm that there are factors that positively or negatively influence its price.
The factors that can affect the price of the app are differentiated according to those that have a positive and those that have a negative impact.
There is a sentence about Apple that sums up this section better than anything else:
How does Apple negotiate when it buys companies?
“In the end, Apple gets what Apple wants”
Ultimately, it's about being able to sell the app at the price that suits you best.
Clearly being Apple is not the same as being a developer but understanding the dynamics of the phrase and the context, the goal should be the same.
It is true that you will have to establish legal and financial considerations that are beneficial to you.
For that, you can count on a lawyer to assist you throughout the process.
To further illustrate everything we have explained in this section, we will take as reference the 5 most expensive apps in history.
Why is each of them worth what they are worth?
| App Name | Reason for High Value & Reference | Downloads | Active Users | Number of Employees | Sale Price (In billions) |
| Facebook has taken the lead in mobile communication and has one of the largest databases in the world. Its potential for monetization possibilities is almost endless. | 2 Billion+ | 2 Billion | 550+ Employees | $19 | |
| Acquired by Microsoft, LinkedIn is a global database and one of the most referenced apps in the world of business and professionals. | 740 Million+ | 310 Million | 16.000+ Employees | $26.2 | |
| Once again, Facebook enters the scene to acquire one of the most in-demand apps, thanks to its constant growth, penetration, and its unique style of image usage. | 1 Billion+ | 1 Billion | 700+ Employees | $1 | |
| Waze | The map application business has found one of its most essential references in Waze. Google has taken note of this and has been able to take advantage of its potential to acquire this incredible app. | 130 million+ | 50 million | 550+ employees | $1.1 |
| King Digital | With Candy Crush at the forefront, this company has managed to maximize the benefits of mobile gaming, and that is why a giant like Activision has decided to buy its entire platform. | 3 billion+ | 240 million | 2000+ Employees | $5.9 |
As a developer, you should keep in mind each of the points we have taught you in this article to get the most benefit possible when selling your application.
Take into account market demand, PMF status, and who your target customer will be.
At the same time, be clear with your monetization strategy of the app, as that will be a very important factor at the time of negotiation.
From that, calculate the profit and set a selling price based on the 3 variables we have explained to you: valuation methods, factors affecting the sale, and the final negotiation points.
To help you we have left our exclusive APP so you can enjoy it for free and have an estimated value of your work.
In short, using all the tips and strategies we have explained, grow customer value and you will be ready to sell your app at the best price on the market.
The choice of valuation method depends on the state of the PPP. But surely the best option will be to optimize both processes in order to achieve the best possible valuation.
Selecting the right number depends on factors such as niche, industry, profits, or monthly downloads.
However, we could say that a standard number would be to set the value and multiply it between 2 and 5 times.
Establishing the right sales value for an app can be a complicated task if the different strategies we have highlighted in this article are not taken into account.
You must be careful not to overvalue the app, ignore industry trends, lose focus of the real costs, or even fail in the legal arena.
To increase the value of your app, you can focus on increasing the number of active users, improve your monetization strategies or even be attentive to the trends and needs of your niche.
Idan Waller
A die-hard digital entrepreneur and app industry innovator, I’ve dedicated my career to revolutionizing mobile applications. After growing in direct response marketing and founding the 100K and 10M clubs, I co-founded BlueThrone with my brother Alon. We’re committed to elevating extraordinary apps and shaping the app industry’s future, focusing on creating unparalleled user experiences worldwide.
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