How to Value an App Without Losing Money
How much do you think an app is worth?
The 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.
What makes an app more valuable?
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.
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.
User base and growth
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.
Monetization strategy
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.
Unique selling points
This aspect is very important when evaluating an app since it includes two key points:
Innovative features
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.
Intellectual properties and patents
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.
How do you calculate profit on an App?
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.
Let's go with the specific example explained in the same article about a calorie counting app that offers two types of subscriptions:
- Basic ($7 per month)
- Premium ($10 per month)
How to calculate Net Revenue?
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
How to calculate Costs?
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.
Valuation methods
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.
Cost Approach
When to use
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.
How to execute
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.
Benefits
Straightforward and relatively easy to calculate.
Limitations
Does not consider the app's future potential or the value of its intellectual property.
Market Approach
When to use
The market approach is suitable for apps with a strong presence in the market and comparable apps or transactions available for analysis.
How to execute
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.
Benefits
Reflects current market conditions and is easily understandable by investors.
Limitations
Limited by the availability of comparable data and may not account for unique features or growth potential.
Income Approach
When to use
The income approach is suitable for apps with a history of revenue generation and predictable future cash flows.
How to execute
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.
Benefits
Focuses on the app's future earning potential and accounts for risk.
Limitations
Requires numerous assumptions and projections, which may be subjective or inaccurate.
User-based Valuation
When to use
The user-based valuation method is suitable for apps with a large user base and significant engagement metrics.
How to execute
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.
Benefits
Directly links the app's value to its user base and engagement.
Limitations
May not account for future growth or changes in user behavior.
Hybrid Valuation Methods
When to use
Hybrid valuation methods are suitable for apps with complex business models or when a single valuation method does not provide a comprehensive assessment.
How to execute
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.
Benefits
Provides a more comprehensive and accurate valuation by considering multiple aspects.
Limitations
May require additional data and assumptions, making the process more complex and time-consuming.
How to value an app using BlueThrone's app valuation tool
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.
How Much Can You Sell an App For?
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.
Factors affecting the selling price and potential dangers
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.
- The market conditions and competition represent a key point when setting a selling price for an app. It is not the same to establish yourself in a market as competitive as the gaming market as it is to establish yourself in a market with a much lower barrier to entry.
- The growth potential and scalability will also be determining factors because if the application has enough edges to be able to increase the profit, its price will be significantly higher than what a totally opposite scenario could mean.
- The structure and the work team are also important. If you have robust and well-trained customer support, the problems will be much less, and consequently, the selling price of the app will be higher.
- You should not neglect the legal area, privacy, and suspicious activities on the part of users, as that could negatively impact the selling price of the application.
Negotiating and closing the deal
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.
The 5 most expensive apps in history
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?
Keep reading
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