The mobile app market has completely transformed the way we live our lives. There are a number of different ways to profit off of mobile apps, as monetization tactics are becoming increasingly diverse and versatile in order to deal with the various companies that are being established in order to fulfill the enormous demand we are currently seeing. For the purposes of this article, the definition of an app will be narrowed down a little. Basically, we will be referring to universal apps which differ from those apps that can only be accessed through browsers. Mobile apps tend to be easier to access.
People that work in the field of app development and offer the apps and services they are working on in the various app stores often wonder the actual value of their app. The answer to this question is complex because there are a number of different factors involved, all of which need to be taken into consideration before any kind of consensus can be reached on this particular topic.
Some of the factors have to do with the industry. These are called macro factors and they take into account the various intricacies of the larger ecosystem in which these apps exist. If you are looking for an exit strategy of sorts you need to be prepared for these factors so that you can get the best price possible for your app.
There are also a number of factors that can’t be helped. These include how old the app is as well as the company that created the app, as well as the particular niche that it is in. For the purposes of this article we will mainly be talking about those factors that can impact the value of an app whilst simultaneously making the company that manufactured said apps as profitable as possible.
All in all it is important to get a general understanding of all of the factors and variables that can impact the success of your app. It is important to realize that this information isn’t just helpful to people that are looking to sell their companies. This information is also very useful indeed for people that are looking to excel and succeed in the app market in the first place.
Understanding the value of your app can help you better understand the direction that you can take your app in, as well as how you should handle any future ventures that you might end up taking part in. Another thing to note is that it doesn’t matter how well established your business is, you can always take steps in the right direction if the value of your app is lower than you thought it would be. All in all it’s never too late to make your app more valuable than it was before.
A Real Look at Earnings in 3 Ways
If you want to improve the value of your app, the first thing you are going to have to do is figure out how much you are earning right now. This is will become the base upon which you can build the rest of the valuation process. There are two techniques that you can use in order to figure out how much you are earning at this point in time: SDE and EBITDA. Which one you use depends on how your business is structured as well as your gross revenue.
This stands for Seller’s Discretionary Earnings, and is usually used for apps who are estimated to be worth less than five million dollars. Another reason to use this method is if the app or the company is run by an owner operator which is usually the case with smaller businesses. In situations like this, the person that owns and runs the business usually lists money used for personal reasons as business expenses. This is generally done so that the owner operator pays less tax. Another factor that is taken into account in this method of ascertaining the value of an app is that the person that owns the company is usually getting paid a regular salary from that company.
Because of the fact that personal expenses are deducted from company money and the owner gets paid a salary, the amount of gross revenue is calculate differently. The money spent in these situations comes from gross revenue, and is thus included in the calculation process while attempting to ascertain the baseline earnings of a particular app. Not counting these expenses would be a huge mistake because of the fact that it would make the app seem a lot less profitable than it actually is.
This is a much more complicated system of calculation. The reason that it is so complex is because of the fact that it is used to estimate the value of much bigger companies, those whose value goes beyond the five million dollar limit for the SDE. The companies for whom EBITDA is used are generally not operated by the person or people that own them. The full form of this method of calculation is Earnings Before Interest, Taxes, Depreciation and Amortization.
It is the most accurate calculation method out there which is a big part of the reason why it has become an industry standard. Businesses that use this method often have several sources of income in order to expand as quickly as possible. All of these revenues are taken into account in order to make the calculation process as easy as possible.
Whichever of these two calculation methods are used, once baseline earnings have been ascertained, it is time to move on to the next step of the valuation process.
The 12 Drivers of Mobile App Value
This terms basically refers to the number of customers that download your app but then never use it. A lot of tech companies funnel a lot of money into marketing campaigns that are supposed to help users discover the app without realizing how important engagement can be.
Abandonment is a hurdle that a number of app developers are facing. It is estimated that a quarter of all downloaded apps are used once after they are downloaded and then never used again. These apps also use three quarters of their DAUs or Daily Active Users about half a week after they have been installed. A good way to fix a high abandonment rate is to look at the point where users stopped using your app and figuring out how you can entice users into coming back.
#2 Financial Records
If you want an accurate assessment of how much your app is worth, one of the most important things that you will have to look into is getting all of your financial records in order. Not only do these financial records need to be accurate and complete, they need to be verifiable as well. A lot of owners don’t keep good records which is why their apps end up being undervalued. If you own an app you need to ensure that you keep your books in order from the very start, otherwise an accurate assessment of what the app is worth is going to be pretty much impossible to ascertain.
#3 Rate of Growth
Whenever someone is thinking about buying a particular develop or company, one of the factors that will affect their decision is rate of growth. If your app has been growing steadily, chances are that there will be more buyers interested in getting in on the action. However, if your app has not been growing as of late you will find that there are fewer offers and you are going to have to settle for a lower offer. This is because of the fact that there are going to be certain things to handle in order to ensure that the growth rate can be reversed.
There needs to be documentation that signifies that growth is occurring and there is also the fact that well kept books are going to be a factor here as well. Google analytics are also going to play a role here in terms of documentation. Providing data that will show the actual popularity of your app will help boost the value of the app.
It is also important to get into the nitty gritty of the performance of your app. All the details are going to help, and you can bet that anyone that might be thinking of buying your app is going to want as many details as possible. Look into tools that will allow you to get the best analytics possible. If the app you are offering is an Android app then App Annie is a good choice. For Android apps, AppsFlyer is a great option that is both powerful and precise.
#4 Level of Control Afforded to Owner
If you own the company that you are trying to sell, you need to first figure out how involved you are in the day to day operations of the company. You need to outsource as much of the work as possible to people that you have hired. This is actually going to boost the value of your business because of the fact that anyone looking to buy your company is probably going to want something that can earn them a fair amount of income without them having to work too hard. If you are working full days at your company, anyone that buys your company will have to do the same and this is something that will make them want to pay less for your enterprise.
#5 Level of Expertise in Code
Any kind of software including apps is built through codes. Anyone that is thinking of buying your app is going to want to look through the code in order to figure out how well the app has been made. Hence, if you are intending to sell your company at any point, you need to make sure that the code is going to be top notch. No one will want to buy an app that has bad code because it is going to result in problems in the future. That is to say, no one will want to buy an app like this at a high price.
#6 Diversity of Offerings
One thing that a lot of people don’t realize is that potential buyers are going to want to buy a company that is as diverse as possible. No one wants to buy a company that is a one trick pony, and that is depending on a single app for a majority of its earnings. The problem with this is that tides can change at any point, and if this happens the person that buys your company is going to end up with a company that is no longer really worth anything.
#7 Number of Engaged Users
A lot of people look at the number of times that an app has been downloaded as some kind of sign that the app is valuable. However, just because an app has been downloaded does not mean that it is actually as popular as all that. Indeed, one of the more important factors that you should be looking into is how active your users are.
User engagement needs to be ascertained and verified, because it is only then that the actual popularity of the app can be figured out. User engagement means more people watching ads, and a much higher chance that one of your users is going to end up making some sort of in app purchase. These are pretty much the only two ways in which apps can end up earning money, so it is obviously going to have an enormous impact on how much you are offered for your app.
Another reason that user engagement is extremely important because of the fact that it helps the developer figure out how well the app is working. Whenever you use an app, if there is a problem you can choose to report it. These reports can then be analyzed and used to improve the app in various ways. It is pretty clear that all of these things are going to end up playing an important role in how much you are offered for your app.
#8 How Old The App Is
This is one of those factors that you can’t really do anything about. That being said, it still affects the value of your app. A newer app is going to be more relevant, but older apps tend to be considered more stable especially if they have a steady and consistent rate of growth. This makes them seem like more sustainable options that are going to allow the buyers to have a steady source of income for the foreseeable future.
A younger app is going to be seen as riskier because it has yet to prove itself in the arena of platform risk as well as the other storms that most apps have to weather. Buyers are going to pay less for younger apps because they are going to predict a number of pitfalls in the app’s future.
If the app is a year old, the affect that newness has begins to decrease. After the two year mark it becomes much less of an issue, and by the time the app is three years old its age is now something that can actually drive up its value by an enormous amount.
Age itself is not going to cut it of course. Your app will need to have grown consistently as well, something that is not as easy as you might think it is. If there were any problems or down rounds during the course of the app’s history this could prevent premium valuation from occurring.
#9 Customer Acquisition Cost And Customer Lifetime Value
These two terms are pretty self explanatory. The amount that you spend trying to get your customer to download your app is the former, and the amount of money each customer earns while they use they app is the latter term. There obviously needs to be some kind of balance between the two. A low CAC and high CLV is going to send the value of your app through the roof, but this is easier said than done. While it is possible for an app to function even if the CAC exceeds CLV, it will be difficult for the app to continue working for a long period of time.
#10 Consistency in Revenue
This basically means how much revenue you get and when you get it. If the rate of revenue has remained relatively consistent, it will make your company look like a much safer bet. There is also the fact that it will ensure that the buyer will enjoy stable income in the future. However, if the revenue stream ended up being lower or higher than average it will make your company seem riskier and thus people will be less willing to pay a premium amount for it. You should try to justify dips or spikes in income by showing the seasonality of your app or something of a similar nature. This should help reduce the impact that such factors end up having on the overall value of your company.
#11 Number of Downloads
We now get to one of the most obvious factors that affect the value of your company. You need to boost download numbers while keeping all of the aforementioned factors in mind. This will allow you to show people that your app has value, and that the way it has been marketed allows it to be seen by people as a solution to certain problems.
This also shows the conversion rate that your app is enjoying. The fact of the matter is that if you are marketing your app at all, you are going to get people visiting your profile in the app store. You need to show that these people are also downloading your app. A good conversion rate is always key in situations like this.
If people are visiting your app in the app store but they are not downloading your app there are a variety of things that are probably impacting it. Here are the factors that might affect the conversion rate for your app:
- Doesn’t Solve a Problem: Your app basically doesn’t do anything important so people just don’t feel like downloading it. The first rule of an app is that it should handle some kind of problem for you so that users have a reason to download it in the first place.
- Lack of Compelling App Content: When users come to the app page the content that describes what your app does and why does not seem engaging to potential users. Hence, they assume that the previous point is true of this app and they end up passing it over in favor of something presumably better.
- Bad Reviews: This is one of the most obvious reasons why people might not be downloading your app. This is rather easily fixed, all you need to do is remedy the issues and ask people to start rating your app.
One thing you should make sure of is that you are never too intrusive while asking your users why they might not be downloading your app. This will further lower your reviews and ratings and might end up making your valuation go even lower.
#12 How The Business Runs
Your business’s new owner is going to know how things are done. If things are complicated and there is a lot of red tape they are probably going to pay a lot less because they will have to work to streamline things. One thing you should keep in mind is the fact that the easier you make it for your business’s new owners to earn money without doing anything, the more likely they are to pay a higher amount for said business.