Do you wonder how Angry Birds, Candy Crush, and Clash of Clans continue to generate significant amounts of cash? Moreover, do you aspire to make your mobile app as big as these giants? Well, you can. But you must know that for each one of these it was not just their unique business idea that brought them success, but also their smart financial model.
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First, let’s talk about the mobile app industry. There are approximately 2.56 million apps available for download on Google Play. But how many do you think make the cut? In short, it’s only a few thousand.
So how do these few do it? The short answer is they operate on a sound business model that is financially viable. Therefore, if you’re ready to build your mobile app and watch it succeed, read on to find out more.
Step One: Create Your Revenue Model
You can base your financial model on one of three major revenue streams. These include paid downloads, subscriptions, and advertisements.
Revenue Stream #1: Paid Downloads
Some good examples of apps that have one-time paid downloads as a revenue stream are Pocketcasts (the best podcast app), Photostudio, and Wallpaper maker. To calculate revenue using this financial model, multiply the number of units by the average monthly price:
Revenue = number of units x average monthly price
The main revenue driver for this financial model is the number of downloads from Google Play and Apple Store. Most apps are priced between $1 and $200. This is quite a range. Keep in mind that niche apps are priced higher, and educational apps are priced on the lower side.
You can project your monthly recurring revenue by estimating the number of downloads you expect from each app store and multiplying that number by the download price you have set.
Revenue Stream #2: Subscriptions
Some good examples of apps that have a recurring revenue stream include Spotify, Apple Music, and Netflix. Calculate your expected monthly recurring revenue for this financial model by multiplying the number of paying users by the average monthly price plan.
Monthly recurring revenue = number of paying users x average monthly price plan
Revenue Stream #3: Advertisements
Facebook, Instagram, and Twitter are good examples of apps that have advertisements as a revenue stream.
To calculate revenue for this financial model, multiply the number of recurring users by the number of sessions per month, then multiply that number by the average minutes per session, times the ad impressions per minute, times the average cost per thousand (CPM). Then divide that number by 1,000, like so:
Revenue calculation = number of recurring users x sessions per month x average minutes per session x ad impressions per minute x average CPM/1000
For clarity, we define the revenue drivers for this financial model here:
- Number of Recurring Users: Recurring users are your returning/active users.
- Sessions per Month: When users click on an app page then it is called a visit. The time duration for which the user stays is a session.
- Average Minutes per Session: The average duration which a user stays per session. Average app session length is around three minutes. Game, media, and entertainment apps account for longer sessions, while e-commerce apps account for shorter ones.
- Ad Impressions per Minute: Number of ad impressions shown in a minute. Some of the different kinds of ads are banner ads, native ads, videos, and more.
- Average CPM: CPM stands for either cost per thousand or cost per mile. This is a marketing term that denotes the price of 1,000 ad impressions. If an ad publisher charges $2.0 CPM, then an advertiser has to pay $2.0 for every 1,000 views of its ad.
You can probably count on $1 to $2 per 1,000 impressions at best (unless you have a very niche app). For video ads with high conversion rates (10%), you can charge from $5 all the way up to $30.
Step Two: Budget Your Expenses
Classify expenses into one-time, fixed costs (like office space, utilities, and the like) and variable costs (such as server expenses).
Step Three: Track the Performance of the Financial Model You Have Chosen
Now that you’re ready with your financial projections, let’s measure the performance of the financial model you have chosen. Here are the key performance indicators:
- Active Users: Out of total downloads, the number of users who keep returning to your app are called active users. They are normally calculated on daily and monthly intervals.
- Monthly Active Users (MAU): These are the number of users who used your app in a month. Keep in mind that acquiring a new customer is 5 to 25 times more expensive than retaining one.
- Average Revenue Per User (ARPU): This is the average amount of revenue generated per user. Calculate this number by dividing your total revenue by the total number of users. The global ARPU for mobile gaming apps stands at $35.
- Monthly Recurring Revenue: This is the monthly income a business expects with a high degree of certainty. Calculate this number by multiplying the average revenue per user by the total number of customers.
- Churn Rate (CR): This is the rate at which your active users unsubscribe or uninstall your app. Calculate your churn rate like so: CR = 1 – [(Ending User Base – Additions)/Beginning User Base].
- Lifetime Value (LTV): The lifetime value of a single user is your total revenue divided by the earnings a single user will generate before they stop being a user. This number is helpful for building your marketing budget and fixing a realistic customer acquisition cost (CAC).
To calculate the lifetime value of a single user, multiply the average conversion value by the average conversions, then by the average customer lifetime:
LTV = Average Conversion Value x Average Conversions x Average Customer Lifetime.
Alternatively, you can divide the average revenue per user by your churn rate: LTV = ARPU/CR.
An Important Side Note That Pertains to All Financial Models:
The worldwide app retention rate stood at 32% in 2019. Improving retention has a two to four times greater impact on growth than does acquisition. Said another way, compared to 5-20% for a prospective user, the probability of selling to an existing user is 60-70%. In other words, it is far more cost-effective to retain your current users than to try to gain new users.
Claim Your Mobile App’s Spot in the Marketplace by Choosing a Sound Financial Model
Get down to business intelligently by relying on a financial model you can count on. To this end, the folks at UPtick have financial model templates for all businesses. So if you want your mobile app to be alive and kicking, adopt a flawless business strategy and a viable financial model. Get industry-vetted financial model templates from UPtickgo.com.