How To Determine The Value Of A Mobile Application
The mobile Application development industry holds a prominent position in the online sector because of the huge consumption of data via mobile devices or smartphones. While designing an app, the crucial part is to focus on the app development process & maintaining a clean UI/UX. After the development process, the second most important step is to gain maximum return on investment(ROI) & to calculate the ROI of the mobile app you need to calculate the valuation of the app based on some standard formula.
Total app valuation is mostly determined by the probable timeline on the specific marketplace as well as on its user base. Valuation of an application is an indicator of the app's success. The main reason for valuing a mobile app is to determine its value when it comes time to sell it.
The value of an app can be determined by looking at factors such as downloads, revenue generated, and potential earnings for future downloads or updates. The calculation for this estimate is different for each company.
In this article, we will discuss some formulas to attain the calculative valuation of an app and some additional factors in a nutshell.
Valuation Formula & Metrics You Need To Know
If your end-users are purchasing any products or if your service requires a subscription method then the valuation of your application should be a mathematical formula. There are still some companies that calculate their company's valuation like Revenue- Expenses= Profit. But profit & app valuation isn’t the same concept typically. When you are calculating value, you have to consider app abandonment(failed using the app after a single use) & churn rate(customer lost in a given period).
CLTV & CAC are the two vital metrics in establishing the valuation of the app.
CLTV stands for Customer Lifetime Value- the amount of revenue or net margin a customer provides for the entire lifetime of their use of an app. Your app’s success & failure depend on the LTV. So, the average gross profit is equal to the net margin per user. LTV can be denoted as:
CLTV = Average lifetime (months) x Average Gross Profit per User
We can acquire CLTV differently:
CLTV = ARPU (1/Churn)
Where, ARPU= Per User Average Revenue & revenue comes from different sources- in-app purchase, advertising revenue, subscription-based revenue, or application cost.
Churn Rate= Percentage of the total lost customers within a given time
CAC stands for Customer Acquisition cost- the total amount of money owners have spent to ‘retain’ or ‘acquire’ a new customer. CAC requires different kinds of marketing expenses- paid tools, paid promotion/ads & salaries of the related marketing team. So, CAC can be denoted as:
CAC= Total Marketing Spend for A Set period / Number of Users Acquired in that Period
For most app businesses the ideal CLTV & CAC ratio is 3:1. To attain long-term fruitful success, make sure your CAC doesn't exceed the CLTV ratio.
Now the total Mobile Application Valuation formula looks like the following:
App Valuation= Number of app users * (CLTV-CAC)
In a nutshell, the procedure is- at first you have to calculate the lifetime value of customers & Churn rate. Then you need to emphasize the cost of acquiring per user. After this stage, you can probably calculate the return on investment easily. It will help you to adjust any variables for maintaining a healthy profit
Other Factors You Should Consider
In the above section, the formulas & metrics we have discussed will help for the paid service apps & subscription-based services, but in iOS & Google App store you will find thousands of free service apps that also be valued based on some other additional factors. Other aspects may raise your valuation sometimes. These are described in the below section-
SOPs: SOP stands for Standard Operational Process. It refers to clean & understanding documentation of all the functional processes & operation activity of your application. It helps to convey the operational responsibilities to the new owners or employees. This will help you to standardize & streamline the functionalities of the technical activity & let you scale your business in a mannered way.
The number Of App Downloads: This is a vital concern when determining the valuation of an app. To evaluate the value & performance of the application the universal metric is to focus on the number of your app downloads from the related app stores. For this, you should track the average app storage web page conversion rate. From a recent study, it is revealed that 50% of the app users only come from the app store search.
Apps abandonment: Apps abandonment is a negative factor for any type of mobile application. It occurs when a user fails to use this app after using one time or downloading it. But you should consider this factor for app valuation as it is directly related to app downloads. You ultimately should not be increasing the download rate of apps rather than focusing on the functionality that will increase the app's abandonment rate. According to research, out of four mobile apps, one app is abandoned after only a single time of use & most of the applications lose 77% of daily users after three to four days of installation. To decrease app abandonment you need to look at the onboarding process of the application significantly.
Customer Review & Rating: Analyzing customer feedback is the positive & most cost-effective process to boost user engagement & customer retention. You can easily evaluate your app & customer through social proof on different social media platforms. In recent years, Google play store & Apple App store changed their app search engine algorithm. Now, they are utilizing users' reviews & to evaluate app quality & discoverability on the platform.
App’s Growth: It is said that the faster your app’s growth is, the more valuable your business will be. Any potential buyer will look at the app’s growth factor & it is a crucial part. Growth figures will trend your business upwards & it will help to increase customer acquisition rate effectively. You can track your app growth rate through any analytics tool such as Google Analytics. Tracking growth means analyzing the behavior of your user & measuring the performance of the application.
So we have come to the conclusion that how to determine the value of a mobile app. A mobile app valuation is an assessment of the worth of your mobile app as an asset. Valuations are typically done to sell or acquire the mobile app. It can be done by looking at different aspects of the app such as its user base, revenue generated, downloads, ratings, reviews, etc as we discussed above. Hopefully, these factors will help you with the future evaluation of your application with ease.
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Royex Technologies has been in the business since 2013 and has competent team members who have been developing projects for hundreds of clients to date, all over the world. We specialize in mobile app development in Dubai. Check our website and portfolio to see our previous works. Contact us via email at info@royex.net or call us at +971566027916 with your requirements, only then we can tell you the development cost precisely.