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Financial Model for an App: Estimating Revenue and Costs

For an app to succeed financially, you need to ensure that your app generates a higher average revenue per user (ARPU) than your expenses.

Your expenses include:

  • Platform fees to Apple and Google
  • Cost per install (CPI) that you pay to ad networks
  • Server costs, usually for Firebase or AWS
  • Staffing expenses for marketing, customer service and ongoing app development

Next, let’s break down how you can estimate your revenue, even if you haven’t launched your app yet.

Calculate your average revenue per user (ARPU)

To have a sustainable business, it’s important to acquire a lot of users, to maximize user engagement, and to diversify your income sources so that you maximize profits from each user.

Factors that affect user acquisition

Acquiring users will come down to several factors.

  • Product/market fit with a unique customer segment
  • Customer awareness – specifically whether customers understand how they can improve their lives with your app
  • Value proposition – whether customers know why they should buy your app (as opposed to a competitor’s app)
  • Scalability – your ability to stay ahead of your competition, especially if a larger company decides to rip off your app’s features
  • Your marketing budget – whether your budget is sufficient to help you acquire users at a fast enough rate to pay down debt and grow your market share

Maximize user engagement

In addition to acquiring users, you also need to maximize user engagement so that people keep returning to your app. Avoid “churn and burn” approaches – for example, where you bombard a user with ads and they leave the app.

Instead, think about how you can make your app personalized, fun, and useful, and avoid giving your customers reasons to leave.

Tooltips, welcome tutorials, progress bars, gamification, permissions customization, in-app support, welcome emails, and product update alerts are all best practices.

Types of revenue your app can generate

Each customer has a lifetime value (LTV) for your business. This measurement is the total amount of money they will spend over the course of their lives.

  • Billion dollar companies have LTVs in the thousands. A Netflix customer can easily spend $200/year and thousands in the course of their lives.
  • Companies like King, the maker of Candy Crush, still have LTVs in the hundreds or double digits.
  • An independent app may only have a LTV in the single digits or less than a dollar. These are rarely sustainable.

One of the biggest factors impacting LTV is an app’s revenue source.

You can use a number of methods to generate revenue from your app:

  • Subscriptions
  • App purchases
  • In-app purchases
  • Non-digital products and services
  • Advertising revenue

Subscriptions deliver the most revenue

Subscriptions are the most popular form of app revenue today. A customer who subscribes for $4.99/month can earn you $60/year. That same customer might only bring you $5/year in ad revenue.

While many apps in the “early days” of the app world (2008-2012) survived ad revenue and in-app purchases, the competitiveness of the app landscape and the cost to acquire each user made most apps without subscription models nonviable.

App purchases help you acquire more users

App purchases give you immediate short term revenue. These can be useful for immediately offsetting your advertising costs. For example, if you’re paying $2 to acquire a user, charging the user $2.99 to get started with your app puts you “in the black” so that your business can continue buying additional users.

In-app purchases let you sell more to each customer

In-app purchases (IAPs) are similar to purchases, except that they occur inside the app interface. In-app purchases can be either consumable (like coins or temporary power-ups) or durable / non-consumable (like a pack of stickers that doesn’t expire). Consumable in-app purchases are preferable because they allow you to sell the same product to the customer again and again.

Non-digital product and service sales benefit other business activities

You can sell non-digital products and services to monetize your app. The Amazon app and the Lyft app are both free because Amazon uses their app to sell products and Lyft uses their app to sell rides.

Perhaps you developed your app to offer your customers a product or service that will enhance their experience buying real-world products or services from you? Examples abound in this area including loyalty rewards apps, utility apps, informational apps, and training apps.

Advertising revenue can help you monetize other users

In most apps, 85% of users will not buy anything. That leaves you with one clear option for monetizing these users: advertising.

Google reports that game developers who combine ads with in-app purchases earn double the revenue per download compared to developers who only offer in-app purchases.

The app genres that generate the most ad views (in order) are: games, news, social networking, entertainment, and media. Genres that generate the fewest ad views (in order) are: productivity, travel, shopping, lifestyle, health, tech, sports, and communication services.

The vast majority of ads inside mobile apps are for other apps, and the total ad spend for mobile app installs is $118 billion/year. The easiest way to take part in this market is by adding a SDK for an app ad network to your source code.

Most ad networks pay based on CPM – cost per 1,000 impressions (advertisement views).

The top-paying ad networks today are:

I recommend starting with Meta Audience Network ads and only changing if you don’t reach close to industry standard results. In 2022, Meta is paying:

  • $2.20 per 1,000 iOS impressions of native ads (in which the ad fits relatively seamlessly into your app’s user experience)
  • $4.30 per 1,000 iOS impressions for interstitial pop-up ads
  • $16.30 per 1,000 iOS impressions for rewarded video ads (which users can choose to view or skip)

A combination revenue model gives you the most flexibility

Increasingly, apps that used to be subscription-only are reaching out to users with other options. For example, Disney and Netflix are both adding tiers where users can pay a reduced price in exchange for watching ads.

Imagine 100 possible customers on a pyramid based on what each is willing to pay.

  • The customers on the bottom layer have the most bricks (of cash) available to spend. They’re the people who might spend $249 for lifetime access to all languages on Babbel.
  • The customers right above them are also willing to pay a lot. They’re the foundation of your business. Perhaps they’ll sign up for a monthly subscription for your highest tier of service.
  • The customers in the middle are willing to pay varying amounts of money. Perhaps they’ll pay a monthly subscription on a lower tier. By offering various pricing tiers and in-app purchases, you can maximize revenue from customers who have varying budgets and interest levels.
  • The customers at the top are only willing to pay a small amount of money. It’s not essential to have them as customers. However, they’re part of your addressable market. If you’ve already paid to get them to install your app, perhaps you can package a low-cost in-app purchase that would interest them so you can recoup your advertising investment? If they like your app, they might refer their friends or spend more inside your app down the road.
  • The customers at the top have limited budgets or limited interest. You might be able to entice them to make a purchase with the right seasonal special discount offer. Otherwise, you can monetize this segment with ads.

How to estimate your average revenue per user

For an app development company, there are two steps to win a customer. First, you have to get someone to download your app. Second, you have to get them to spend money in your app. Beyond that, you want to retain the user so you can keep earning money.

When a user spends money, they’re said to have “converted” to a customer.

You can calculate how much money your app will generate per user by building a spreadsheet.

  • In the first column, list of the offers available (each in-app purchase, each subscription option, etc).
  • In the second column, list the price for each offer.
  • In the third column, list the expected conversion rate.
  • In the fourth column, create a formula to multiply the price times the expected conversion rate times 85%. (Multiplying by 85% allows you to factor in the cut that Apple or Google will take before your app’s revenue hits your bank account.)

You can adapt this formula as needed with additional columns to calculate revenue from subscriptions or ads.

You can finish off your spreadsheet by totalling the expected revenue column to arrive at a final “average revenue per user” (ARPU). This number will be essential for calculating the profitability of your business model.

How to get accurate conversion rates

The only way to tell for sure how accurate your expected conversion rates are is to launch your app and check your analytics. Short of this, the best you can do is estimate based on industry standards. Each niche is incredibly different, so look for figures from products that are as close to your app as possible.

How to account for ads in your revenue model

To fine tune your ad revenue estimates, consider these three factors.

Ad revenue depends on the platform the user is on. Advertisers will pay about twice as much to reach an iOS user as an Android user.

Ad revenue is strongly correlated with user retention. If a user spends 8 hours in your app, they’ll see vastly more ads than a user who spends 5 minutes in your app.

Finally, ad revenue is tied to the country where your users live.

  • American users will yield the most ad revenue because advertisers are willing to pay more to reach the US market.
  • Canadian, European, Japanese, and South Korean users will bring in the second best ad revenue per user – about 60% of the revenue per user compared to an American user.
  • Finally, Chinese, Indian, South American, and African users will bring in the lowest ad revenue per user – about 30% of the revenue per user compared to an American user.

Most likely, it will be difficult to get any data from your competitors about their ad revenue. If you need to make a projection, I suggest estimating no more than $1 per user in ad revenue. And only estimate $1 per user if you have an iOS app and you can credibly make the case that your app will retain the average user for 5 hours and at least a third of users will be in the US. This means that in general, your ad revenue will only amount to a small sum until your app hits 1 million users.

Minimize platform fees

Apple and Google both charge businesses 15-30% of all revenue generated from digital products sold in their app stores. This includes subscriptions, app purchases, and in-app purchases for digital goods.

I recommend factoring platform fees into your revenue calculations. This is because, while your app may technically make $1 million in sales, you will only see $700k hit your bank account.

There are three ways you can reduce the fees you pay to platforms.

Apply for lower platform rates

99% of app businesses make less than $1 million annually. Until late 2020, both Apple and Google charged a 30% commission on app sales and in-app purchases. In late 2020, Apple introduced a reduced “app tax” for small businesses and Google followed suit in early 2021.

Apply for the Apple Small Business Program

If you made less than $1 million in the last calendar year from all your iOS or Mac apps, then you can apply for the App Store Small Business Program. The program will reduce the tax you pay to Apple from 30% to 15%.

After you pass $1 million in sales, Apple will apply a 30% app tax to your future sales. If you fall below $1 million in sales in a future year, you can requalify for the special 15% rate.

You only need to do a few tasks to apply.

  • Sign up for the Apple Developer Program, which is required simply to launch apps on the iOS and Mac app stores.
  • Fill out your paid app agreements, which Apple also requires to launch apps
  • Click “Enroll Now” on the Small Business Program sign-up page.

Apply for Google’s 15% Service Tier

As with Apple, if you made less than $1 million in the last calendar year on all your Android apps, you can pay Google a 15% service fee rather than 30%.

To enroll in Google’s 15% service fee program, you just need to do the following.

Sell non-digital products

Your business can skirt app store fees if you offer services outside your app. For example, you can sell physical products that you ship in the mail and services like consulting sessions or training classes.

Some businesses are better off selling non-digital products in part so that they can avoid paying such a significant share of their revenue to app stores.

Distribute your app for free

If your app functions as a marketing tool or facilitates operations for your business, then you may not need to monetize the app.

Alternatively, you could offer the app for free. For instance, Lofti, a property management software app, allows users to download the app for free and manage their first five tenancies for free. Any more than five tenancies will need to be paid for, however.

If it’s important for your organization to profit directly from digital product sales, but your organization feels significant financial pressure from Apple’s or Google’s “app tax”, you can consider supporting the Coalition for App Fairness. The coalition lobbies for antitrust legislation to address Apple’s and Google’s alleged abuse of their monopoly power.

Subtract Your Cost Per Install

For most developers, the biggest line item on their income statement is the fees they pay for advertising platforms.

Typically a developer bids for a CPI – a cost per install. Ad networks calculate CPI as your marketing campaign spend divided by the number of installs you receive from your campaign.

Factors that Affect App CPI

App developers generally pay from $1 to $8 per app install. The CPI you pay will depend on the platform (iOS on the high end, Android on the low end), country (US on the high end, Brazil on the low end), and app genre (shopping apps on the high end, weather apps on the low end).

Business of Apps published CPI statistics for 2022. The average mobile app CPI by region is as follows:

  • $5.28 (North America)
  • $1.03 (Europe, Middle East and Africa)
  • $0.93 (Asia Pacific)
  • $0.34 (Latin America)

iOS apps cost more per install than Android.

  • $3.60 iOS app CPI globally
  • $1.22 Android app CPI globally
  • $4.30 iOS games CPI globally
  • $1.15 Android games CPI globally

CPI for Apple Search Ads

Apple Search Ads Basic and Apple Search Ads Advanced are popular for app advertising since they let you target users based on the searches they’re already running in the App Store. 

Apple Search Ads Basic charges by install (CPI), which they also refer to as Cost Per Acquisition (CPA). With this platform, most apps cost $0.70 to $2.00 per user acquisition and this has remained fairly consistent over time.

Apple Search Ads Advanced charges by tap (CPT). Additionally, with the Advanced option, you can choose specific placements and keywords.

You can generally get a lower CPI using Advanced, but this requires optimizing your screenshots and app descriptions to ensure that people who tap on your ad also download your app. 

CPI for Facebook App Ads

Facebook App Ads allow you to target users by demographics and interests. Facebook Ads data shows that the average iOS app costs about $2.00 per install and the average Android app costs about $1.00 per install.

How to Estimate Your App’s CPI

The best way to find out your app’s CPI for your intended audience is to launch an app and start bidding. Typically you’ll have a target that you want to hit – for example, to get 500 new users per day. As your target increases, you’ll need to pay more to attract each additional user.

If you’re not ready to launch your app but you need a projection, pencil in numbers based on your closest competitors or app genre. If you can’t find this information, pencil in a $4 CPI for US-based iOS users and a $2 CPI for US-based Android users.

I recommend these higher estimates for two reasons.

  • By “anchoring high,” any lower CPI costs you might achieve will exceed expectations rather than break your business model.
  • Higher estimates will help you accommodate seasonal pricing fluctuations. This way, you can still afford to pay for installs even when your competitors increase their bids.
  • You’ll also be able to deal with pricing shocks that can occur due to industry disruptions like the recent disruption in Facebook Ads from Apple’s App Tracking Transparency feature.

Given the substantial cost just to get a user, you can see why it’s critical that your app effectively retain and monetize users.

Subtract Your Server Costs

Most apps that require a server will use either Amazon Web Services (AWS) or Google Firebase.

Review the pricing for AWS and the pricing for Firebase. Next, confer with your developer on the cost you should anticipate for 1,000 users, 10,000 users, and 100,000 users. This will help you forecast your server costs per user for different stages of your business.

Subtract Your Staffing Expenses

The majority of apps fail in part due to underinvestment in marketing, customer service, and ongoing app development. If you’re handling all these functions yourself, you’ll likely benefit from partnering with people who will complement your capabilities.

If you’re seeking investment, you’ll benefit if you can forecast your expenses around each of these activities. So let’s take a look at the tasks involved in each, where you can source talent, and the costs you should expect to pay.

Marketing

If you hire a marketing specialist, I recommend seeking a candidate who has experience managing app advertising and publishing campaigns on the ad platform you plan to use. There are other marketing skills that will be valuable to you. You can list these as “preferred but not required” so that you don’t over-filter candidates.

You might plan for your marketing specialist to handle the following:

  • Publishing and advertising campaign management (experience filtering preferred)
  • Managing influencer campaigns (hiring influencers, measuring CPI, and optimizing campaigns)
  • Submitting quotes to journalists on HARO
  • Managing social media (creating video and image-based content and moderating conversations)
  • Blogging (1 post every 2 or 4 weeks)
  • SEO outreach (link-building experienced with AHRefs)
  • Responding to partnership inquiries and messaging potential partners about co-marketing opportunities

You can hire a full-time marketing specialist for roughly $60,000/year or $5,000/month. If this is out of reach initially, you can hire someone part-time to do the work that is most essential – usually managing ad campaigns and influencer campaigns.

As your company scales, your marketing specialist may decide to hire out some of this work. For example, they might hire an agency that works with journalists through HARO, a blogger who can write more cost effectively at $0.10/word, or a SEO specialist to help your site gain visibility on Google.

As your marketing specialist and you work more closely, you may also decide to test more marketing tactics that are specific to your audience and product.

It’s difficult to track the CPI (cost per install) for marketing activities other than direct advertising campaigns. However, after some experimentation, you’ll be able to hone in on the activities that are giving you traction.

While you could forego other marketing activities and just focus on advertising, it can be helpful to develop public awareness of your app. Once people have heard about your app on social media, they’re more likely to download it when they see it advertised. This lowers your CPI and makes your advertising campaigns more affordable.

Customer Service

It’s common for a CEO to double as a customer service specialist, and to dedicate an hour a day to responding to customer emails. If this task begins to take longer than a couple hours, you may want to outsource it and price in the expense to your business model.

You can hire affordable customer service representatives on UpWork for $15-25/hour. The quality of your results working with CSRs will depend on how well you train them. So make sure to dedicate a few hours to teaching each CSR exactly how to handle every problem you can think of and the best practices for communicating with your customers.

Ongoing App Development

If your app gets traction, competitors will eventually step in to take away your market share. This is why you need to invest in continually updating your app to stay ahead.

Your app developer’s duties will include:

  • Managing any cloud services associated with your app including AWS or Firebase
  • Logging customer issues in Basecamp or Jira and turning these into actionable tickets
  • Communicating with you on the priority level of each ticket
  • Implementing changes as needed in the source code
  • Bug testing new updates on a selection of devices (a task your developer may want to outsource)
  • Submitting app updates to Apple and Google Play
  • Discussing future app development with the CEO and other company leaders and projecting costs for new features
  • Developing new features, and hiring associate developers and designers as needed

A full-time developer will usually cost you $80k/year. If you’re preparing a financial model, you should price in a full-time developer so that you can resolve issues that your customers bring up and implement new features to stay ahead of your competitors.

If you’re not ready to hire a full-time developer, you can also hire a developer to work on an hourly or milestone basis on UpWork.

Put It All Together

If you haven’t already, go through this article again, step by step, and pencil in the formulas and numbers for each part of your financial model.

The sections  you should include are:

  • + Total Revenue
  • – Cost Per Install
  • – Server Costs (if applicable)
  • – Staffing Expenses

You can plug in different numbers of installs per year to show yourself (or investors) what your business will look like with 1,000 annual installs, 10,000 annual installs, and 100,000 annual installs.

Project app installs more accurately with real-world data

Next, check against real-world data points to ground your numbers reality.

For example, if you’re building an app that helps photographers collect release form signatures from models on-the-go, you could visit photography Facebook groups dedicated to portrait or street photography and note the number of people in each group.

To go a step further, run a poll in these groups (check with the admins first) to see how many members would be interested in an app like you have in mind. Ideally, follow up by asking if photographers would be willing to pay a modest subscription of $1.99/month for your utility app.

Now, choose a number of likely users from this research to plug into your app financial model. This approach will help you narrow in on a specific number of potential users.

Make a spreadsheet for your app’s financial model

If you’re pitching to investors, you can save a lot of time by downloading a template for your financial model.

I recommend a template by Jose Cayasso. You can buy his mobile app financial model template for $79 and you can watch his tutorial on how to fill it out on YouTube. (This is not an affiliate promotion. I just recommend his product.)

Your spreadsheet is only as good as the numbers you put into it. So if this sheet seems overkill for your purposes, I’d suggest making a simpler model in Google Sheets and plugging in the data that’s relevant for your project.

Conclusion

As CEO, it’s your responsibility to come up with a realistic financial model to present to investors, or even just to manage your own finances and risk exposure.

As your app enters the marketplace, update your models with the latest data at your disposal. This will help you follow your strategy or revise it as needed so you can minimize debt and reach profitability as soon as possible.

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