When do we buy any products or services? The simple answer is when we understand the money we’ll pay is equal to or more than the value of the particular products or services we generate. It is called valuation in a simple possible way.
Whether getting additional funding or selling off, understanding the actual value of your mobile app is paramount. A high valuation may keep prospective investors away, whereas a low valuation costs you dearly.
Mobile app valuation is a process where both parties agree on the worth of a business to get a fair deal. Mobile app valuation activities have increased due to readily available buyers, sellers, and investors in the market. So, let’s help you decode this with all you need to know.
How Mobile Apps Valuation Works?
There are two factors enterprises usually consider at the time of calculating the total value of their apps. First is the App’s time on the market, and another is its overall user base. Enterprises also calculate their apps by multiplying their monthly revenue by a specified number of months.
Let’s make it more explicit by example: an enterprise has an app for sale that can generate a certain amount of money per month ($1000). In this situation, the owner willing to sell the app will multiply the monthly revenue by a specified number of months (6 months) and then sell it for $6000. It is one kind of mobile app valuation technique practiced by Enterprises.
Generally, the app’s Return on Investment (ROI) or the “month’s worth of revenue” multiplier depends on the cumulative duration the app has been available on the app store.
Here is the main catch of the previous example: if the app has occupied the app store for less than 6 months, then it can be sold with a total multiplied profit amount of 8-9 months, around $8000-$9000. But if it spends more than six months, it can reach the price tag of $14000 to $15000, equal to 14-15 months’ worth of revenue.
However, several other mobile app valuation methods are also available to calculate the total revenue. Owners with fresh applications may opt to use something other than the above mentioned method due to a lack of monetization.
Instead, they are more likely to assess their app’s value depending on the user count or number of downloads. Here also, the same rule is applied to calculate the worth of the app’s users. Formula: Total downloads or Users/Total Revenue.
Different valuation algorithms consider other more complex and difficult-to-understand elements, such as the app’s daily and weekly ratings, user engagements, rankings, etc.
Mobile App Valuation Formula And Metrics
As we know, several subscription-based applications are also available in the market. These applications require mathematical valuation methods; however, traditional formulas, such as deducting expenses from the revenue to calculate the profit, are also used. However, you must understand that the valuation of an app is different from basic profit calculation.
Here are the three best methods for mobile app valuation.
CLTV (Customer Lifetime Value)
And also, CLTV= APRU (1/Churn). Now you might be thinking, what is APRU? Let us describe It as the per-user average revenue generated from different sources within an app, like subscription-based revenue, in-app purchases, advertising revenue, etc. APRU plays a significant role in mobile app valuation.
CAC (Customer Acquisition Cost)
CAC is the money enterprises spend on paid tools, paid promotions/ads, and marketing agencies to ‘acquire’ or ‘retain’ customers. This part is very crucial for any app-developing enterprise.
CLTV And CAC Ratio
Enterprises always try to maintain the CLTV and CAC in a 3:1 ratio since it’s the most beneficial for long-term faithful success.
Formula: App Valuation = Number of app users*(CLTV-CAC)
Major Mobile App Valuation Drivers
Abandonment Rate
What is the purpose of uploading the app to the Play Store or I Store? It’s for the end users to download and use them so that you can generate revenues. Unless your app comes with a paid download, you’ll not earn if users download and do not use it.
A high Abandonment rate indicates the user’s reluctance to use your app after downloads. Studies show that one out of four users don’t use the app after downloading it. Investors hesitate in investing in apps with high abandonment rates for their underlying problems. Look at drop-off points and explore them further to understand why users are abandoning the app in between.
Reviews And Ratings
Not just users but investors, too, love positive reviews and high ratings. It works like a social proof of your mobile apps acceptance to a broad audience. So, if you want an excellent mobile app valuation, encourage the users to share their feedback on the relevant app store.
You can opt for subtle reminders to rate and review the app. If a user is enjoying your app, a gentle reminder now and then is more likely to result in a positive review.
Positive reviews can significantly affect how many people decide to use your app. Recent changes in the Apple App Store’s search algorithm also consider user reviews., affecting how easily your app is discovered on the platform. Similarly, Google Play also considers user reviews when evaluating app quality, which, in turn, impacts your app’s search ranking.
Quality Of App
An app is primarily made with code and documentation. The mobile app valuation will be high if the clean code supports fast, secure, and reliable operations. Similarly, documentation needs to follow best industry practices and due diligence. You need to have a clear policy for everything impacting apps. If it’s good code and you have clear instructions, it’s more valuable.
Financial Data
The purpose of a valuation is to understand the financials better, right? So what if your data shows a consistent loss over a few quarters? Or the numbers of users are consistently down?
Financials is about how much money the app makes and whether it’s profitable. Think of it like any business. If it earns a lot of money and has low costs, it’s valuable. Make sure to have complete and verifiable financial records for valuing your app. You can use best accounting practices to gain investors’ trust for the long-term value of your business.
Growth Potential
If you ask us the single word impacting the mobile app valuation greatly, we’ll call it growth potential. Apps with upward growth will undoubtedly fetch more valuation than the opposite one.
And the reason is apparent. An ideal investor always looks for attractive development rather than stagnant and lagging growth. However, it is also true that investors put money in apps having not-so-profitable financials. They do so by understanding the growth in the future or their understanding of the app’s business model.
That’s like the app gaining new users and making more money over time, which makes it more valuable.
Apps Business Dependency On Owner
The owner is the best brand ambassador for any business. More involvement shows stability and firm belief in the businesses. If owners hesitate to put in enough time, it is more than clear that the business’s interests are diminished or diminishing.
If the app is an active income source for owners, the probability of high mobile app valuation increases. However, it is also necessary to mention that it could be a better sign if the app only depends on you. But it’s more valuable if it can run independently, with the owner’s active support.
Number Of Active Users And Downloads
Will you put money in any app that doesn’t have substantial active users? User activity and engagement are important metrics for mobile apps.
It is because mobile apps are often used daily, and users can quickly become frustrated if they find that an app needs to meet their needs.
Concentration Of Earnings And Platform Risk
Investors always pay attention to the risks of mobile app valuation. Let’s say your app solely relies on a single monetization method: a paid subscription. What if next month, some other business came with identical services at a low subscription or free of cost?
It will impact the future growth, right? Concentration of earnings is a risk for app owners because it makes them vulnerable to unforeseen changes in the app market, such as changes to platform policies or technology.
Concluding Remark
We hope you understand that mobile application valuation is a multifaceted process. It requires carefully examining financial data, user metrics, market dynamics, and technology. A comprehensive appraisal is essential whether you’re considering selling your app, seeking investment, or assessing its worth.
For that, Hybrid App Builder always recommends contacting the experts. They don’t just determine the mobile app valuation by its financial performance but also by its growth potential, user base, and market positioning.
HybridAppBuilders
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