Good entrepreneurs are often brilliant at spotting gaps in the market and leveraging their apps to fill these gaps. They’re good at setting up new apps and monetizing them through the right channels.
However, many talented entrepreneurs stumble at one key hurdle - evaluating the apps they build.
Putting a dollar value on a mobile app is difficult. Mobile apps only came into the mainstream in 2008. In the larger scheme of things, apps are still a new trend. It is never easy to quantify the value of something new in the world of technology.
Some might ask the need to evaluate a mobile app. When raising money for an app startup, entrepreneurs have to put forth the investment they need and the percentage of the company they’re willing to offer in exchange.
In such cases, it becomes vital for companies and entrepreneurs to know the true value of their app. They can then negotiate a better deal when dealing with investors or even selling their app.
App resellers are another set of professionals who would see the value in learning app evaluation. Whether the app is built from scratch or created with a free iOS and Android app maker, it has a material value. The job of resellers, entrepreneurs, and companies with an app in the market is to reach the right evaluation.
This piece provides a step-by-step guide on app evaluation. Entrepreneurs can use this method to get a basic idea of where their app stands in the market.
Step #1 - Get a baseline
There are many factors which contribute to the overall value of a mobile app. However, it makes sense to first start with the actual earnings of the app. This creates a baseline on which other important factors can be added.
There are two ways to establish an earning baseline -
Number one - Seller’s Discretionary Earnings (SDE)
SDE is ideal to get a baseline for companies which are still earning less than $5M from their mobile apps. Typically, SDE does not account for expenses like taxes, interests, and depreciation. It is a raw calculation of the earning of a company which takes into account the operating expenses, cost of maintaining the app, and the salary paid to the chief executive.
This is the formula -
SDE = Revenue - Cost of goods sold - Operating expenses + Executive compensation
Number two - Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
This evaluation is ideal for businesses earning more than $5M and need to account for expenses like taxes, interest, and so on.
The formula for EBITDA is given as follows-
EBITDA = Revenue - Expenses + Depreciation + Amortization
By accounting for expenses like taxes and interest, EBITDA is able to represent the true earnings potential of an app. This is because the expenses are counted for apps with a high revenue volume.
Step #2 - Calculate non-financial investment
Once you calculate an earning baseline, should it alone represent your app value.
The short answer is no.
It takes a lot of effort to bring an app to a point where it starts earnings money. This effort is often hidden behind financial metrics like SDE and EBITDA.
Firstly, entrepreneurs and companies take a big risk in starting the process to create an app. Building anything new involves some kind of risk. This should contribute to the overall value of the app as well.
There are many other factors such as the value of the team working on the app, their longevity to the project, the future vision planned by the team, and so on.
How does one boil down these factors into real numbers?
Here’s a simple question which will help you arrive at a number - how much money would an investor need to create the exact same app without your team and resources right now?
At the end of the day, this number is the real value of your app. This is why different investors want to invest in your app in the first place. The investment another company would have to make to create an app as good as your own and reach the same level of users and earnings marks the real value of your company. This should ultimately add upon your base earnings.
Step #3 - Setup growth metrics
Anyone investing in your app or buying it forever would ideally want to know about its future. Some apps show incredible promise for a short period of time but fade away later. This is fairly common in the mobile app market.
If the iOS and Android app for your WooCommerce store sells phone cases for a particular model, your business strategy doesn’t exactly promise longevity. This is because your phone cases would become useless when people start using another phone.
This shows the need to provide key growth metrics. These metrics provide a glimpse of where an app can be over a long period of time. There are various mobile app analytics tools such as App Annie and Firebase which enable analysts to create powerful reports. These reports typically point to the potential of an app across various verticals, from acquisition to retention and monetization.
Step #4 - Market perception and competition analysis
An app can have the best monetization metrics and growth opportunities in its path and still fail to get a right evaluation without the right perception.
The right perception can come from various factors such as ratings, reviews, and quality compared to the competition.
Let’s take an example. Assume you plan on reselling an app you built with an online app builder. There are many tools these days which will enable you to learn how to convert WordPress to mobile app.
If the app doesn’t get a decent rating on an app store, you cannot hope to get a fair price while reselling. The buyer won’t pay a premium for an app which doesn’t have a decent perception amongst its own users.
The stature of an app compared to its competitors also shapes its perception. A small-time ecommerce app cannot be valued on the same level behemoths like Amazon and Walmart are.
App evaluation is important for a number of reasons. Entrepreneurs need to learn how to value their app when looking for funding for their startup. App resellers need to learn app evaluation as they’re in the business of selling mobile apps.
This piece provides a complete analysis on the process of evaluating a mobile app. There are many other factors which contribute to the value of an app as well. The ones covered here can help entrepreneurs come close to the right value of their mobile app.