The trend of mobile app development is getting strong. Companies ranging from startups to large-scale enterprises are employing developers or contacting app development companies to create mobile apps to drive their growth. Besides the crucial aspect of app development, achieving the highest return on investment is another significant concern for them.
As a business owner, determining your app’s value is the best course of action. Mobile app valuation provides a clearer picture of the app’s performance and helps you decide whether it’s the right time to sell or invest in the app. However, like any other business, apps are pretty complex, and their valuation requires understanding factors affecting the valuation and various methods.
This blog will serve that purpose for all those looking to read quality content on app valuation. We’ll discuss various ways to find the value of a mobile app. However, before proceeding, you should know why app valuation is important and what factors are considered for correct valuation.
Importance Of Mobile App Valuation
Assessing an app’s worth is crucial for several reasons. First, it enables owners to know the app’s market value when they choose to sell it. Second, by obtaining a precise valuation, app owners can also enhance their bargaining power to secure a more favorable selling price for their applications.
Furthermore, understanding an app’s valuation reveals opportunities to enhance its marketability and achieve success in the competitive app industry. For instance, recognizing that the app has fewer users may prompt a focus on strategies to boost user acquisition and elevate its overall value.
Having a straightforward mobile app valuation also facilitates more strategic business decisions. With a reliable estimation, developers and marketers can make well-informed choices about investing in new features or marketing campaigns to increase the app’s worth further.
Critical Considerations For Mobile App Valuation
Assessing The Financial Data
When evaluating your mobile app’s worth, it is crucial to closely monitor and utilize financial records that encompass historical earnings, costs, and profits alongside monthly or annual revenue figures. These financial records are indispensable as they provide a foundational benchmark for the app’s valuation.
User Engagement And Acquisition Metrics
Accurate measurement of user-related metrics is another vital component in mobile app evaluation. This metric includes
- Data on active users
- Rate of new user acquisitions
- Cost of acquiring new users
- User engagement rates
- User retention rates
- Insights into the age groups
- Demographic reach
- User behavior patterns
- Bounce rates
Market Competition
Identifying applications that offer similar services is fundamental in the competitive landscape. Understanding the market value of these competitors and examining details of their recent financial activities and unique selling propositions can provide valuable context for your own app’s market standing.
Sources Of Revenue
Mobile apps generate revenue through channels, including in-app purchases, subscription models, advertising, and affiliate programs. In 2022, approximately 5.195 million mobile apps amassed $567.49 billion from advertising alone. It is essential to examine each revenue stream in detail and understand their contributions to your total income.
Intellectual Property Value
Intellectual property rights, such as patents and trademarks, can significantly enhance mobile app valuation. These aspects should be carefully factored into your overall assessment.
Stage Of App
The current stage of your app’s development significantly influences its value. Younger apps, such as those less than six months old, experience slower growth and present uncertainties regarding future success.
Conversely, apps in a more developed stage with a stable user base display consistent performance that can be critical for accurate valuation.
Various Methods Of Mobile App Valuation
Cost-Based Approach
This mobile app valuation strategy considers the development timeframe and costs.
When To Use?
This approach is ideal for apps at their inception or those with limited financial records. It is also apt when the app is innovative and no similar market comparisons are available.
How To Execute?
- Calculate the expenses in creating a comparable application, including design, development, testing, and marketing costs.
- Consider the potential cost of the development team’s time, which could otherwise be allocated to different ventures.
When opting for a cost-based valuation, consider them.
App Development Cost
Consult a leading app development firm to obtain precise costs, including design, programming, testing, integration of third-party APIs, and other additional costs.
App Updates
Factor in post-launch updates and maintenance costs to ensure the app’s long-term functionality.
Depreciation Cost
Mobile apps, as intangible assets, have a limited lifespan. Include depreciation or amortization in your calculations.
Combine all costs using the formula.
App Value = Total Development Cost + (Cost of Enhancements or Updates) - (Depreciation or Amortization)
Although only sometimes pinpoint accurate, this valuation helps you assess if your investment is sound.
Advantages
Simple and fairly straightforward to compute.
Disadvantages
- It ignores potential future earnings and the intellectual property’s worth.
- Steps for applying the cost-based approach:
Income-Based Approach
Just like the past, the future is also significant. You can determine the app’s value using the Income-based method. This mobile application valuation technique lets app owners forecast future cash flows and present discounted values. To employ this valuation method, use the following formula:
Valuation formula = ∑ (CF / (1+r)^t)
- CF = Annual cash flow
- r = Discount rate (the expected an investor seeks to invest in the app)
- t = Cash flow year
When To Use
Appropriate for apps with proven revenue history and stable projected cash flows.
How To Execute?
- Forecast the app’s future revenues and expenses for a designated term (typically 5-10 years)
- Apply this discount rate to the projected cash flows, converting them to their present worth.
- Identify a suitable discount rate that reflects the app’s future cash flow risks.
- Aggregate these present values to conclude the app’s valuation.
Advantages
It centers on the app’s potential future profitability and covers associated risks.
Disadvantages
It relies on numerous assumptions and forecasts, which can be subjective or imprecise.
Market-Based Approach
As previously outlined, whether you term it competitor analysis or a market-based approach, it assists in understanding your current market standing. With this approach, you identify significant competitors and learn about their journey to success.
Determine the valuation using:
Mobile app valuation formula = Your App’s Financial Metric * Valuation Multiple
Valuation Multiple = Average or Median (Comparable App Metric/Comparable App Value).
For instance, with an average revenue multiple of 4x derived from comparable apps and your app’s $500,000 in annual revenue, the value estimation would be:
App Value = $500,000 * 4 = $2,000,000
This calculation gives your market value, yet it’s not the sole method for market valuation. Consulting with professionals is recommended to enhance accuracy in market-based app valuations.
When To Use
Suitable for well-established apps with available market comparables or transaction data.
How To Execute?
- To apply this app valuation method, begin by researching and comparing recent transactions and market trends of apps similar to yours.
- Gather essential data before using the formulas.
- Identify apps similar to yours in industry, scale, services provided, revenue strategies, target demographics, and more.
- Collect recent and relevant financial information on these apps, including revenue, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and the active user base.
- Choose an appropriate valuation ratio (e.g., price-to-revenue, price-to-earnings) derived from industry norms or past deals.d. Use this ratio to calculate your app’s estimated value based on its metrics.
Advantages
Mirrors present market trends and are straightforward for investors to grasp.
Disadvantages
It depends on comparable data and might need to look into distinct characteristics or potential growth.
User-Based Approach
This mobile app valuation approach is essential for understanding your app’s worth from a user perspective. Many businesses overlook the significance of active users, who are critical in determining an app’s value.
To compute your app’s value based on users, you need:
- Total active users and the value each user contributes.
- To estimate the value per user, consider the app’s monetization strategies, average revenue per user, user engagement, and anticipated growth.
Apply this formula:
App Value = Number of Active Users * Value per User
For example, if there are 100 active users, each valued at $5, the approximated app value is:
App Value = 100 * $5 = $500
This method reveals your app’s value based on users and helps identify competitors with similar target audiences and user bases.
When To Use?
It is suitable for apps with extensive user engagement and significant user metrics.
How To Execute?
- Assess crucial user statistics like daily active users, average revenue per user (ARPU), and user retention and involvement metrics.
- Multiply this value by the total user count to gauge the app’s valuation.
- Assign a financial value to each user drawing from industry standards or historical analyses.
Advantages
Directly correlates the app’s worth with its user engagement and base size.
Disadvantages
It may overlook possible future expansions or shifts in user behavior.
Concluding Remark
A transparent mobile app valuation is significant for your app due to its role in buying, selling, and taking other strategic actions. By applying the strategies and advice we’ve outlined, you can enhance the value you offer to your customers and position your app competitively to achieve the best possible selling price in the market. If it’s difficult to determine the actual value of your apps by yourself, we recommend contacting experts to do the valuation.
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