When it comes the time to sell an app or to attract extra funding, this decision requires a deep analysis and consideration from several perspectives. Moreover, you need to understand what factors influence an investor’s decision. App valuation is important for investors and founders because they need to be sure about the app they want to invest in or buy. Together with Alon Waller from Bluethrone, an app acquisition company, we will discuss the factors that affect subscription app valuation, how to calculate it, and how to measure and optimize the metrics that affect investors’ decisions. Moreover, you get useful insights about what real investors are ready to pay more and what makes an app attractive for them.
3 Key Factors That Affect an App Valuation
Usually, when thinking about app valuation, app owners think about churn rates, LTV (Life-time value), or other important metrics for subscription apps one by one. But the point is that everything is connected, and you need to look at the whole picture to understand it.
Investors see the app valuation process as a crime scene, and every app has its own story. Their goal is to find out what’s really happening behind the scenes. When they are looking for an app, they go deep into numbers to make sense of the story and to understand what is the essential value of the app. Therefore, for app developers or owners, it is essential to look at the numbers and optimize them because investors are looking at these same metrics.
There are 3 main factors that developers or app owners should consider while deciding to sell the app:
Factor #1 – Is the App Growing or Dying?
The first factor is understanding whether the app is growing or dying. Let’s look at the example in the picture below.
You can see there are two apps: one of them is app A, making 567K per year, and the other one is app B, making 488K per year. And without going into the numbers and digging into all the metrics, it seems like both apps are doing well and probably work pretty much the same. However, here you need to consider what is called “new money” and “all money” or “renew money”. Basically, you need to compare new and old revenue growth.
What we see here is that app A has only 5% of new money, which means that it relies on 95% of all app money. But not only the total amount that your application has attracted is important here, but also when there was an increase and what the level of growth is. Although app A makes 567K per year, app A can be considered as a dying app.
Let’s look at app B. It has about 50% of new money versus old money. There is a good balance between the growth stages.
Such numbers, however, also depend on the life cycle of the app. If the app is starting to grow and just implement a subscription, the new money or activations can be 80% or even 90%. And the old money in this case will support the app and keep it going.
How to Get the Full Subscription App Numbers?
Sometimes app owners have some difficulties with getting the KPIs numbers or tracking the right metrics because their analytics platform does not show it. But in the app subscription business, it’s pretty essential to know the new money, renew money, LTV, and these very important indicators in order to take your app growth stable on each growth stage, maybe to the exit. To get proper subscription app analytics, you need to install special analytic infrastructure, like Qonversion.
Qonversion allows you to differentiate two events for subscription started and subscription renewed, and like this, you can easily and instantly see the ratio between them and identify whether the app is growing or dying. Moreover, you can also get deeper and see how your app is doing in different countries using the country filter. In a few clicks, you can get crucial indicators and metrics. It’s important because if the app owner has everything already set up and ready to show to investors, it makes the process much easier.
Moreover, it also can help to create a better valuation because you can show the real data without any additional estimations through formulas, etc. that might hurt the app valuation itself.
Why Is the App Dying?
We found out that investors look at the new and old money to identify whether the app is dying or not, but what else can notify you about your app’s soon death?
Niche in decline
It is evident that if the niche is declining, all the apps from it will be dying too. No one wants to use applications that are not needed and irrelevant. You need to analyze whether the niche where you operate is growing, what the recent trends are, how well competitors are funded, and what the level of competition is to understand your app valuation.
Sudden loss of core keywords
Investors also pay attention to the core keywords lists. And the more you rely on one keyword per one country on one platform, the more risk you have to lose it all. Therefore, you need to have a different core keyword list for each country and each of the stores. It allows investors to assess the level of risk and the less risk there is, the better valuation you’ll get.
Competition with better value or offer
Your app should be a great app and fit the market demand. It should deliver real value, have a unique selling proposition. and be useful for users, not just connecting to some kind of API and being easy to copy.
Unhappy paying users
Positive reviews mean that your users are satisfied with your app and it brings value for them. Bad ratings can tell a lot about your app, and if there are too many bad ratings, this might be a problem. Investors usually look through the reviews and check their reliability. Of course there can be some spam reviews, but they are not taken into consideration.
Onboarding process is important for customer retention and loyalty. If there is an outdated onboarding process customers may not convert into paying one after the install and there will be a big churn, which is alarming to investors.
Factor #2 – Subscription Optimization
So, let’s move on to the second factor. It is the three-step subscription funnel: downloads – free trial – activations.
When investors are looking for an app, they carefully analyze these three metrics in order to understand the health, app monetization level, and the willingness of the users to pay and subscribe. For example, an app has 1,600 daily downloads, and the free trial conversion is 13.9%, which means from this 1,600, 13.9% converting to free trial. Then users start using your app, and, the activations from them are 30%. The benchmark for a good health indicator for a subscription app is beyond the 10% conversion to free trial and 30% and above for the activation to become a paid user.
Let’s see what happens if we optimize it. Let’s say the yearly subscription price is $6,99, downloads are 1,600, the free trial conversion is $13.9, and activation is 30%, resulting in a daily revenue of $466. Now we increase each indicator by 10%.
We will now get 1,760 downloads, and the conversion will be 15%. The activation increased to 33%, resulting in $621 in revenue. A tiny 10% increase in each of the three sub funnel steps equals a 33% increase in revenue. Not bad, don’t you think? Let’s see what will happen next in the next section.
Factor #3 – The Insane Power of Multipliers
The third factor is the insane power of the multiplier, and it follows from the previous section.
We now have $621 from this 10%, 10%, 10% optimization. The most common multiplier is 36 months. However, you can have even more or less, depending on the essential metrics and how healthy your app is.
Let’s calculate the original app valuation. Remember, we had 466$ daily revenue, and then we multiplied it by 30 days to get $13,980 in monthly revenue. We multiplied the monthly revenue by 36 months (that is our multiplier). Therefore, we get $503,280 for the app before optimization.
Then once we slightly optimize the app and make the same calculations, the valuation jumps to $670,680.
You can even get a 20% increment for each indicator with good optimization, and it will give you an 73% increase in revenue. Use A/B testing of different onboarding screens and prices. It is a great instrument for experimenting and identifying the best performing options.
Let’s return to our example. We slightly increased the price (from $6,99 to $7,99) and a 20% app optimization. After all calculations, we now have almost 1 million dollars in app valuation. That is the insane power of multiplier—a tiny 10% to 20% app improvement can actually double your exit package.
What Else Affects App Valuation
There are also a lot of things that investors pay attention to when buying an app, but they are more or less individual. If you want to have a high valuation for your app, this is the bare minimum (in addition to those we have already listed) that should be achieved:
Listing optimization is what investors look at first. If the listing is optimized and converts from impression to download and your app is not from the risky niche, like dating apps or casino apps, the valuation increases.
Investors also look at the ASA campaigns and its optimization. Having some keywords that actually convert downloads to activations and to paying users increase your app value
It is better to sell an app when the trend is growing and not starting to deep dive.
Investors should understand the size of the market you’re in. For example, it is some specific and unknown niche market that lowers app valuation.
Usually, investors use AI predictions on top of the current numbers. It helps them to better understand what will happen with these trends, with these numbers, with this LTV, and where the app will grow.
App age is also an important factor for app valuation. Because, for example, if your app is young and about three month old, it’s better not to sell it and focus on its optimization and growth. The more the app is operating stable, the higher valuation it will have. Your app should be at least 6 month old, but still 12 or 18 month will say more about the stability of the app, and you will get a higher valuation.
Offer conversion rate
Offering code conversion rate is a crucial metric for investors. It shows how many unique users react to your offers and actually convert. Moreover, it’s not only saying a lot of things about the product or the offer. It also says a lot of things about the customer: if he’s willing to pay or maybe he has some better solutions out there.
How to Sell an App: The App Sale Process
Now let’s proceed to the app selling process itself.
App valuation process usually lasts for 21 days. It starts with the first stage of on-surface valuation where the brief screening of your metrics without digging into numbers is done.
Then the second stage is deep valuation. This is the stage when you get an official offer from an app acquisition company and tell them how your app works. During this stage, you have two options: You can either choose to sell it or in case there are things you might need to work on.
After the suggested improvements, you can come back in 90 days or in a year, and if you optimize your app properly, then you can sell an app. The final step is closing and the exit.
If you’re a subscription app owner with high profits and a proven track record of successful app growth, sooner or later you will think about selling your app, and for this, you need to know how much your app is worth. In this article, we offered the most basic attributes of high valuation that can be applicable to every app. However, it’s difficult to evaluate each app for every scenario because each app requires a detailed understanding of its unique complexities and operates in different environments. Therefore, exit-planning is the long-term consideration that should be well planned, and when you are ready to sell, your app will be in the best position possible.
If you’re already considering selling your app, it’s time to delve into your core metrics. Use Qonversion to track your subscription data. This tool is very-well fitted for investors’ eyes. To receive a quote for your app, please don’t hesitate to reach out to the Bluethrone team.