Tag: breakeven

This follows on the breakeven discussion continuing from last Friday and Monday. The interest today is to provide some rough examples to help mobile app developers better gauge their breakeven points not only on the product development side, but the marketing and advertising side, too.

The examples aren’t necessarily drawn out of thin air, but are greatly simplified for easy math. Either way, you will need to research and plug in your own numbers to get a better reading on your requirements.   For ease of reference, we will use the figures from Monday – basically that the physical production of your mobile app comes to $10,000, and involving 3 months of development time.

Your breakeven point on your mobile app development is the easiest part of the equation to define. Marketing and advertising are not free, so you need to budget for the promotion of your app on top of everything else.   Running with the $10,000 breakeven point for developing an app over 3 months of development does not typically include a marketing or advertising budget.

Also, as previously addressed, whether you factor your time and labor in your calculations is likely to have a major impact. That applies not only to the time you spent developing your app, but in marketing it, too.   Even if you are not making par value for your labor, it is worthwhile to keep track of.   Track your actual expenses, your time on development, your time on the marketing and advertising for future reference and comparison.

How much should you budget for marketing your mobile app?

As you probably guessed, “that depends” – on a lot of things, including:

  • size and freshness of your current mailing list
  • size and quality of your social network
  • how readily you are able to connect with media (blogs, ezines, podcasts, radio, television, print, etc.)
  • your pay cycle/s
  • your revenue model

Other components may apply, too – whether you are very much in bootstrapper mode (working with a near $0 operating budget), or you have a job, plenty of savings, whether your app development is done under your name or under the aegis of a business. You need to look at your total financial situation.

Example 1. Free App with CPM based advertising. Using “easy numbers”:

  • You have an arrangement for $5 per CPM on ads you deliver to end users.
  • You estimate your average user will use your app an average of 8.5 hours at 2 ads per minute (1:1 ratio)
  • Your average cost of advertising to get end users runs $2.50 each
  • You end up with a $2.50 gross profit per customer.

Important: The downside to this revenue model is that the full $5 per end user is spread over the lifetime of their use of your app and is further adjusted by the pay cycle of your advertising agent. You can probably expect the bulk of end user time to occur in the first month, tapering off substantially in the second and trickling in the third – maybe a 65%/25%/10% – but the projections and research are on you to perform.  

Knowing your breakeven point, in our example, $10,000 – you divide that by $2.50 to determine that you will need at least 4,000 end users to break even.   Depending upon how cautious or optimistic you are, it is good to provide a cushion as 85% of projects do go over budget. That is a separate topic though.

Using the Free App with CPM based revenue model, in this example, you would ultimately need to invest another $10,000 into advertising – but you won’t need to do it all at once. Provided your numbers stand up to reality,

Cycle 1: Start with $1000 for a theoretical return of $2000 (-$9k from breakeven)

Cycle 2: Apply that $2000 for a theoretical return of $4000 (-$7k from breakeven)

Cycle 3: Apply that $4000 for a theoretical return of $8000 (-$3k from breakeven)

Cycle 4: Apply that $8000 for a theoretical return of $16,000 (+$5k)

 By the end of your fourth cycle, you will have theoretically achieved your breakeven point on physical production, get your initial $1,000 advertising seed money returned, and have an extra $5,000 profit to show for it.

Nothing is ever that simple, nor are the returns always that reliable, suffice that you have to continuously track your app’s metrics and performance – and engage to improve performance wherever possible.  The basic idea is that as long as you are getting back more than you are spending on advertising, you are getting closer to breaking even and closer to making a profit.

To improve your campaign’s performance, you would be looking at possibilities to increase your download/install rate; increase the average time users spend with your app; look at possibilities to increase your advertising CPM revenue; look at possibilities to decrease your advertising costs while retaining the same or better performance.

The most important factor under this model is likely to be shorten your cycle time. If you get paid monthly, you will be looking at this campaign running 4 – 6 months before you can pocket any money as actual profit.

 

Example 2. Straight Premium Mobile App Sales

We’ll use the same numbers as used in the first example. Your breakeven point for your app’s physical development amounts to $10,000. On the vast majority of mobile app stores, the store takes a 30% cut on premium app sales. That’s industry standard and comparable to brick-n-mortar retail, too.

If you are looking to make $5 per app, then you would need to price it on the store at roughly $7.00 (for revenues of $4.90).

In this example, we will consider the advertising rate at $2.00 CPD (cost per download), so you would be looking at roughly $2.90 gross profit. Your breakeven point of $10,000 divided by your gross profit, would require reaching 3,448 end users, or close to $7,0000 in advertising for this example.

Again though, that $7,000 in advertising is not needed all at once. Starting with just $1,000 and reinvesting everything you generate into more advertising would theoretically allow you to breakeven roughly by the end of your third pay cycle.

The main advantage of this revenue model is that you are not dependent upon customer’s usage over time, sales revenues are received faster.

All revenue models can benefit by having multiple components, adding in-app purchases and upgrades, commissions on referrals, and otherwise.

All apps can benefit through continued efforts to improve on conversion rates.

Third-party Premium Subscription Plans can dramatically help you to develop marketing campaigns on a more targeted, heavily localized basis (on a per language, per country, per mobile carrier basis) which is excellent for developing social networking.

It’s a rare product that can be put on a store shelf and sell itself.

The majority of mobile app developers are not breaking even.  That can be attributed to many different things.  Nevertheless, there are strong indications that most developers who are not breaking even are also spending little to no time or money on marketing/advertising.

What this article functionally asserts is that you do not need a lot of money to start with when it comes to advertising, only to do so consistently.


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If you are needing to bootstrap your mobile apps, the following articles can provide you additional tips and perspectives to help you maximize your efforts:

 

As we’ve looked at many of the different expenses associated with app development, we should be able to define a pretty good breakeven point. As long as you are breaking even, you can do whatever you want to do for as long as you want. Unfortunately, defining our costs is only half of the equation. It is the easiest half, but is frequently ignored for the second half, i.e. actually trying to break even.   If you don’t know your breakeven point, in most cases you won’t really know if you are making a profit.  [Editor:  About 60% of mobile developers are not breaking even – see this PCMag article and app-promo.com infographic.]

If you have a day job that more than meets your cost of living requirements, you have far more latitude in defining your breakeven point than if you are completely reliant upon your app development for your livelihood. A good day job offsets the need to include your labor, your computer and mobile devices that you already have, probably your utilities, rent and insurance, too. However, if you are looking to switch to mobile app development on a fulltime basis, you will want to track your relative performance on a reliable basis (say 3 to 6 months of your app-based income) before making a transition. That is, you may have a day job but develop apps in the evenings as a sort of second job.

Several surveys indicate that the cost of developing a relatively basic app runs up to $10,000 over 3 months. As mentioned previously, you don’t want to be in a position of relying upon a single idea for a mobile app. You want several apps to evaluate – examining each relative to your means (programming skills, graphics, marketing capabilities, time, possible difficulties, etc.) and the app’s potential (what others think of the idea, compatibility, target market demographics, etc.).

Revenue Model

Before we get into defining your marketing budget, you need to define your revenue model/s. Will your app be free to play and rely upon in-app advertising? Maybe freemium with in-app purchases and upgrades? Premium? Subscription model?   Do you have any B2B components or sponsors? Will your app have other possibilities for monetization (i.e. survey capabilities, promotion of other apps, prominently focus on email and newsletter marketing)?

Target Market

We also want to take exceptional care in defining your target market. There are two parts to your target market. The first part is the largest and includes your end users, the people who will play your game, use your utility, etc. The second part considers what businesses, products and services your end-users will be interested in – thereby opening doors for business to business possibilities, as referenced above. If you are able to reach people specifically interested in one thing, your app will be of interest to others trying to reach those end users, too.

App Pricing

This deserves an entire article (or five) unto itself. Your app pricing ties into both your target market/s and your revenue model/s. Of particular interest on defining price for your target market, if you are marketing on an international basis, you will want to include price segmentation for end users in different countries with widely varying incomes.

  1. Free with CPM Advertising – If you are going with a free app wherein all of your revenue is derived from advertising directed to your end users, you have the complex job of determining the average value of that advertising relative to the average lifespan of your app. How many hours will your end users play? How many ads will they see per hour?   What do you receive on a CPM basis?
  2. Free with Commission Advertising – Alternatively, if you can set up with an affiliate system to get paid on a commission basis for all referrals your app generates who make an order – you need to get an idea of your conversion rate, their average order, your commission rate, duration of any cookies and potential for subsequent orders. Many affiliate programs offer bonuses on volume using a tier system, so this is another factor to evaluate.
  3. Freemium – If selling in-app upgrades, vanity items, or other in-app purchases, you have the hard task of defining the lifetime value of your app. If your app is like many MMO-style games, you may have to factor that 80% of your users will spend little to no money and rely upon your 20% super user group (which includes about a 4% hardcore user group). Each app is different, which is to say that there is likely way for the same app to be structured in several different ways depending upon your programming ability.
  4. Premium – Just because you go with a premium app does not preclude you from offering in-app upgrades and other in-app purchasable items. An app needs to be quite distinctive to compete in the premium market, suffice that it does provide some greater ease in calculating your advertising budget requirements as you are mainly looking at conversion rates.
  5. Service-based Subscription – For those licensing an app on a periodic (monthly) basis, you need to know your conversion rates and average subscription lifetime.
  6. Third-party Premium Subscription Plans – This includes models like the Opera Mobile Store Subscription Service which is offered to end users via participating mobile carriers. This requires some time participating in a program to assess, suffice that conversion rates are typically higher while revenue per download is lower than a premium offering.  Three advantages apply –
    • Economy of Scale with
    • built-in localized price segmentation and
    • essentially free (if basic) advertising.

Your earnings are based on the number of downloads your apps receive compared to total number of downloads relative to total subscription revenue per pay period.

This is the one model where you don’t need to budget any advertising costs unless you want to reinforce this program, probably focusing on social networking methods.

With this, I will cut it short and aim to provide some specific examples on Wednesday drawing upon the points here.   It seems worthwhile to go through the full breakeven analysis process, too – so we may do that on Friday.   The most important components here are delineating approaches to doing the critical thinking on your own to apply to your own apps.

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About 60-65% of developers are not breaking even with their mobile apps. Congratulations if you are!  [Editor:  About 60% of mobile developers are not breaking even – see this PCMag article and app-promo.com infographic. ]

What is “breaking even”? That depends upon whether you are expecting to see money for your time, or not. You might be a first time app developer not expecting to make money. You might be donating your time for a cause, or engaging a particular app as a “labor of love”. In these cases, it’s reasonable to not expect money for your time.

Otherwise, you are likely expecting to at least meet the costs of developing an app. Understand, too, that as a business, depending upon your countries and laws, your business expenses are deducted from your earnings. Properly managing your expenses can save on your taxes. Even if you are not engaging app development as a business, it probably does have an impact upon your cost of living.

All of the following are expenses:

  • Cost of your computers and smart phones
  • Cost of Internet Service Provider and mobile subscription plans
  • Office Rent and if you work from home, you may be able to assign proportionate use.
  • Office materials not part of products or services sold
  • Utilities (electricity, water, garbage disposal, etc.)
  • Insurance (apartment/home/office/health/business vehicles)
  • Administrative fees and registrations required to do business
  • Possible to include educational expenses
  • Business travel and entertainment
  • Advertising and marketing costs

If you goal is to make a profit on your mobile app, these items and probably more (minus your time) can be used to help define your breakeven point.

If you do plan to make a profit, you do want to include your time. That is especially the case if you have no other form of revenue.  The same applies to any employees. Cost of labor is likely to be your #1 expense when it comes to mobile app development.

Wages and salary are significantly influenced by the country, sometimes the state/province, and even the city or neighborhood, in which you live. A programmer in New York City might be earning $100 an hour while the same developer in Ukraine might make $8-10 an hour.

As your own boss, you get to set your own wage/salary expectations. The only question is meeting them. Monthly wage is probably easiest to start with, as you know your monthly expenses – you want to recover those expenses and get ahead some.

The idea is that as long as you make $x per month, you can do what you want to do, indefinitely, for as long as you want. That’s an awesome position to be in. It beats having to do a job you detest, forever. It passes the “Hot Fudge Sundae or Hot Poker in the Eye” test, hands down.

Any extra money you make should stay in your business account or remain allocated to your business. Handling your extra “business” money is a completely separate topic.

Adding your real business expenses with your expected (reasonable) salary provides you a real breakeven point to work with. It provides you the basis of comparing and analyzing your prospects for success with a specific app.

There are a few points to conclude with:

  1. You should try to never be in a position to where you are reliant upon one idea for a mobile app. You want to have many possible projects on the drawing board. You want to evaluate all of them and assess which of them has the greatest potential to offer a return on your investment.
  2. Your app is an investment; the only question is how well it will perform.
  3. The value for your time considers what you would likely make in a comparable job as an employee in another company. The difference between how much you would have made as an employee and how much revenue your app pulls in is one standard for evaluating the return on your investment.

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