The need to evaluate the value of an application
Software development is growing at a rapid rate and ever since the application has taken a prominent position in the online space, every business be it a startup or conglomerate, their first plan of action after conceptualizing their business and establishing its foundation in the landscape is to go in this direction and leverage from a robust mobile or web application.
The increasing consumption of data through smartphones and growing consumer needs has added to the urgency of having an application under your business name, and why would it not be? After all, having an app for your business can help boost brand recognition, enhance visibility, and increase customer engagement towards your business.
While app development and maintenance are crucial for the business to ensure that they gain maximum return on investment, what is equally or probably even more important is to evaluate the value of your mobile application. It must have surely crossed your mind, at least once, “what would be the worth of my app?”.
Why not evaluate the value of it? The evaluation helps you:
Understand how do you want your app to be used by the targeted audience and have you invested, right?
Helps your business become sustainable and profitable with its direct relation with the app downloads and revenue will
Should the app be built around a value?
Evaluating an app even before it is conceptualized or the processing has started might sound like the wrong way to go about app development, but doing so can ensure that you can achieve maximum success. How much a buyer is willing to pay will be your profit, and that profit depends on every aspect of the application be it the purpose, development, marketing is responsible for either increasing or decreasing that profit. Building an app around the value helps you understand what your application is capable of, to what extent it will be useful to the targeted audience.
Application valuation drivers
Although different app businesses have a different set of valuation drivers depending upon the intricacies of the business, specific conventional valuation metrics should be kept into consideration beyond devising the steps for evaluation of the app.
INDUSTRY:
- How aggressive is the competition in your industry? The kind of app you have developed will be valued on its urgency and need and whether or not there are similar applications in the marketplace.
- Speaking of a similar application, do you feel your application has faced barriers when trying to enter the market place? Restrictions, be it competition wise, or others can impact how much your app would be sold for, should you plan to do it in the future.
- At what rate is the industry growing? Is your app build in a way that it will evolve to cater to the audience as per the growing trends and developments in the industry?
FINANCIAL:
- Will the consumers utilize the developed app for years to come? Will it remain in demand for the most extended period, considering the app of that niche?
- How old is the business, and how has it been maintaining its gross and net income from the past 2-3 years?
- Is the cost structure complex? Will the split of income between recurring revenue and one time in your favor?
PROCESSING:
- Have you thought about the key man risk within the business during the operations? Losing a critical person involved in the processing and responsible for the growth of the company can have a severe financial impact.
- How many times does the app need updates to stay functional? Updates are necessary to keep the app feature rich and practical, free from any bug risk. Over updates might fatigue the users and not timely updating it would ruin the user’s experience.
- Up to what extent of technical knowledge was invested in running and managing the app development operations?
CONSUMER:
- What section of audience qualifies as your audience base? This will help you determine the average app utilization. Also, keep a note of what are the channels by which you have acquired the customer and how much did ti cost you.
- Are there consumers opting out of using the app? If yes, then what is the common reason behind it? Fixing it would increase the value of your app. Similarly, check what the consumer lifetime value is.
- How many monthly active users and downloads does the application have?
More such valuation drivers will help you come up with a strategy for a tailored evaluation of the value of mobile app such as whether or not is the intellectual property protected, does your business fulfill all the licensing requirements, etc.
Having described the crucial valuation drivers, let us look at the steps that will be critical in evaluating the value of an app
- EARNINGS:
You need to establish the earning baseline, grounds of which you will apply the other valuation drivers. This will include your gross revenues and the structure of your business. There are two methods which can help with calculating the baseline earning:
Seller’s discretionary earnings, which applies to an app with the value under 5$ million, while the formula of earnings before interest, taxes, depreciation, and alteration(EBITDA) is appropriate for a larger corporation.
- CODE AND DOCUMENTATION:
Applications are made on code and architecture and to evaluate how much would your app be worth, you need to perform due diligence and check the quality of the codes and have it documented. The app built by industry accepted standard protocols would be of high value.
- APP ABANDONMENT:
One of the biggest challenges for the developers and marketers in the customers not using your app after downloading because of a lack of features. High app abandonment rate can have an adverse financial impact. If you find the abandonment rate continuously increasing, perform an examination, look for the errors and malfunctioning, and develop a procedure to optimize the user onboarding process to keep your audience base hooked.
- STANDARD OPERATING PROCEDURE:
Clear documentation of all the processes that have been carried out in the development of the application is necessary for escalating the value of the app. This way not only will you streamline and strategize the process but also ensure its scalability.
- AGE:
This has to be kept into account on a molecular level, especially when the risks are addressed; since the younger, the app is, the higher would be the risk, and smaller would be the list of potential buyers. Apps age will be an asset to the business, and if you have a successful track record and the app customer base is still growing, then you can surely get higher value for it.
- TRAFFIC:
Utilize the analytics tool available for tracking the traffic and documents from which all channels is the traffic coming to the application store, to your website or application. This will provide you with exact valuation along with monitoring and improving the performance of the app and the business.
These steps when implemented right will help in ensuring the present success of the application and business by helping you make an informed decision centered around the value of the app throughout the journey and if in future you plan to sell the business, you can rest assured that you will have a profitable exit strategy.