Mobile apps have played a big role in the growth of businesses.
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Taking advantage of this huge online market requires certain skills, one of which is measuring your mobile app’s return on investment (ROI). Effectively determining your mobile app ROI could mean the difference between earning a lot and biting the dust.
Read this article and learn how to calculate your potential and actual mobile app ROI to ensure your app’s financial success and sustainability.
Mobile app ROI is how much is earned for every dollar spent to create and promote an app. This ROI is directly affected by revenues earned from an app and expenses incurred to make, market, and maintain it.
In particular, these major expenses directly affect mobile app ROI:
- Development (app design and programming)
- Marketing (spreading the word about the new app)
- Maintenance (i.e., customer service, app updates after launch, etc.)
Now that you know the main costs of creating an app, it’s time to consider factors affecting mobile app ROI.
Is your app just an idea in your head? Or have you launched it through Google Play or the App Store?
The two major stages of an app’s life are the pre-launch and post-launch phases:
- The pre-launch stage includes activities like app conceptualization, design, and development.
- The post-launch phase involves uploading the finished app so people can download it, replying to app user queries or complaints, marketing it, and troubleshooting any technical problems.
To relate these two stages to ROI, we could connect them with three main expenses involved in making an app. Pre-launch is closely linked to app development costs, while post-launch is more in line with marketing and maintenance costs.
It is important to know at what stage your app is in so you can compute the right ROI value. Calculating ROI pre-launch differs from measuring ROI after launching your app into the market.
Pro Tip: Connecting with the right app design and development team could help maximize app ROI. Feel free to contact our experts to learn how our world-class design team can help you zoom past both stages of app development toward optimal ROI.
Each stage of app development affects ROI differently because each involves different costs. Let’s explore these expenses further.
As mentioned, the three main expenses you need to factor in for measuring app ROI are those involving Development, Marketing, and Maintenance.
Development costs involve any expense related to designing, creating, and publishing your app. The best developers and designers help ROI by lowering app creation costs or producing quality output for less investment.
Marketing costs in advertising and promotion help increase your app users, which ultimately affects ROI.
Mobile app marketing involves using many promotional channels, among which include:
- Social media marketing
- Search engine optimization (SEO)
- App store optimization (ASO) on online stores like Google Play Store or Apple’s App Store
When done right, marketing costs can easily help increase ROI through more app users.
Maintenance costs mainly revolve around the concept of retention rate. This mobile app industry rate refers to the number of users still using your app versus the ones who stopped using it. Maintaining user retention is all about keeping your app users happy and engaged with your app.
This means maintenance expenses include spending money on the following:
- User support (chatbot or human customer support rep)
- Programmers who will fix any post-launch app bugs or modify the app to make it function better
These expenses are good investments because they tend to increase your app’s users. The more users your app has, the more money you can earn from in-app ads and other forms of app monetization. More earnings mean a higher ROI.
But to be sure about how much you could earn versus how much you’re spending, let’s crunch some numbers by calculating mobile app ROI.
As mentioned, the formula for ROI before an app’s launch (pre-launch stage) differs from the ROI calculation after the app’s launch (post-launch phase). Let’s see the difference between the two.
Calculating pre-launch ROI is as close as you can get to a crystal ball in the competitive app development world.
If your app idea is still in your head, it is good first to find help or do your research so you can answer the following questions:
- Life span: How long would users keep using your app?
- Potential revenue: How much could your app earn during its estimated lifespan
- Development and maintenance costs: How much would you spend designing, building, and updating your app?
- Cost of debt and equity: How much money would you need to borrow, crowdfund, or get from your savings so you can develop and maintain your app throughout its life span?
Answering these questions is important for a better estimate of your app’s pre-launch ROI.
So you can easily crunch the numbers to get your app’s ROI before launching, let’s have a sample scenario. Imagine you have a custom mobile app idea that will give existing messaging apps a run for their money.
Here are some hypothetical numbers covering the 7 years of your app’s useful life:
- Development costs – $80,000
- Maintenance costs – $60,000
- Debt and equity costs – $280,000
- Potential revenue – $7,500,000
- Life span (of the app) – 7 years
To get your pre-launch ROI, we must first compute two Net Present Value (NPV) components. These are:
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- Net Present Value Advantages (NPVadv)
- Net Present Value Costs (NPVcosts)
These two NPVs are necessary to compute for the pre-launch ROI, which the image below shows:
The table below shows how to compute these two ROI components and the pre-launch ROI itself:
|Formula||Computation Procedure||Numbers Plugged into Formula||Result of Formula Computation|
(Potential revenue x Life Span) – Debt and equity costs
|Multiply potential revenue by the app life span. After getting the result, subtract debt and equity costs.||NPVadv = ($7,500,000 x 7) – $280,000||NPVadv = $52,220,000|
|NPVcosts = [(Development costs + maintenance costs) x Life Span] – Debt and equity costs||Add development and maintenance costs. Multiply the result by the app life span. Then subtract debt and equity costs from the result of the multiplication.||NPVcosts = [($80,000 + $60,000) x 7] – $280,000||NPVcosts = $700,000|
|Pre-launch ROI = NPVadv / NPVcosts||Divide the NPV advantages by the NPV costs.||Pre-launch ROI = $52,220,000 / $700,000||Pre-launch ROI = 74.6|
The pre-launch ROI value estimates that, for the 7 years of your app’s existence, every dollar you spend for production and maintenance yields a return of $74.6. In other words, you earn around 70 times as much as you spend on making and maintaining an app.
It’s good to take note that the ROI above does not take into account marketing costs after an app’s launch. So for that, we move on to the next type of ROI calculation, the post-launch ROI.
Now, let’s assume you just launched your messaging app. A year has passed, and you want to know whether or not all your investment was worth it.
Since you have already launched your app, your return on investment will no longer include production costs. Your sole focus here is the marketing and retention costs.
Going back to your app scenario, let’s say you spent around $200,000 within the first year of your app’s launch to promote it using paid ads on Facebook. Simultaneously, you earned $1,000,000 for your app within the same period (through subscriptions or in-app ads). You also spent around $100,000 hiring programmers or developers to keep your app defect-free and develop chatbot software to help answer user queries.
From the scenario above, we can see the following figures for the first year of your app’s operations:
- Net return on investment – $1,000,000
- Marketing cost – $200,000
- Maintenance cost – $100,000
To determine post-launch ROI, we simply plug the figures above into the equation below:
To get the cost of investment, simply add the marketing cost and maintenance cost. After getting the sum, use that to divide your app’s net return on investment like so:
ROI = $1,000,000 / ($200,000 + $100,000)
= $1,000,000 / $300,000
ROI = 3.33
This ROI figure means that after a year of launching, every dollar you spent on your app’s marketing and keeping users interested earned $3.33 in income.
Take note that your pre-launch ROI is around 20 times bigger than your post-launch ROI. This is because the pre-launch estimate covers the entire seven years of your app’s projected useful life, while the other ROI covers just the first year.
As long as you keep your ROI above “1,” your app business is in relatively good financial health.
To make sure your app business model will succeed, it’s not enough to depend on the pre- and post-launch ROIs. Customer Lifetime Value (CLV) can help you see your app’s financial sustainability on a per-user basis.
If you want to determine how to get your app’s CLV to supplement your ROI computations, you can read this easily understandable article on Customer Lifetime Value.
Now that you know how to compute ROI and other related measurements, it’s time to discover what they mean in terms of strategy to help optimize your app business.
- Cut down retention costs – This could mean investing in customer service chatbots or hiring competent programmers from cost-efficient development companies.
- Improve customer targeting – Use your app analytics tool to identify what your users love (or hate) about your app and update the app accordingly.
- Gently push your non-paying users to subscribe to your app – The freemium monetization model has helped increase return on investment in many cases. This model earns money by giving app users free access to basic features while charging fees for more advanced ones. The intelligent use of push notifications and other related strategies is also a step in the right direction for encouraging subscriptions.
- Make your app user-friendly and reliable – This means getting the best app developers and UI/UX designers to ensure your app is easy to use and does not leave users hanging (in terms of “screen freezing” and unmet expectations).
Speaking of hanging, Grill’d is a restaurant whose food delivery app kept crashing. But with the help of our app developers, the healthy food company reeled in more users and improved its ROI.
- Increase your conversion rate – This is all about convincing more users to download your app after they see your app ads. One way to do this is to use analytics tools to check the source of your app’s users and plan your marketing strategy accordingly.
- Aim for high-quality traffic – If the broadcast-style ads approach doesn’t seem to improve your app ROI, try focusing your ads on your most loyal users.
An app idea for mobile devices is only as successful as its return on investment.
To increase your chances of winning with your app idea, it’s good to reach out to business strategists who have a track record of success. We have helped launch apps from zero to multi-million dollars in sectors like nonprofits, social media, food, healthcare, and education.
Schedule a chat with our mobile app development team to discuss ROI and other things you need to boost the growth and prosperity of your business.
Jesus Carmelo Arguelles, aka Mel, is a Content Marketing Specialist by profession. Though he holds a bachelor's degree in business administration, he also took courses in fields like computer troubleshooting and data analytics. He also has a wealth of experience in content writing, marketing, education, and customer support. Outside office hours, he finds deep joy in reading, traveling, and photography.
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