How To Build A Financial Model For A Mobile Application

A mobile application or app is a computer program or software application designed to run on a mobile device such as a phone, tablet, or watch.

A financial model creates a summary of a company's expenses and earnings.

Creating any financial model is a tricky task. Producing financial modeling for mobile applications isn't different than other economic models creation. When creating a financial model for mobile apps, one must consider the following aspects.

Mobile App-Specific Revenues

The first step in making a financial model for a mobile app is identifying the source of income. App revenues usually can stem from two sources - advertisements and subscriptions.

Advertisements: the first source of income generated by the mobile app is advertisements. Advertisements can be presented in the app to produce revenues.

Subscription plans: the second source of revenue is the users. Users can pay a one-time fee for a lifetime deal (LTD) when downloading the app, or periodic payments, such as a monthly or quarterly payment, renewed once per period as long as the user decides to subscribe to the app.

To estimate the future income, one must estimate the number of users in each coming period, the abandonment rate, and the subscription price. He also must evaluate the revenue from advertisements.

For example, suppose - currently, 1,000 users are using the mobile app, the monthly cost is 10 USD per month, the number of users grows at a pace of 5% per month, but 1% of the users doesn't renew their subscription, the revenue stream is expected to be:

Period 0: 1,000x10 = 10,000 USD

Month 1: 1,000x10x(1+0.05-0.01) = 10,400 USD

Mobile App Cost Drivers

The second phase in creating a financial model for a mobile app is identifying the cost drivers. One should consider the initial costs and the recurring costs. 

The initial investment

The initial costs include development costs and marketing costs.

No one wants to invest time and money in an app that no one will use. Therefore, the first cost is a marketing cost. Developing any mobile app must start with two simple marketing questions - who will want to use it, and will they use it? The answers can be found using a market survey or a process of validating the idea. This phase includes finding the ideal profile customer (or IPC) in many cases.

Once we have concluded that users need our mobile app, we can build the app. We will need to design the user interface (UI / UX) in that stage. 

These costs are the design costs.

The third cost driver is the development costs for creating the initial version of the product. Usually, it's recommended to create an MVP - minimum viable product - a product with the least number of features that the users will need to adopt and use. We don't want to invest too much money developing features we are not sure the users need.