How to create a financial model for a mobile app

Financial modeling for a mobile app is very peculiar. It is different from the other financial models since it has some key requirements and some unique business models, like ad revenue, in-app purchases and subscriptions all in a single model. Fortunately we have created a financial modeling tool that is perfect for mobile apps.

First of all we need to understand that every business has it's particular financial model, there is no one-size-fits-all. Mobile apps are no exception.
What are the particularities of a financial model for an app startup? If we can identify the differences and the key unique things than we can create a perfect financial model, luckily, we at Sturppy already did this for you. Since we are app developers too, we understand how to create actual financial models that reflect the reality at their best.
Let's learn how to create a financial model for your new startup.

To make things easier, we decided to split the creation of the financial model in different parts. Each part is used to configure a particular part of your financial model, at the end of these five simple steps you will have built your financial for your mobile app model from scratch without you even knowing it.

Users projection

A mobile app lives and dies by the number of it's users. Let's see how to create a complete and realistic user projection in your financial model in a quick and easy way.

User acquisition

You need to bring people to your app, you need to make your app known. These is where you will configure how you will drive traffic to your app.

As you can see from the image, there are four main variables that you need to set:

  1. Starting users: any users that you already have, if your app it's already active.

  2. Organic monthly downloads: how many downloads your app will generate each month organically, this means downloads that are free since they don't come from any marketing expense. This usually happens with virality, brand awarness, PR coverage and if your app shows in the first when a user search for it's category in the stores.

  3. Monthly marketing budget: how much you intend to spend each month on paid advertising like Google Ads, Facebook Ads, ecc... You can decide this value based on how much you want and can afford to spend in marketing.

  4. CPI - Cost Per Install: how much each download of your app it's costing you. You will find this number in the platform that you use to advertise your app. This number can very greatly from 0.05$ to 0.6$ per install.

As you can see, after you have entered these numbers, the platform will automatically generate the projections for the user acqusition of your app.
You may be seeing more inputs and some extra paramenters that you can set, but for now you can ignore those, we will see later how to use Sturppy to create your financial models to it's fullest.

User retention

Unfortunately not all the users that download your app keep it, we hoped that they did, but most of them uninstall the app after it's first use. Of course this is a great area for improvements.
This time you only need to configure two variables:

  1. Download conversion rate: how many downloads convert to active users. This is the number of users that after having downloaded your app don't uninstall it right away. You can calculate it by doing installs - uninstalls in a single day. (es. 50% means that half of the downloads conevrt to active users that keep using your app.)

  2. Retention rate: the percentage of users that keep using your app over a month. This is a very important metric that a lot of financial model don't include. This is used to correctly simulate user engagement in your app and user loss.

At the end we have an accurate projection of your userbase. In this example we can see that at the 12th month, we will get 3.100 new users, lose 2480 users for a total of 9.920 active users in month twelve.

Revenues

This is a very important part of your financial model. You can decide what part to configure based on the monetisation of your app. If you have multiple monetisation models you can add them all.

Ad revenue

If your app makes money by displaying ads to your users. This is the most common around free mobile apps, giants like Instagram and Facebook use this business model. In your case, you will use a third party service like AdMob or Facebook Audience Network.

  1. eCPM - estimated Cost Per Mille: this is how much you will get payed every thousand impressions. This means that after a single ad is seen one-thousand times, then you will be accredited this amount. Unfortunately you can't really decide this value by yourself since it is calculated by the Ad Network Provider.

  2. Impressions per day per user: how many ads a single user will see in a day. You can either enter it or calculate it with the other inputs in the platform by entering the number of sessions, the average session duration and the number of impressions per minute. This is something you can see in the dashboard of your ad network or try to calculate yourself by thinking about your app flow.

In-App Purchases

Everyone most hated and loved monetisation method. If you sell unlockables inside your app you can configure them here. These are items that you buy once or multiple times, not subscriptions. If you have subscriptions then go to the next section.

  1. Conversion rate: the percentage of active users that purchase something in your app.

  2. Transactions per user per month: out of the users that become customers (those who purchase something) how many transactions do they average in a month. This is because if your app allows it your customers could buy more than one product in a single month.

  3. Fees: usually a cut for the payment processor like Google Store, App Store or Stripe.

  4. Products: this is all your catalog. If you have multiple items you need to tell us the percentage of transactions that are done for each product out of 100%. In this example since I have only one product it has 100% shares.

Subscriptions

Very similar to In-App Purchases, but the customers are brought along in the next month since they are subscribers and will pay you monthly (if you receive payments annually, just divide your cost by twelve).

  1. Conversion rate: exactly like In-App Purchases.

  2. Churn rate: the percentage of subscribers that cancel their subcriptions at the end of the month. This is the main difference with In-App Purchases.

  3. Fees: just like In-App Purchases.

  4. Plans: like In-App Purchases.

And very easily you have configured the revenues for your financial model, combining different businesses models. Of course if you have one you can use it alone.

Expenses

This is the last step in creating the financial model for your mobile app startup. We noe need to configure the expenses that you have to sustain and everything is done.

COGS

Cost of Goods Sold. These are costs that are directly linked to the selling of your product. In a mobile app you don't have many they are mainly for physical goods, but you can't ignore them.
We at Sturppy have identified the best COGS for you to track while creating the financial model for your mobile app.

  1. Cost per thousand MAU: how much you are going to pay for every thousand active customers. This is mainly the cost of your tech infrastructure basically the cost for the servers. Of course this cost needs to be tied to the number of active users that are using your app.

  2. Other: other costs directly correlated to your app that are not related to the number of active users. For instance if you have fixed subscriptions to external services.

SG&A

Selling, General & Administrative. These are the cost that are intrisic of running a business, also called OPEX (operational expenses). These cost are not directly related to the selling or use of your product. A good way to understand the difference with COGS is that SG&A are costs that even if you are not selling anything and no one is using your app, you still have to sustain.
The marketing budget that you defined in the User Acquisition section, is automatically added.

  1. Team: the people that are working in your business. You can also configure an hiring plan, raises and associated expenses, but for now we will keep it simple.

  2. Other: other costs that you need to sustain each month, like rent or utilities.

CAPEX

Capital Expenditure. The costs that you have to sustain to buy assets that are needed in your startup. The basic example is computers, but you may need some specific software that you have to buy.

  1. Initial investment: the list of assets that you buy at the start of your activities. If have to configure a lifetime for each asset to create a depreciation plan (all handled by Sturppy).

  2. Items: these are assets that can be linked to a row in the SG&A team row to link a new hire to a CAPEX (for instance buying a new computer for every new hire). You can leave it empty.

With this all the expeses are configured and nicely projected. Of course this is just a simple model, but you can easily configure it to make it more complex and more specific to your startup.

Projections

After these three simple steps you have now configured everything you need to create a financial model for your app startup. Let's see what Sturppy generated for you (all the dirty work).

Income Statement

This is flow statement that is used to track your revenues, expenses and calculate your margins and net incomes.

Balance Sheet

How your assets compare to your liabilities.

Cash Flow Statement

How much cash are you producing. Cash is King.

Conclusions

As you can see creating a financial model for your startup is very easy with Sturppy. You just have to concentrate on your metrics and on your product while we do the rest, no need to learn accounting or finance.
This was just a basic example, but you can configure much more in the platform like debt, taxes and incremental increases. Also you will find explanations in the platform in every page and useful suggestions when creating assumptions for your financial model.
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