The Right Way to Invest in the Mobile Market

Be it a tablet, smartphone or that new-fangled wearable tech, mobile is where it’s at. This statement is supported by the fact that in 2013 worldwide shipping of PCs and laptops declined by a record 6.9% (Gartner, 2014). As such, it’s not surprising that there is a huge move by investors towards the mobile market.

But, before you run out and buy stock in a nascent mobile company, let’s talk about the smartest ways you can capitalize on this growing business segment.

First, there are several ways of investing in the mobile market, let’s walk through each of them, one by one.

You can hire a development team and develop an app. We aren’t going to review this option since it involves a development process and not just an investment.

You could acquire an existing popular title, which already has traction. Even if you don’t have any first hand statistical data about an app developed by another company, you still can get a sense of how much traffic it is getting and how much revenue it generates. 

We are going to look at an app that is built on a freemium model which means an app is free to download but is monetized with an in-app purchase mechanism that allows users to acquire additional functionality. 

Using a tool like http://appannie.com you can open up a Top 500 chart for a specific category in the iOS App Store or Google Play and you’ll be able to see what 500 apps are currently at the top of those app stores.

Choose the Top Free and Top Grossing columns. The Top Free chart presents figures for how many downloads and traffic each app is generating. This information doesn’t include the ratio between frequent users and the ones that are back after certain period of time, but this data can be used as a really good proxy for actual data.

The Top Grossing chart presents figures for how much revenue is being generated by in-app purchases and for iOS via Apple’s iAd mobile ad platform. Unfortunately all revenue streams from third parties aren’t included into this data set.

All you need to do is to find an app that is in the Top Grossing chart at a high position, but at the same time is low or absent at all from the Top Free chart. Once you’ve managed to find such app, it is safe to conclude that the app is getting a small amount of traffic. Meaning, the app is getting a fewer number of downloads compared to other apps, yet at the same time manages to make a reasonable profit. 

This is the golden spot: The chance of making a profit from investing into the app traffic of such an app is high.

You could invest in the purchase of a copy of a profitable app. While this investment model is quite popular, it would be reasonable to argue that it is hard to repeat the success of a popular app with a copy, and only the very first imitators have high chances of success.

‘

There are services such as these below you can use to look for app copies:

 http://codecanyon.net/category/mobile/ios?utf8=%E2%9C%93&sort_by=sales_count&categories=mobile%2Fios

 http://www.binpress.com/app/flappy-bird-clone/1855

 http://www.chupamobile.com/

Next you have to figure out if the app is profitable. This is best discovered via testing, but you need to realize that app copies cost way less than developing a new one from scratch. 

Once you are ready its time to buy an app copy. Incorporate analytics with the help of your technical team or by paying extra to the app’s code owner. Release the app onto the app store and launch a test ad campaign with a small budget. For iOS budget size varies by device type and country, the desirable amount of the app downloads for this type of campaign is around 10,000. During the next month, monitor daily statistical data and check out the app’s progress.

If it happens that you’ve managed to generate a profit using this method, keep investing in traffic generation because you’ve found a profitable app. If the app has generated modest income, carefully analyze all data available from the analytics you incorporated into the app’s initial campaign. 

As a result of this analysis you may find weak points in your app that you can improve upon - contact your developer and update the app according to these findings. If the ratio between your expenses towards the app’s promotion and the income the app has generated is way off balance - stop investing in this particular app and look for another copy of a different popular app to invest in.

Next, let’s discuss the most efficient way to evaluate the profitability potential of an app or portfolio of apps before getting in touch with its seller.

First, for iOS you should check out the iTunesConnect reports. The app seller is supposed to provide you with these prior to purchase and the reports should show you how much money the app has been pulling in.

It is important to make sure that you’ve turned on the filter in the iTunesConnect reporting system that shows the number of in-app purchases along with the total profit number.

Do not make your decision to purchase the app without seeing the complete profit report - no matter what position the app has currently within the app store. You need to have access to an iTunes Connect account for the app (or, at least .XLS file with all data available) in order to completely analyze the app and determine its’ profitability potential.

An app has several potential income sources and you need to evaluate these which include: direct sales of a paid app; in-app purchases; and in-app advertising.

What are traffic sources for the app? The truth is that the genuine traffic sources and its specific split within different channels for an app are only available if the current owner of the app chooses to share that data with you. This is a problem. 

You can attribute the traffic an app in one of the top charts as free traffic, but in reality many app owners make significant monetary investments into retaining the chart position for their app position. 

There is a certain level of traffic an app receives that you can attribute to coverage via the media, video blogs and so on. A single publication isn’t capable of delivering significant traffic, but a number of varied publications can.

To make an informed decision, you need to figure out the price of acquiring a single app user via pay-for-publication inclusions.

You will need an analytics tool integrated into an app to be able to figure out an app’s current level of active users. Active users means the number of app users who launch an app during a certain period - a month, week or day. This number includes new users and returning customers. If you don’t have such information in hand, you need to use the number of users your app has seen in the last three months.

The bottom line is that to get an app’s estimate of value you need to have two figures: (1) The summary income for a specific time period and (2) The number of active users for the same period. 

If you do not have active user data, you need new user data to make an educated estimate. To find the revenue per user, divide the total number of users into the total revenue from the app. Let’s assume that you discover that you are making $.30 per user in revenue. The question is - is it a lot of not?

The important question is: Can you acquire new users for less than you are spending inside the app? If the answer is yes, great! You’ve found an ideal app for an investment. An app which meets this requirement is the cornerstone of a successful app investing business.

One of the most common mistakes that app investors make is the thought that an app that is currently ranking on a particular app store top chart and is getting its traffic for free will remain like that for an extended period of time. You need to think about the traffic your app is getting from a top chart as a pleasant bonus. The ideal scenario is that your app will be profitable via paid traffic.

It’s hard to know the reason a particular app reached the top chart it is in. The owner may have purchased traffic and is actually losing money on the app - only having purchased traffic in order to show good metrics while selling it to you. In this case, it’s possible that once you’ve purchased the app, it’ll magically disappear from the top chart. So you should not consider the profit an app is generating without having figures that shows how much money is being spent to generate the profit. 

You shouldn’t also forget that 30% of an app’s profit goes to Apple. If an app is making only 30% profit it means it is bringing zero profit to the owner.

We hope this article will help you to make a smart investment in an app that will be profitable for you. If you have any questions about the app investing business, or any other related questions, we at ComboApp are always willing to listen and help you out. Shoot us an email at newmedia@comboapp.com.

Contributions to this article were made by Roman Kolos, Analyst at ComboApp.