How To Build A Rock-Solid Mobile App Financial Model

Are you about to launch a new mobile app startup? Are you fundraising for your existing mobile app? Building a solid mobile app financial model is crucial to successfully raise capital.

In this article we guide you through all the key steps you need to follow to build your own. Whether your mobile app is a social media platform, gaming app or any B2C subscription mobile app business.

Looking for a template instead? Check out our template and start save yourself hours of work!

What is a mobile app financial model?

Mobile app businesses are on the rise worldwide, on the back of increasing smartphone adoption rates, the shift of mobile vs. desktop (55% of all searches where made via a smartphone in 2021, source here) and efficient mobile payment services.

Mobile app startups have specific revenue models depending on their business model (subscription, affiliate or even ads revenue), expenses (Apple & Google Play store service fees) and metrics of their own. 

Want to know more about the 9 most important mobile app key metrics and you should include in your pitch deck? Read our article here.

Why is it important to build a financial model for your mobile app startup?

Startups usually build financial plans when fundraising. Yet, raising funds is not the only reason why you would create your own financial model: communicating to investors, estimating a valuation for your business, or simply elaborating a well-thought business strategy are some of the many reasons why any entrepreneur or founder would look into forecasting their business. 

Whilst financial models are likely not to be fully accurate due to the inherent nature of startups, building a rock-solid financial plan is very important for 2 reasons:

• Understanding better your revenue model, growth and its impact on cash flows allows you to make better, informed decisions
• Investors will get more confidence in a well-thought financial model with verified assumptions, benchmarks and calculations

Step 1: Estimate downloads from paid marketing and virality

Revenue is a direct function of your users, and therefore downloads. Thus, before forecasting your revenue, you need to calculate the number of downloads you will generate over time. 

Downloads are a function of the number of visitors (to your website or your app store page for instance) and a conversion rate. 

Note: we recommend to differentiate all the different acquisition channels, such as Appstore, Google Play, Website, etc. and have different conversion rates for all of them.

Visitors (often called as “traffic”) come from 2 sources:

• Paid marketing: you pay for each visitor to Apple or Google for instance (in average, cost-per-install varies between $0.44 and $2.23) 

• Organic: this is the true acquisition source that can make your mobile app become a worldwide success through network effects. You do not pay to ‘acquire’ organic downloads, they come for free (organically). Think about a social B2C mobile app your friend just downloaded, he refers you so he can get a discount or simply because he wants you to join: you visit the AppStore page (you are an organic visitor), and  you download (you are an organic download). Organic growth is often referred to as “viral growth” or “virality” when it gets exponential: as you would expect, the more downloads (from paid or organic sources), the more likely users are going to spread the word and generate organic visitors, and therefore downloads.

Note: virality is forecasted using the K factor which, in simple terms, is the product of the number of invitations per user (think about how many people a user spread the word to) and a conversion rate (similar to paid acquisition channels). 

Let’s take an example and calculate K-factor for a mobile app that estimates each user send in average 4 invitations which convert at 25%. This means any new user generates 1 user organically (K factor of 1). Be careful with viral growth: any K factor equal of superior to 1 is exponential. You will end up with very large numbers quickly, so try to be as conservative as possible when estimating organic growth.

Step 2: Build your revenue

Revenue build depends on the type of business model you have. Usually there are 3 separate revenue streams:

• Subscription revenue: the method to follow is exactly the same as for subscription and SaaS business
• Ads revenue: simply multiply the eCPM by the number of ad impressions. See a link here for more information on eCPM (usually ranges from $0.5 to $1.0). Impressions are a function of your users: the more users, the more ads they are going to watch
• Affiliate revenue: multiply the average order value by a commission rate and the percentage of your users who purchase an affiliate item on your mobile app. Let’s assume you have a gaming app whereby users can buy an item of $10, for which you earn 50% commission. You estimate 20% of users will buy every month. Therefore monthly revenue is equal to: number of users x $10 x 20% x 50%

Step 3: List all your roles in the Hiring plan

Salaries are often the most important expense category for subscription and SaaS businesses. That is why building an accurate and flexible hiring plan is key:

• Accurate because you will need to list all the roles, their salaries and starting dates as accurately as possible in the foreseeable future (12 to 24 months usually)
• Flexible because if it can be cumbersome to list dozens, if not 100’s of roles (especially if you are forecasting 5 years) but also because it may difficult to assess how to scale your workforce in the outer years (anytime beyond 24 months usually)

For more information around how to build your hiring plan, please refer to our free hiring plan model in Excel format here.

Step 4: Build Expenses

For expenses other than salaries, list them and try to bundle them into categories. Usual expenses categories for mobile app businesses include:

1. Cost of Goods Sold (COGS)

• Service fees: the 30% or 15% commission rate Apple and Google usually charge on your gross revenues. This is a very important expense to model carefully. Indeed, the rate depends on the lifetime of your users, for more detail around service fees from various platforms, see an article here
• Payment processing expenses
• Hosting (and other tech infrastructure costs)
• Customer service (whether in-house or outsourced)

2. Sales, General & Administrative expenses (SG&A)

• Marketing: paid media, offline marketing, agencies fees, etc.
• Sales: sales commissions
• Other operating expenses: subscriptions, travel costs, office supplies, rent, etc.
• Other expenses: legal advisory, bank fees, miscellaneous, etc.

Note: we recommend adding relevant salaries to their respective expense category for more transparence when reading your projections. For instance marketing team salaries would fall under Marketing expenses

When forecasting expenses, you have 2 options, they can be either:

• Dynamically calculated: suitable for variable expenses (they will grow in line with a given metric, such as users, or revenue). It can be as simple as a given % of revenues for instance (payment processing fees), or more complicated (for instance, customer service can be estimated by using the number of customer service tickets, your customer service team efficiency and their hourly rate); or
• An input from you: suitable for fixed expenses (they don’t vary based on growth). They can be expenses such as bank fees, rent, etc.

Note: you might be wondering how much it actually cost to build a mobile app. For more information on how much app development actually costs, read our article here.

Step 5: Wrap it up

Once you have built your revenue and your expenses (including all the salaries in the hiring plan), you can easily build your profit-and-loss, cash flow statement and balance sheet. You can also easily calculate key metrics such as CAC, LTV, etc. For more information around the 9 most important metrics for mobile app businesses, see our article here.