Disclaimer: this article is for anyone who downloads our Mobile App financial model template and need a step-by-step guide on how to use it. We remind you that our template also comes with a 1 hour onboarding video as well.
Before we dive in the step-by-step guide, note that we are using for the purpose of this article the Google Sheets version. You can of course download the template use it with Excel instead. Let’s dive in!
Step 1: Settings
The first thing we need to do is to enter a few details in the Settings tab. They are:
- Company name: the name of your business / project
- Start date: the first month the model will forecast from. Note that the first month should be in the future, and it isn’t necessarily the following month. For instance, assuming we are today in July 2021, and you are raising capital which you expect to last 2 months, the start date can very well be September 2021 or even later.
- Fiscal year end: by definition, this is the date that defines the end of a 12-month period for accounting purposes. In our templates, this date is important as it will serve to calculate the annual summaries of your P&L, balance sheet and cash flow statement. Note that most businesses have 31st December as fiscal year end. When in doubt, ask your accountant.
Note: the year in the fiscal year end is not relevant. For instance, if your fiscal year ends on December 31st, 31/12/2021 and 31/12/2022 are exactly the same thing.
- Currency: the main currency of your business and in which you want to present your financials. Note that the currency does not impact any calculation: it is simply used as a legend throughout the model.
Note: if your business operates in different currencies, use the same currency throughout for your model. For instance, assuming you sell your products in USD but have some staff paid in EUR and your reporting currency is USD. In this case, the expenses (the salaries of the staff in EUR) should be converted in their USD equivalent when you enter your hiring plan (more on that below)
- Corporate tax rate: this is the tax rate you pay in your jurisdiction. If you aren’t sure which is yours, refer to KPMG’s exhaustive updated list here.
Step 2: Subscription revenue
The Mobile App financial model template allows for up to 3 different revenue streams. They are:
- Subscription revenue. Whether or not you charge subscription fees to your users, you need to enter some assumptions on Subscription revenue in the Settings tab. For instance, if you do not charge any subscription fees and only have 1 plan, you still need to change relevant assumptions for pricing (e.g. leave pricing to zero) and user breakdown (e.g. all new users fall into the same plan)
- Ad revenue: if you earn revenue from ads on your mobile app. Change assumptions in Revenue tab
- Affiliate revenue: if you sell products and / or services on your mobile app and charge a commission rate as revenue. Refer to the Revenue tab for assumptions.
Note: you will be able to choose which tiers ad revenue applies to later on. For instance, if you only earn ad revenue from “Free” users, you will be able to exclude the other tiers from ad revenue.
Let’s start with Subscription Revenue below.
2.1 Subscription tiers
- The name of your subscription tiers: the model allows you to have up to 4 subscriptions (including a free plan if you need to). The names you enter will flow through the Revenue and Operating Model sheets of the template
- Pricing: enter the monthly and annual fee of your subscriptions. If your plan does not include one or the other, simply enter zero. Annual subscriptions typically are discounted vs. monthly billings, so the template gives you this ability.
Note: the annual fee is per year. In the example above, the price of the “Paid” plan is $19.9 per month (so $238.8 per year), or $190 per year if billed yearly.
- Start date: this is the date from which the subscription is launched. For instance, you might not launch all subscriptions at the same time, instead you might launch some later in the future. In the example above, all subscriptions are launched in March 2021.
Note: start date cannot be prior the model Start date.
2.2 New users distribution
This is where we decide which new user choose which plan.
Note: This is only valid for new users (the leads who converted and became customers). Indeed, existing customers will have the ability to move between the subscription tiers via upsell and downsell (more on that below).
For each of the subscription tiers, you will need to enter:
- The breakdown of new users per tier: in our example, if you convert 100 new customers in a month, 70 will choose “Free”, 20% “Paid”, 5% “Premium” and the remaining 5% the “Corporate” plan.
- The sum of all percentages need to be 100%
- If you have less than 4 tiers (for instance 2) enter 0% for the relevant tiers.
- The breakdown of new users is calculated in the Revenue tab. Because the users are rounded, if the number of new users is too low the percentage might round up or down the value. For instance, assuming you convert 10 new users in a month, because we can’t have 0.5 customers choosing Premium and Corporate respectively, the model will round Premium to 1 and Corporate to 0
- If you entered different start dates in the Subscription Tiers section, the breakdown will take it into account. Let’s assume you have 2 tiers and you launch the 2nd six month after the 1st, and you enter 50/50% for the new users breakdown. The model will attribute 100% of new users to plan 1 for the first 6 months, and 50/50% from month 7 onwards.
- The breakdown of new users per billing cycle: choose which percentage, for each tier, of new users who choose to pay annual vs. monthly.
2.3 Upsell and downsell
By upsell and downsell, we allow customer movements between the different tiers after they have converted as customers for the first time.
For each plan, you will need to enter a percentage. This is the percentage of a plan’s total users that move to the nearest plan (either up for upsell, or down for downsell). For instance, in our example above, every month, you expect 2% of the “Free” plan to move (or “upsell”) to the “Paid” plan.
Downsell is simply the inverse of upsell.
Note: remember these values are monthly. THerefore, if you enter 20% it means that every month, 20% of a given tier will upsell or downsell to another plan. If you expect, say, a 20% upsell rate from plan A to B, simply use 20%/12 for the monthly upsell equivalent.
Here you need to enter the percentage of monthly churn to calculate the number of users, each month, who cancel their plan and leave. Note this is across all subscription tiers.
Note: like upsell and downsell rates, churn is a monthly percentage. As such if you expect 20% annual churn, enter 20%/12 for the monthly churn instead.
Step 3: Ad Revenue
As said earlier, ad revenue need to be changed in the Revenue sheet itself. The simply formula to calculate ad revenue for each tier is:
Ad Revenue = Monthly Active Users x number of ad impressions per MAU x eCPM
First, let’s select which tier does ad revenue applies to. Simply select by “Yes” or “No” in the drop-down list whether you will earn revenue from the respective tier.
Then, we need to setup the eCPM you will earn from the sale of ads on your mobile app. Of course, this amount can change over time.
Finally, we will calculate ad revenue for each of the respective tiers. Let’s see all the assumptions you need to change, they are
- Percentage of Monthly Active Users as % of total users. Here we calculate from the total number of users you have the respective number of MAUs (more on this metric in our article here). Indeed, only the MAUs are susceptible to see ad impressions. Inactive users, in comparison, do not open the app hence do not generate any ad impression.
Then we calculate the number of ad impressions a MAU sees in average per month. It is the product of:
- Average number of sessions per user per month. Set the average number of sessions a MAU has per month. Are they checking your app 2 times a month or daily?
- Average number of page views per session. Set the average number of pages they check out in your app
- Average number of ads per page. The average number of ads per page.
Note: if you do not have all these details from your dashboard, you can use assumptions instead. The total number of impressions per user is the most important number here as it will drive your ad revenue.
Step 4: Affiliate Revenue
Similarly to ad revenue, affiliate revenue is a function of the number of MAUs you have. The simple formula is:
Affiliate Revenue = Monthly Active Users x number of transactions per MAU x AOV x commission rate
Let’s see all the assumptions you need to change, they are
- Share of MAUs buying. Here we calculate from the total number of MAUs who make a purchase (or conversion) every month. This allows us to calculate the number of orders your mobile app generates each month.
- Average Order Value. This is the average value of the products or services being transacted on your mobile app.
- Commission rate: the commission rate you earn from these transactions.
Step 5: Acquisition
In Settings tab, we will now enter key assumptions affecting your acquisition: how to “acquire” downloads (ie users). A mobile app generates downloads from 2 different sources which are already pre-built in the template:
- Paid traffic: if you acquire downloads from per-pay-click campaigns
- Virality (organic traffic): an organic source of downloads: you do not pay anything for these downloads. Virality is very specific for mobile app businesses and, as explained in our article here, make or break mobile apps. If you can demonstrate your mobile app has strong virality, it means you generate many users organic from word-of-mouth or other organic referrals
5.1. Paid traffic
Paid traffic is by definition the number of visitors who land on your website via paid ads (Google Ads, social media, etc.). The number of downloads you generate from paid traffic simply is:
New downloads = Number of visitors x conversion rate
Whilst we will set your conversion rate later on, it is paramount to estimate correctly the number of paid visitors. The simple formula is:
Number of paid visitors = Paid marketing budget / average cost-per-click
Calculating paid marketing budget
Therefore we need to set 3 assumptions here:
- The average cost-per-click of all your campaigns. If you are running search and social media ads for instance, enter the average CPC. For more information about cost-per-click benchmarks per industry, have a look at our article here.
- The first month of your marketing budget spending. By default, the first month is the date of the launch of your first subscription. The amount is the monthly budget you expect to spend in that month.
Example: Let’s assume you start your model in September 2021, and expect a 6 month product development during which you will not generate any revenues. If you launch your mobile app and start acquiring downloads at the end of the 6 month period, set the date in February 2022. From this date onwards you would start to spend money in paid marketing to acquire paid traffic
- The monthly growth of your marketing budget. This is a tricky one: you marketing budget will change over time (likely it will increase) from the first month you just set. As such, you will spend more in the future, and we need to estimate the amount of monthly marketing budget you will spend over time. This monthly marketing budget is calculated using a monthly percentage growth. Yet, because the monthly budgets will increase over time, the percentages themselves will decrease. In other words, you are still increasing your marketing budget over time, yet the positive percentage growth decreases. See below an illustration to make it clearer.
Note: the percentages are set at the beginning of each year. In our example above, monthly growth starts at 20% in the beginning of the first year, and decreases progressively down to 10% at the beginning of year 2, and so on.
In order to estimate the number of download you generate from organic sources (virality), we need to estimate the number of “invitations” each new user sends to her/his friends.
For a refresher on what virality and invitations are, see our article here on the most important metrics for mobile app businesses.
Note: be very careful when setting the number of invitations per user and the conversion rate (below) as virality easily becomes exponential. If you expect to generate many downloads organically, be sure to check whether it makes sense from a market size perspective (see our article on market sizing and how to use when projecting revenues)
5.3. Conversion rates
Once we have calculated the number of paid visitors, we simply need to set the conversion rate for each paid traffic and virality sources. For instance, in our example above, we assume that for each download from paid marketing we need 20 paid visitors (5% conversion rate). Regarding virality, for each “invitation” from an existing user, only 5% convert into a download.
Step 6: Hiring Plan
One of the biggest expense category of Mobile app businesses often is salaries. It is therefore very important to set up your future roles and their related expenses (salaries, bonuses) correctly.
The first thing we need to do is to list the different teams you have and group them into up to 5 categories. This will allow us to differentiate salaries into the different teams in your P&L and your metrics later on.
Note: if you selected inbound acquisition under Acquisition (section 3 above) earlier you will need to enter at least a “Sales” team so the template can calculate correctly the number of Sales people that generate customers in the Acquisition sheet.
In the Hiring Plan sheet, you will need to enter all the roles you expect to hire in the future. For each, you will need to enter (as shown in the table above), in order:
- Role: either the role or the name of the recruit
- Team: drop-down list to select the name of the team the role falls into (the teams are the ones we set up earlier)
- Salary: the annual gross salary
- Starting: the date when you expect to hire the role.
Note: if you already have existing roles before the start of the model, enter the date in the future you recruited the role. For instance, if you are CEO and started to work since January 2021 but the first date you project your financials from is September 2021, enter January 2021 as the starting date for CEO.
- Taxes: any taxes and benefits you incur on top of salary, expressed as a percentage of gross annual salary
- Leaving. If you have contractors with fixed term employment contracts for instance, enter the date at which you will not employ that role anymore
- New salary amount. If you expect to increases salaries in the future of certain roles, enter the new annual gross salary here
- New salary starting date: the date you start to pay the new salary
- Bonus %. If you pay bonuses on top of salary to certain roles, enter the corresponding percentage of annual gross salary you pay each year as a cash bonus.
- Bonus timing. Here you can set whether you pay bonuses every month, quarter or yearly.
Step 7: Expenses
In the Settings sheet you can enter a number of assumptions for the template to calculate automatically the expense amounts in Expenses.
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.
7.1. Service fees
Most mobile app businesses need to pay service fees to the platform they are being advertised on (e.g. Appstore or Google Play). These fees, as you may already know, are source of disputes and lawsuits recently.
No need to do anything here, the template calculates automatically the service fees based on the seniority of your users. Unless the law changes in the near future you will need to pay 30% commission on qualifying revenues generated from users joining your platform less than 12 months ago, and 15% for users above 12 months seniority.
The service fees expense is calculated in the Expenses tab.
Note: have a look at whether your revenue sources qualify under the commission schemes applied by Apple and Google as some of them might be exempt.
7.2. Payment processing fees
Enter the percentage of revenues you will pay to your payment processing provider (e.g. Stripe, Paypal, etc.)
7.3. Customer Support
Customer support is an important expense category for most Mobile App businesses. The template gives you the ability to forecast Customer Support in 2 different ways, either:
- Enter the customer support roles one by one in the Hiring Plan as shown above; or
- Forecast customer support salaries as a function of the number of users you have
We are covering here the 2nd approach. Customer support salaries will be calculated by taking into account 3 different assumptions which you will need to set:
- Percentage of customers requiring customer support per month. Let’s assume you have 1,000 active customers in a month, not all might contact your customer support service. For instance, if a customer calls your CS say, every 2 months, enter 50% (indeed, 50% of all active customers contact CS every month, ie every 2 months)
- Number of tickets processed by a customer support agent per hour. Here we set the “efficiency” of your customer support team. If your are dealing with small requests (logins issues, etc.) chances are your tickets will be dealt via email within a few minutes: enter a higher number here
- Hourly cost of a customer support agent. This is the total hourly cost you pay your customer support agents (including taxes and benefits, if any)
Note: If customer support is outsourced to a 3rd party instead (to Teleperformance for instance), simply enter here the hourly cost you pay per customer agent.
Enter here the amount you spend per month per user in hosting, tech infrastructure, etc. If unsure, ask you your CTO.
7.5. Team expenses
For each team, you have the ability to set a spending per role, it includes:
- Onboarding costs: any one-off you incur when you hire a role (computer, desk, etc.)
- Ongoing costs: any recurring expenses you incur per month per role (subscription, meal allowances, etc.)
- Travel: the travel allowance per role per month. Management and sales team may travel more than the engineering team for instance, so you can differentiate them here.
7.6. Other expenses
Enter here any other recurring expenses you haven’t included yet. For each expense there are 4 assumptions to set:
- Expense: the name of the expense
- Start date: the date from which you start to incur such expense
- First monthly expense: the amount of the first month
- Increase (per year): the percentage increase (per year) at which the expense grows over time (if it does)
Note: if the expense stays flat over time, leave percentage increase to zero instead.
Step 8: Balance sheet
- Cash starting balance: the amount of cash you already have in the bank before the start of the model
Note: do not include the fundraising round (see below) you expect to raise here. It will be added automatically to your cash balance.
- Losses carry-forward starting balance. If you have any tax credit from your state, enter the amount here. For a refresher on what losses carry-forward, see Investopedia’s definition here.
- D&A lifetime amortisation. Any capex you will spend in the future (see below) will be depreciated over time. This is where you select the depreciation schedule. If in doubt, ask your accountant.
Step 9: Capex
If you expect to spend any capital expenditure in the future (building, equipment, etc.) or simply capitalise part of your expenses, enter the amount under “Other capex” in the Capex & D&A sheet.
Note: by default the template already includes onboarding costs (see team expenses) within capex. Indeed, onboarding costs such as computers and desks are assets and need to be included within capex and depreciated over time.
Step 10: Fundraising
This is where you can set the fundraising rounds you expect in the future. Set here 3 assumptions:
- Round: name of the round (e.g. Seed, Series A, etc.)
- Amount: the amount you expect to raise from this round
- Date: the date of the round