The idea of building a platform or app and having this steady stream of passive income is very attractive prospect. Unfortunately, the question of how to make money from an app is not so clear cut.
There are a lot of factors that affect success, but often the issue is that the numbers weren’t right in the first place. It seems obvious, but it happens in business – all of the time.
In the simplest of terms (and sometimes that’s all it takes), your financial equation is going to look at two key components – revenue and costs. In order to operate and hopefully make any money, revenue (or cash in) has to exceed costs (or cash out). I’ve put it this way, because there are many startups that don’t make money until they sell their business (and when that happens, they can make a lot of money). However, in the meantime, they still need cash to pay the bills on an ongoing basis.
A simple way to gauge your financial success
Success is a relative term and a very personal one, so your definition will depends on the goals you have of a platform or app. If you want to replace your income, then that’s a different measure than supplementing your income. It will also affect your approach to building your product.
So, a very simple gauge as to whether you can make money is:
- Decide how much you want to make a year.
- Decide how much you can charge for your platform, and an average revenue amount per customer (e.g. what’s your price?)
- Divide how much you want to make by your average revenue per customer.
This gives you the number of customers you need a year to reach your target. Does this number sound reasonable? If not, you’ll need to play around with the numbers to see if you can get the required price and number of customers to more manageable amounts. It may not be possible. In this case, your idea won’t make you the money that you’re looking for.
Now you have to think about the costs.
If you think you can make enough money from your platform or app, the next part of the equation is your costs. This will include the initial development costs, but you’ll also need to include the ongoing costs of managing and enhancing your product. On top of that, you have the overheads of running a business – insurance, marketing, advertising, legal, accounting, payment providers, banking, etc. It can all add up and eat into your hard earned revenue.
The next step is to take your revenue every year and deduct the costs. If the number isn’t positive, then you won’t make money that year. As simple as that.
You’ll then have to go back and either adjust your revenue numbers to cover all of these costs, or you’ll need to cut back on your costs, so that you can still make money.
But when will you start making money?
The thing about the above revenue number is that it’s your ideal number. The reality is that you’ll need to ramp up to that number – and it will take longer than you think. This means that you won’t be making all of that money on Day 1. The important part of this means you need to have enough money to cover your ongoing costs. Don’t spend all of your money on the upfront development!
An important cashflow indicator is called a ‘payback period’. This is how long it takes to pay back your original investment. Only then do you really start making money (after taking out your ongoing costs). Most software development projects in corporate land look for a payback period of about 18 months to 2 years. As a small business relying on your own money, this will probably be longer, as you may not have access to the same resources you need to scale quickly.
The above is a very simple view of figuring out if you can make money, but it will give you a quick indication of whether the numbers can stack up. For a more detailed view, talk to an accountant or financial advisor where you can get advice on a model to suit your specific business.
The bottom line is that it’s not so easy to make money as you might think. Even the big startups don’t actually make money yet, and their worth is based on their valuation as a business. However, if you’re a small business owner looking to enhance your income in the short to medium term, you do have to have a good handle on the numbers before you start. Otherwise, you’ll find yourself running out of money before you can figure out if your platform or app can be successful.
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