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Cracking the App Recurring Revenue Conundrum Part 3 of 3

In Part 1 of Cracking the App Recurring Revenue Conundrum we covered why App Recurring Revenue is the life-blood of any ambitious mobile app agency. We showed how you could map app recurring revenue services against the typical lifecycle of a mobile app. In Part 2 we dug a bit deeper into how to structure services around the key questions app publishers have and how to make app recurring revenue progressive. This showed how it can be easy to upgrade their service when their needs mature and suggested what you could include (and exclude) within your post-build app services to build a strong app recurring revenue platform for your business.

We now round this subject off with the last pieces of the App Recurring Revenue Conundrum. In Part 3 we’ll cover how to price, how to deliver and how to make sure you make a profit.

Delivering App Recurring Revenue Services

If you are asking your app clients to commit to giving you a check each month, its important to make sure that you show the value of your service regularly. You have to make sure you get the price point right, make sure they value what you do and make sure there’s a clear distinction between the Reactive, Proactive and  Fully Managed service levels This was covered in detail in Part 2. It’s also essential of course that you understand how much the services cost to deliver and what profit margin you need from the App Recurring Revenue Services.

How to price

So this is the tricky bit. How much to charge. Too cheap, your customers won’t value it. Too expensive and they may question its value.

The most important thing is to start your base-layer service at an affordable price point. A cost that’s easy to just say yes to. Its also essential to position this as an entry service (some thing that in time the customer will out grow) explaining its a good place to start. The higher up the “Value Curve”(Value Curve is explained in Part 2) you get the price goes up (along with your margin of course).

App Recurring Revenue

Given the Base-layer Service (see Part 2) is just observing what’s happening, the report should be almost 100% automated, so low cost and low labor effort to produce each month. This service is there to help you show your value to your clients AND most importantly spot areas they need to address, areas where you of course can help them further, and charge them of course on your normal project hourly rate that applies.

This is a full topic in its own right, so we may struggle to do it justice here, but so we give you the concept,  here goes.

There are two approaches you can take, Value Based Pricing or Cost Plus Pricing.

Value pricing – set your price based on what value you see it delivering for your clients. The easiest way to do this is based on a percentage of the cost for the app build. If the app cost $50,000 to build, 1% a month for the base-layer service seems reasonable – a monthly report on your apps performance $500. As you move up the Value Curve 1% (Base), 5% (Mid), 10% (Managed) a month seems reasonable. The cost is higher, because the service is more valuable, it also reflects the additional effort you will need to put in, moving the engagement from Reactive (We’ve seen this), through Proactive (We have seen this, so have done that), all the way up to (You want us to achieve this outcome, this is where we are against that target).

Cost plus Pricing – Work out the profit margin you need on top of the costs to produce it, both systems and the agency labor you need to deliver the service. So take an example of App Hosting. This typically would be a service component in the App Care Services as show in the diagram above.

Here’s a working example. We’ll keep the math simple and assume your charge out your time at $50/hour.

  • You buy in your MBaaS  hosting, data base, content management, API & micro-services you need to run the app for say $50 a month.
  • You add on labor to deliver that service, say an hour a month to produce the report, manage backups, and the various dev-ops tasks that you are doing to keep their infrastructure running well – costing you another $50 in time. In reality this should be completely automated for a base-layer service so $50 falls straight through to the bottom line.
  • Now you charge this out at $150 per month, per app – (or adjust for your own labor rate).

In reality you’ll probably come at this with a combination of Value and Cost Plus Pricing to settle at a level that feels right for your business and your client’s ability to pay.

Profit Margin

Rule of thumb is the higher up the value curve you go, the more value you are adding and the higher the profit margin you should be able to command. Some App agencies we talk to decide to offer these services “At Cost” or even as loss-leaders as the  additional revenue that these services generate from spin-off work is where they see the value.

So as we said earlier, the margin you get from the services will depend how high up the value curve your services are. From the research we’ve done, baselayer (Reactive) services (that are largely or completely automated)  rule of thumb, most companies get around 50% profit margin (more if you load “labor” into this automated service). Proactive Mid-layer is further up the value curve, will involve more management time so justify a higher cost and higher margin. Software tool costs should be pretty much the same as the base-layer services, but will involve a considerable amount of time to analyse results and suggest remedial action. Rather than 1 hour of labor for the Reactive Service, most agencies cost in 7 hours a month in labor for offering their Proactive Service. Margin is typically higher on labor so your Proactive Service would cost would be $400 per app per month ($350 labor, $50 for your mBaaS tool).

Managed App Services, where you commit to delivering the outcome for the app, will be the highest margin service you will offer, at the top of the value curve. You are in effect taking on risk by delivering this service and therefore need to ensure you price this risk on to your service. Its risk in that you are committing to delivering the “Single Definable Objective” of the app.  Again software costs will be pretty much the same, but you’ll be using a combination of labor and probably media costs (google adwords, advertising, social media) required to make sure you maximize mobile app downloads and build highly engaged app user base.

From what we have observed with Kumulos Customers you should aim for around 80% profit margin on labor and around 50% profit on any systems you are using to produce those services. Also around 10% on any media you are handling.

Automated Service Reports – branded as Yours

So this is the important bit. You must wrap all these services up into an easy to digest, simple to read report so they can see the physical output of what you’re doing. You’ve got to make sure the report is easy (or even completely automated) to produce with the base-layer services.  For services further up the value curve make sure you are annotating the report with observations, comments and suggested actions, (especially if those actions require the client to sign off the budget for the follow on work).  Make sure the report is consistent each month, so there’s a regular flow to what you are communicating and make sure that the report is covering the key questions that your app customers will have.  Lastly, and most importantly, make sure the report has your branding all over it, so it’s your name they see each month. Send these reports regularly (see Frequency below) and follow up with a call to highlight areas that you think need attention. You are showing your clients how you can help make their app a success, so they will naturally give you more work to help solve their problems.

Frequency

In terms of frequency, a monthly service, will be… eh, monthly. Wont it? Well the App Publisher is going to be more interested in the first few weeks and months, so a call/meeting to discuss your report weekly initially makes sense (and costed as such). It will settle into monthly, 3 to 4 months down the line when the anxiety around the initial launch subsides.

When you move your services up the Service Value Curve and are offering Proactive or Fully Managed App Services then we’ve seen clients happy to get a report monthly ,paying for the service monthly but unless there are any big changes, get together quarterly.

Regardless of the service you’re offering, what’s essential here is understanding that issuing the Agency Branded Report is a sales event. It is something that you must follow up on and make sure your clients reading and digesting what the report is telling them. If you don’t get questions, be worried, be very worried. It’s a sign that they aren’t as engaged as they should be. Low engagement means they probably don’t value what you are doing, so there’s a high likelihood of them cancelling your App Recurring Revenue services.

What’s arguably even more important is that the Report/Meeting is also the time to opportunity spot new projects coming down the track – the latest platform update to iOS# that will require a review and partial rebuild and of course changing business needs that may require a completely new version of the app or a new app serving a new purpose, that of course you are now head of the line to deliver for them.

Why this approach brings success to App Developers?

When we ask mobile app development businesses why this approach works for them, three common themes keep coming up.

Service that sells follow on work

Get this right and you have your client paying you to find you more work. Work that, of course, you price up and deliver as micro projects. Smaller pieces of work that you can easily fit around some of the bigger app projects. No matter how good you are, no app is 100% right first time. It’s about launching fast, learning and refining how the app performs. That’s the essence of Lean Thinking.  Your post launch service is about analyzing and learning to improve how the app performs and building those improvements into 1.X releases.  Work that you are there to do for them, of course.

Start small and progress… Reactive => Proactive => Managed.

It’s about turning project based revenue into ongoing services that your customers pay monthly for. So you keep your customers paying . Best way to do this is sell something small to start. Make it easy to sell and easy for your client to say yes to. Get them used to, and valuing what you tell them, then move them up from Reactive “We have seen this”, to Proactive “We have seen this and this is what we need to do”, to ultimately committing to a stated outcome “We have delivered this (single objective), and are now doing that to drive the number higher).

Low risk to the App Agency

As you move up the value curve, in effect the risk on you increases. At top level – Managed – you are in effect committing to delivering an outcome, so with that there’s some risk. For example, you will deliver X numbers of “quality” downloads of the app. So you really need to understand the app, to be sure you can attract the right folks into the app. By starting with the “We’ve Seen this” Reactive base-layer you learn about the app, and your client, so you know what risk your taking on, before you commit. Then when you are comfortable with the app you can suggest your customer moves up to your Proactive Layer.

Summing up

Like most business owners you’ll get why its important to build app recurring revenue services.  It just makes sense to give yourself a more stable income base to the business, a stronger foundation for growth that gives you regular income stream to take the edge off your monthly running costs. Its one thing understanding the need, its another thing knowing how to make it happen. We hope this 3 part blog gives you some ideas on how to get going and how to keep your customers paying once you’ve delivered them their app.

This is a big topic. Something that’s difficult to cover everything in one go (well three bites actually). But hopefully it’s got you thinking and given you some ideas to make those first steps towards growing recurring revenue for your app business.

Still a bit uncertain how to start, then we can help. We can offer you a helping hand to get going with recurring revenue services to support your mobile app agency, get you going and then transition this to your business when you are ready to take this on.

Hope this helps and you start today to give yourself a better App Agency tomorrow and if you want some help, just get in touch.

Good luck.

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