How to Unlock Your App Idea and Forecast Your Profit and Loss (Part 1)
UX research and experimental marketing are the key. There you go, I said it. But let me take a step back and tell you why, what, and how.
Table of Contents
UX research and experimental marketing are the key. There you go, I said it. But let me take a step back and tell you why, what, and how.
THE WHY
The reason is simple: to find your audience, test the market, and see if there is demand for your app. Measuring the level of interest is crucial to your app’s success. Finding potential users is only the first step, because you need to know if there is enough demand in the market to sustain a profitable business.
By starting with UX research, you can assess the business value of your idea before investing potentially tens—or even hundreds—of thousands of dollars on development.
THE WHAT
Before you start, look at the competition. If there are no competitors, ask yourself why. If there are, then find something to set yourself apart.
If you discover they’re doing something different, remember that there is always a reason why. It might be some sticky technical issues or legal mumbo jumbo preventing others from jumping on the same great idea.
Anyway, you should conduct a feasibility study, yet at this point you’re not sure about the details. How can you check if it’s technically and legally possible to do what is still in the cradle of your mind?
You need to flesh out your product idea and have a better understanding of the full picture. Once you have that, then you can start testing it on the ground and get real actionable insights.
Aim at getting answers to these questions:
- Audience: Who’s interested? Where are they? What do they do? Which demographic groups do they belong to? What do they like? What is their lifestyle?
- Product: Which specific features are most important to potential users? Why do they need them? Which problems are they going to solve?
- Model: What percentage of users are willing to pay a monthly fee and how much? What percentage of users are willing to use it only if it was free?
- Market: What is the cost of user acquisition and is it scalable? Which marketing channels would be most effective?
Answering those questions beforehand will help you determine your app’s core features and the right business model based on actual advertising cost. From there you can model your P&L (profit and loss) before you even start.
If it doesn’t work on paper it won’t work in real life. Simulate your app’s business plan and keep optimizing it until you find a successful model and strategy.
There are people who have spent millions of dollars developing their app based on a hypothesis rather than actual user insights and market analysis. Many start-ups have failed due to underestimating the cost of advertising, or overestimating the size of their audience.
Unfortunately, they were so excited about their idea that they rushed to develop it before conducting a UX workshop or running marketing campaigns to figure out the cost of user acquisition. Some of them even ran some campaigns that were effective but not scalable, implying that there were not enough people interested to support a sustainable business.
By now you probably have some broad notion about who your potential users are. If you think your idea would appeal to all of these people, hold your horses. There's a lot more to figure out.
No matter how convinced you are that everyone should be interested in your app, in reality everyone is different. Details about their personalities and circumstances will point you to the sweet spot. Finding it is the first sign that you’re on the right track.
THE HOW
Depending on which stage you're at, there are several things to consider: Is it still a vague idea? Is it a fully formed idea? Do you have a clickable mockup? Have you set up a website?
Let’s consider that you just have a vague idea and you feel it could become a great, useful product for a significant number of people in a given user segment. See case study here.
Create a short questionnaire to rate each feature you’re thinking of developing, so that you can find out which ones are most popular. Ask if people are willing to pay for specific features and how much. Chat with them and find out their pain points. Try to assess whether your solution could be the answer to these problems.
The audience shouldn’t be too broad or too narrow. For example, if your app is about sports, you can already restrict your audience to sports fans. If you don’t know how to narrow it down further, create different advertising campaigns segmented by each sport. You might find that tennis players are more interested than others and the cost of targeting them with ads on Facebook is less than on Google.
Running these campaigns in advance will give you a sense of what the cost of user acquisition might look like and which user segment and channel has the lowest cost and highest rate of conversion.
The major advertising platforms determine price according to relevance. For example, when you see that targeting a specific segment like tennis players has a lower cost of conversion than basketball players, this means that your ad is clearly more relevant to tennis players.
Whether you’re advertising on Facebook, Google or LinkedIn, their algorithms know a huge amount about their users' interests. So if you get a low cost per user, it means that these machines are telling you that you’re getting their attention and interest.
Other factors, such as clicks and other engagements, are taken into consideration and any sort of engagement will help to further refine your audience, if there is one.
Keep optimizing your communication and targeting. Keep experimenting until you come up with a direction to move forward or a clear sign that you should just stop right here.
Now that you have a sense of user acquisition cost, and if a good percentage of people are interested and willing to pay, you can then calculate your expenses and guesstimate the P&L for the first few years based on your budget.
There will still be other metrics to measure, such as the percentage of active users, user churn, and organic growth, but they cannot be determined until you have a running app.
At this point it’s better to look at the worst case vs best case scenario. Run the numbers and put together a matrix of options. What would be the P&L if 10%, 20% or 50% of the users are active on a monthly basis? What if 40%, 60% or 80% of users are churning per month? The same goes for organic user growth. Don’t forget to count all the expenses, mainly the cost of development and marketing.
This exercise will give you a clear idea of what success might look like for your app. Try to validate the business model based on those numbers. How much money should you be making from paid plans, advertising, or both?
If you can get to a positive number in the first year, great, but it is not necessary to be profitable in the first year or two. You just don’t want it to be so deep in the red that you'll run out of money. You will need to see an increase of profit over time, of course.
There will be a high cost for initial development of the core features, so it’s better to run the numbers over a period of five years while assuming an ongoing marketing and development budget.
After this experiment you may still have a few unanswered questions and some new ones that will help you get a better understanding of your audience, marketplace, and channels. They might look like this:
- Is your target audience big enough? If not, is there a similar audience you can test? If the audience is too broad, can it be segmented and narrowed down?
- You also know the initial cost per user, but will the cost remain as low if you increase your ad budget or will it go up? Are there other marketing channels you haven't explored? Would the cost and conversion rate change if you sent the traffic to a microsite instead of a survey or if you send it to a clickable prototype?
THE WHERE
Where to go from here? What’s the least costly and most effective way?
This article was focused on the initial test of a vague app idea, but there are other measures to take into consideration if you have a microsite, a clickable prototype or a working MVP (Minimum Viable Product).
Razi Alakhdar - Marketing Manager
Next month, I will share information on how to move forward and explore other marketing and UX tactics in more detail, depending on which stage you are at. After all, the more you move forward in the start-up product development process, the more you can investigate, experiment, evaluate, and forecast. Read Part 2 here.
