Technovation has partnered up with our friends at HSBC for this lesson! Calculating your revenue is one part of earning maximum points in the "Financial Stability" line of the judging rubric. It can also help with "Future Goals".
In this lesson, you will…
- Learn about different ways to make money for your app
- Calculate how much revenue your business will make over 5 years
- Use this worksheet to complete your calculations
The revenue model that you’ll develop in this lesson will be necessary for the Senior division to complete their 5 page business plan. However, Junior division teams are still encouraged to complete this lesson and talk about how they will earn revenue in their pitch video.
At this point, you have a pretty good idea of what your business will be and how you will do some marketing for your app. Now, it’s time to figure out how your business will make money. Remember, even nonprofits and social enterprises need to make money so that they can pay for all of their expenses.
In this lesson, you’ll calculate your revenue, which is how much money your business earns. In the next entrepreneurship lesson, you will figure out how much it costs to run your business, which is called the operating cost. Then you will calculate your profit, or how much money you have left over once you have paid for all of your expenses.
[Revenue] - [Operating Costs] = [Profit]
Choosing a revenue model
Revenue is the money that a business earns, usually from selling products and services to customers. For mobile apps, there are three main ways to earn revenue. Keep in mind that you can use a combination of the three, like having in-app ads and paid features.
In order to help your team decide which revenue model to use, refer back to your market research from Ideation 5. Think about your users and whether or not they would pay additional money for features in your app. Research how your competitors charge for their apps and additional features.
Calculating your revenue
1. Calculating your market size
To calculate your revenue, you first need to estimate your market size, or how many people could download your app. For example, let’s say we are making an app that will help high school students apply to college in the United States. Our market size would be the number of high school seniors in the United States. We found that 3 million students graduated high school in 2016 and around 70% of them applied to college. So, our potential market size is huge: 2.1 million students!
3 million high school seniors x 70% going to college = 2.1 million potential users
We don’t really expect that 2.1 million students will download our app, and there are many reasons for this. They may not want to use our app, or they may already use one of our competitors. They also won’t know about it, or may not have mobile phones. To determine around of people who you could reasonably expect to be interested in your app, you’ll need to calculate the market opportunity.
2. Calculating your market opportunity
The next step is to calculate your market opportunity, or the number of people who you can reasonably expect will download your app. You may need to do some competitor research online or with user surveys to figure this out. Let's see how our friends at HSBC calculate year to year revenue with our college app:
It may be tempting to overestimate your revenue, but remember that this is not a good way to get people to believe in your app. Reasonable, well explained, and well researched numbers will help you make a great case for why your app will succeed.
Activity: Choose a Revenue Model
With your team, decide on your which revenue model you want to use to earn money. Carefully consider your users and why they are most likely to pay or not pay for. Ask some of your users through a survey if they would pay for things, and for how much. Don’t be afraid to use a combination of the different revenue models.
Activity: Increasing Revenue over Time
Now that you’ve selected a way to make money from your app, you need to think about how you can get more and more users to use it each year. You want your app to grow and become more popular, so that people will invest in your idea. Here are some guiding questions to help you think about how to get more users to download your app each year.
- Are you are using more money for advertising?
- Are others sharing the app by word of mouth?
- Will you build new features that draw more users in?
- Are you going to hire more people to become ambassadors for your app?
You should use your revenue model and the explanation in your pitch video and in your business plan, so make sure to write this down somewhere.
Activity: Calculate your Revenue for 5 Years
Now it’s time for some calculations. You already know how your app will make money, and how you will draw in new users each year. It’s time to fill out the revenue part of this worksheet. You will need to calculate how much money you will make each year. If you aren’t sure how to do these calculations, follow the example above. You might need to do some research, or survey some of your users to make the best estimate possible. Remember that you can always add additional other sources of revenue as the years go.
Don’t worry about the operating costs and startup capital sections of this worksheet. You will do these sections in the next entrepreneurship lesson.
It may be tempting to say your app will make tons of money but it’s very important to have a well thought-out explanation to go along with your revenue model. This will be an essential part of your pitch and how you get people to believe in your idea. If you are serious about creating a sustainable app and business, you must research and plan how you’ll get people to download or continue engaging with your app each year.
Keep track of your revenue model and the explanation in your pitch video and in your business plan, so make sure to write it down somewhere.
Additional Resources: Revenue Models for Nonprofits
If you are a nonprofit, you might not be planning on selling anything. However, you will still need money to develop and upkeep your app. You can still raise money by applying for things like grants or receiving donations. A grant is money that someone gives you that does not need to be repaid. Organizations or governments sometimes give grants to support projects for social good. A donation is similar to a grant but usually given by an individual.
To apply for a grant, you have to tell the person giving the money what you plan to do with the money and how you will use it. If you do not do what you said, they might take the money back. These grants are often very competitive, so you’ll have to appeal to the funder and make the best case for why they should give the money to you above others. If you are planning on raising your revenue through grants and donations, you will need to tell your funders (who give you the money) what you will do with the money. For example, you will donate a certain number of downloads to students who would benefit from it but can’t pay for the app, or you will use the money to improve the app and sell it at half price.
Even if your business is a nonprofit, you can still sell things or earn money through ads or other features. The difference with nonprofits is that you can’t keep the profit like you would with a social enterprise or a for-profit company. What you do with the revenue will be covered in more detail in the next entrepreneurship lesson.