We live in a surreal technology world. Developers focus on apps aiming to market them through The App Stores or Google Play. In contrast, others are active in the SaaS arena. When customers looking at software as a service decide that a product is suitable for their business, they will gladly subscribe for around $40 per month on autopay. However, for an App developer to earn even 50% of that is a tall order, as we’ll see.

The competitive app environment leans toward free downloads in most new app situations (even long-standing ones). Therefore, most of an app’s value proposition occurs after the download, when the user begins to appreciate the numerous benefits. Thus, app success depends on in-app purchases, transitioning from basic (free) to premium (where a subscription is essential), and other feature access, requiring user spending. As a result, predictability is iffy, and pricing optimization is frequently an elusive concept.

Customer behavior patterns: SaaS users vs. Average app users

Immediately we see significant differences between a SaaS and app users:

  • When Saas buyers enter the user circle, it’s after considerable consideration and carries with it a staunch commitment. Therefore, versus the typical app, expect:

  • App customers, because the download is free (or next to nothing – perhaps $0.99), download prolifically. However, the commitment level is startlingly low (relative to SaaS), as demonstrated by a 95% rate churn over time (i.e., deleting the download, using it little or not at all). 

  • The balancing factor is that apps probably enjoy ten times more downloads than SaaS. Otherwise, it would never pay (more on this below). Another way of looking at it is that an App needs to usher in droves of downloads to equal one committed SaaS customer.  

Apples to apples, the app customer that becomes brand loyal may contribute less or more than the SaaS subscription fee over the number of months they use it. It brings us to a critical metric – Lifetime Value (LTV). There are a few ways to calculate this. We find the most practical way is as follows, keeping the SaaS and app comparison front and center of our focus:

  1. Assume 100 customer downloads for both the SaaS and app examples.

  2. Determine ARPU (the Average Revenue Per User for the 100 as long as they stay committed.) 

    1. For Apps: Let’s say it’s $20 monthly derived from subscriptions and in-app purchases.

    2. While active, let’s assume the SaaS user subscribes to a $40 monthly fee – twice the app number.

  3. Next, predict the maximum brand loyalty period and the most significant app fan sustainability. Let’s call it 22 months for the app and SaaS. 

  4. While the SaaS example above, aside from the $40 average monthly usage value (2 X the app), also carries a low churn factor (say 8% or 92% retention), reflecting robust commitment

  5. Now for the hardest pill to swallow – the app churn rate: The observed decay is significantly more destructive. Let’s call it 95% churn over the 22 months or 5% retention (signaling low commitment on entering).

SaaS

  • We can see that 87 of the 100 users stayed brand loyal for the maximum 22 months customer life cycle. 

  • Note: We applied the 8% annual churn extrapolating it to 0.67% monthly against the ARPU of $40 per month. 

  • On average, the LTV of one customer based on the original hundred is $786.

App

  • We can see that only 19 of the 100 users stayed brand loyal for the maximum 22 months customer life cycle. 

  • Note: We applied the 95% annual churn extrapolating it to 8% monthly against the ARPU of $20 per month. 

  • On average, the LTV of one customer from the original hundred is $206.

The decay pattern in the chart is probably more realistic for a SaaS product, while the churn is far quicker in the first six months and then levels off for an app. It won’t make much of a difference, but to be conservative, let’s assume it deflates the average App LTV by another 15% down to $185. 

How realistic is the scenario above?

  • A 2015 survey conducted by Pacific Crest measured  SaaS customer churn at 8% annually. Conversely, these products enjoyed a 92% user retention.

  • On the other hand, apps could only eke out a 5% retention, losing 95% of first-time customers to churn. 

Now, you can argue that things may have changed over the last few years, but ask anyone in the business, and they’ll admit it doesn’t feel like it. App marketers tell us that getting the right customers through the door, ready to make a brand commitment, is an uphill battle. Therefore, If you are an experienced app developer, we’re sure you’ll agree with our visualization above, as being pretty close to reality. Let’s dig a little deeper to see why.

Customer retention and CAC (Customer Acquisition Cost)

Apps, like anything else in the tech environment, are no gimmicks. Investments before launch range from $30,000 to $300,000, and that’s only the start. Hot on the heels comes the brand launch with a significant budget allocated to sophisticated marketing on many levels. So, when we glibly refer to an app, we’re talking about a full-blown business with a team working behind it. All of it comes to nothing unless you can achieve baseline customer retention. 

Why is user retention so vital? 

Because it costs much less to maintain a brand-loyal user than it does to get them on to the customer list. If a customer falls off the bandwagon quickly, advertising spending and ASO planning go down the drain. So it doesn’t matter whether you’re a SaaS or app business; to ROI, churn is the enemy, and retention is the friend.

SaaS retention rates outstrip the app industry by miles. But then, the number of initial downloads for an app substantially exceeds SaaS. So, what does all this tell us about app store optimization pricing and net profitability? It all boils down to CAC.

What is CAC, and what’s its impact on app pricing optimization?

A primary metric emerging in both the SaaS and app industries is Customer Acquisition Cost (CAC). Pundits in both industries cite a traditional yardstick of Lifetime Value (LTV)/(CAC) at 3/1 to ensure success. Some app experts believe a 5/1 ratio is more applicable to their arena. So, in our case study above:

  • The average CAC for SaaS should be average customer LTV/3 = $786/3 = $262

  • The average CAC for the average app should be LTV (adjusted)/3,  ranging to LTV (adjusted)/5 

If you find that your monthly ARPU is lower or higher, substitute it.

Read more at ShyftUp’s article.



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