How much should I charge a client for my mobile app idea?

Hi,

I have a mobile app idea which I pitched with a demo to a client. This app has not been done before and it's a unique technology that would increase buisness for the client. The client was impressed with the demo, however after I quoted the price for the app they haven't shown much interest and are postponing our next meeting. I quoted 40% more than my development cost which I outsource to a company in India. For support, I told them we charge 2.50 USD per user. My total quote was roughly 9,000 USD and my developemnt cost is 5,000-6,000 USD.

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Dear Vamsi

You have not mentioned whether you produced this application for this specific customer or whether you created the software to sell to multiple companies and hence recover your costs over a number of clients.

The problem with all product pricing, whether software or hardware, is they are only worth the price the client is prepared to pay for it. What it costs the producer is in effect the producers problem not the buyers. For the buyer it is about how much money and time it saves, and hence what is the value to the business. To this end, I have split my answer to you in 2 sections and hope one of them be of help to you

Bespoke Software
When we get approached for designing bespoke software by a client we price we break down the prices as following:

1. Requirements Capture – This is when we find out what the product needs to do for the client, how they will use it, how it will add value (or save cost/time)
2. Prototype (Alpha Version)– This is the first cut of the code which we will work with clients to get feedback and make changes, debug, etc.
3. Beta Version – This is the more rounded product and is really where we iron out bugs, operational oversights, etc.
4. Full Release – Final version with 90-days support included in the price
5. Ongoing Support and Maintenance

We charge at each stage of this work and will not start on the next stage until the client has paid for the completed steps. Pricing is usually combination of our time + any additional external costs such as outsourcing of the code or development. We have to recover all our costs from a single client therefore the cost and profit objectives have to be paid by the single customer.

General Sales Software
When we design products for general release such as WordPress themes, we go through the same process except we are the only people who are setting the specification.

We make a forecast of how many units we expect to sell, forecast future support revenue streams, and then set a price that would help us achieve our financial objectives.

It is unreasonable to expect to make all your profit on a software or product that is for general release from your first customer. This means your first customer pays for everything including profit for you, and any additional sales will be pure profit. That sounds great in theory but does not work in real world.

This means if your development costs was about $4000 and you expect to sell 10 of these over the next 12 months, then you should try to amortise the costs over the 10 unit sales (roughly $400 per sale as COGS + Your Cost of Sales). Then add in your support contracts revenue and costs, to get a proper P&L view of your product over 12, 24, 36 months.

Keeping with the above theme and if your price your product at $2,500 and you achieve the 10 sales with average of 10 users per sale your revenues will be roughly:

1st year revenue
10 x $2,500 = $25,000
10 x 10 x $2.5 = $2,500 Annual recurring support revenue
Total Year 1 revenue = $27,500
Costs = $4,000 development cost + Support Delivery + Cost of Sales

2nd year revenue
10 x $2,500 = $25,000 (new sales)
10 x 10 x $2.5 = $2,500 Annual recurring support revenue (New sales)
10 x 10 x $2.5 = $2,500 Annual recurring support revenue (from last year's sales)
Total Year 2 revenue = $30,000
Costs = $0 development cost + Support Delivery + Cost of Sales

3rd year revenue
10 x $2,500 = $25,000 (new sales)
10 x 10 x $2.5 = $2,500 Annual recurring support revenue (New sales)
20 x 10 x $2.5 = $5,000 Annual recurring support revenue (from last year's sales)
Total Year 2 revenue = $32,500
Costs = $0 development cost + Support Delivery + Cost of Sales

Total revenue generated is $90,000 over 3 years from a $4000 development cost. Not a bad return really!

You can stipulate this to year 4 and so on, but of course there is an assumption you do not have any further development cost which is not realistic but it will certainly not be the same as your grounds up development of the product in the first place, so you should add some contingency cost here.

Summary
Setting price for any software, service, or goods is not as simple as COGS + %. You need to check what the market tolerates and what is the value of your product to the user (cost savings, time savings, etc.). You then have to look at your potential ongoing revenue and costs. Finally the most difficult part which is try to guess how many units you will sell over X number of months or years.

I hope this helps.

1

The obstacle with a great idea is finding someone to buy it. You may get lots of encouragement to develop the idea but until someone actually takes out their wallet and throws cash at your product no matter how great the idea doesn't matter.

I would use the customer as a driver for future business. Give them a liscense to use it. Negotiate the cost to them based on what they will do for you; help promoting your app, feedback, think tanks, etc. let them help you debug and exploit the app to others. You'll make a lot more money this way.

As far as price, ask them what they are willing to pay you for it and listen intently as to how they arrive at the there price. Take their price and relate it to your product as this is their perceived value of your app. Used this perceived value to either lower your expectations or strengthen your value proposition statement.

1

Unfortunately this is all about your expectations and your potential client's expectations..... Value added is always "where the rubber hits the road" in a sales negotiation... In the selling process the steps I use:

1. INTEREST--- You obviously had their interest since they viewed your presentation

2. MONEY---This is where your selling process got derailed obviously, so the next step

3.DECISION--- is now a NO

Go back to them if possible and try to open up the lines of communication again and probe to see where you are off track, and whether it is worth keeping the negotiations open.....

Can you use this APP somewhere else?

On costs I always recommend and ABC or Activity Based Costing approach, then add on overhead and profit...

Good luck, but it is always about EXPECTATIONS from my experience....

1

Hi Vamsi, There are a few things that should be considered.
If you have developed this for the client, they should be paying for your skills and expertise.
Also before doing such a project you should have an agreement in place with flagged points (stages) for payment.

If this is something which you have developed yourself, and then tried to market , there are a number of things that you should consider.

1) First there is the concept / idea.
2) Is the application of the app.
3) Is the advantage of someone using the app
4) Then there's the cost benefit and payback time.
5) Who will benefit the most by using the app.

If the app is marketed correctly it may even be worth 5 x or 10 x the total development cost, depending on the benefits provided.
maybe not a an one off payment by by the accumulated profits from the sales and distribution of the app.

Some things you need to be mindful about.
a) how easy is it for someone else to copy your idea.
b) How complex is the engineering development.
c) How should you protect your concept while exposing it to other potential users.

It seems to me that your development cost and sell price seems to be quite low.
This makes my think that the idea may be smart / unique. However the actual development or complexity may be rather low engineered.
That is assuming that you have conducted beta trials and the app works 100%.

you are welcome to contact me if you need further assistance with any of the above points.

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