There are a few proven ways to make money on the app stores. The three most common are: paid apps, in-app purchases, and ads. You can read my breakdown of these methods from a previous post.
While those are the most common, there is another way of making money on the app stores: a buyout plan.
Up front warning: it is much safer to have a business plan that enables your app to make enough money to keep the lights on. The buyout plan is a huge gamble, and there are some very real risks that you might never make back your investment using this method. But when it works, the payoff can be huge.
Real world examples
Buyouts happen every day, where larger competitors scoop up smaller companies and products. Large mergers also occur, with enormous amounts of money. Recent examples are the WhatsApp acquisition by Facebook for 19 billion and Microsoft’s acquisition of Skype for 8.5 billion. Facebook was rumored to have offered 3 billion for SnapChat, who famously turned down the offer and is now estimated to be worth over 10 billion.
These high profile examples are not the norm, but they do exist. Smaller acquisitions happen more frequently, with much less fanfare, but are nonetheless moneymakers for the creators of the original products.
Why would someone buy out your app?
What makes WhatsApp worth 19 billion, or any app worth any amount? Here are four strategies you can use to guide your buyout plan.
One of the hardest parts of building a successful app is getting people to use it. When your app is popular and is used by many people on a daily basis, this user base is extremely valuable. An established user base has loyalty to your product, and provides a venue for targeted advertising to sell add-ons or other products. Typically, companies that acquire companies with large loyal user bases will often leave the original brand and product intact. For example, Skype and WhatsApp still exist as their own entities within the new parent companies. As a user of one of these products, you may not even have noticed the switch. This is often the best case scenario: you receive return on your investment in the product, and the product you’ve poured years of your life into continues to delight and provide value to your users.
If your app is very novel, there may be parts of it that could be patented, or at least valuable as a trade secret. If your app has a piece that is incredibly difficult to create, such as a special recommendation engine to tell a user what movie they want to watch next (e.g., Netflix), this could be a great opportunity to be snapped up by another company looking to have this functionality in their app. Sometimes, there may be an opportunity to license out a piece of your system instead of being acquired outright. This approach may reduce your competitive advantage in the marketplace, but a licensing deal would enable you to keep your original product and also control, to some extent, important aspects of other people’s products.
Similar to the proprietary pieces above, the infrastructure that supports your app might be very valuable to another company. For example, Apple’s recent acquisition of Coherent Navigation, a GPS mapping company, was more than likely due to a variety of factors, including the system and infrastructure they have developed. Similarly, the system underlying WhatsApp allows for millions of people to communicate in real time, which is no small feat of engineering. This infrastructure, and the knowledge of its creation, was no doubt a huge driver of the purchase of WhatsApp.
There is sometimes a more sinister answer to why a company might want to buy you out: you are a threat to their business. As an up-and-comer app, you may be encroaching on territory the established players don’t want to give up. Thus, in some cases, companies may buy your app just to close you down. This is never a great user experience, and will more than likely be damaging for your brand, so this kind of buyout could be more risky than for the other reasons described above.
At Push, we build apps that are unique, scalable, and disruptive to established businesses. In MyLashBook, we converted Eva Zacharias’ unique, trend-setting, and secret formula for applying the perfect set of lashes, optimized for any client’s facial parameters. In ARMS, we built a system that supports several hundred thousand users at once, providing employees with a safety net in case of an emergency when working alone. In AgPriceBook, we enabled farmers to take control of the prices of their inputs by allowing them to anonymously submit prices they received for their agricultural products, disrupting the locked down and secretive established producers and distributors.
These and many of our other apps are prime examples of apps that could be set up for a buyout plan, though because this is a risky proposition, these all have successful business plans that enable them to stay profitable without relying on a buyout.