Breakeven Analysis

Performing a true cost/benefit analysis requires you to develop a breakeven point for your app so that you will have an idea of how much time it will take you to recoup your investment. It's not much of an investment if it takes you two years to make your money back. Ideally, you want your app to break even within a month of releasing it to the Android Market. If it takes much longer than that, your app is probably not going to be too profitable for you because it will not return payment soon enough for you to sustain a living or complete other projects.

Once you have determined a price (refer to other pricing chapters), it's quite easy to plug the numbers into the following breakeven formula, which divides the fixed costs by the app's true selling price:

fixed costs

Breakeven point =---

app selling price (less Google's commission)

This calculation will let you know how many total apps you'll need to sell to break even. Once you've reached that point, you've recovered all costs associated with producing your app (both variable and fixed).

For simplicity's sake, we will not include variable costs as a separate item in this example. Once an app is complete, the expenses are considered complete for that version of the app. Because the app can potentially sell unlimited copies, the cost to produce each app after breakeven is basically zero.

After you reach the breakeven point, every additional copy of your app sold will increase your profit by the amount of the app's contribution margin. The app's contribution margin helps reduce overall fixed costs and can be defined as follows:

App contribution margin = app selling price (less Google's commission)

Using an Excel spreadsheet can help you figure out these calculations quite easily and figure out your own breakeven and contribution margin. An example using the $4.99 productivity app is shown in Figure 11.1.

Our $4.99 Android App - Breakeven Analysis

Contribution Margin (Apple's Commission Deducted) $3.49

Figure 11.1 An Excel spreadsheet helps to easily calculate a breakeven and contribution margin for the $4.99 app.

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