Building a Business Case for a Shopping App: The Online Retailer’s Guide

Many retail execs are still hesitating about whether or not to invest in building a shopping app for their company and customers. It makes sense to be cautious, because when it comes to apps, building the business case can be a bit of a head scratcher.

On the one hand, apps don’t sit at the core of your business. They’re an ongoing investment that requires expensive custom development and constant updates. They’re also not a great tool for acquiring new customers (although customer acquisition costs on apps are much lower than for ecommerce as a whole), and instead only are primarily designed to serve your most loyal customer base.

On the other hand, customers love apps. If the next battleground for customer loyalty is going to be fought on mobile, apps are a crucial part of the wartime arsenal. With the furious pace of innovation in mobile hardware and software showing no sign of slowing down, apps continue to be the best way to take advantage of the most exciting features of a customer’s device and offer them the most transformative shopping experiences.

After many conversations with our customers, what it often comes down to is this: if the numbers make sense and it’s clear that there’s a strong business case for building a shopping app, then it becomes a no brainer.

And so with that in mind, we’ve set out to try to help you overcome the ‘to app, or not to app’ question by providing the set of major inputs you’ll need to consider in your business case – and where to look to make sure you’re plugging in the right numbers.

Input #1: Mobile traffic as a percentage of desktop (and the corresponding growth rate)

The rate at which your customers are adopting mobile is a good indicator of whether or not you should start thinking about a shopping app in the first place. If your mobile traffic is sitting around 30-50% and growing fast, it’s a healthy sign that your core demographic is comfortable using mobile and are likely ready to be engaged further.

To justify the investment in an app, your mobile traffic needs to have reached a point where you can siphon off enough of it into an app so that it becomes financially viable.

What numbers to use:

Web analytics are your best bet here. Look at your current mobile traffic as a percentage of desktop, as well as the quarterly growth rate of this traffic.

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Input #2: Conversion Rate and AOV

One of the biggest draws of an app is the user experience you can give customers. Everything from browsing to payment feels that much faster and sleeker, so it’s no surprise that customers convert at a much higher rate. And with native one-touch payment solutions like Apple Pay and Google Wallet (and a host of other payment services), the benefits can be meaningful.

There is sometimes a tradeoff however, and that’s with your average order value. In a shopping app, customers can make purchases with much less friction, so they’re likely to check out faster and with fewer items in their cart.

You need to look at a combination of increased conversion rate and reduced average order value to arrive at a more meaningful number.

What numbers to use

At Mobify, we use a general rule of thumb that you’ll see a 2x higher conversion rate compared to mobile customers on the web, as well as that your average order value may drop by 5%.

 

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Input #3. Mobile traffic cannibalization rate

According to RJMetrics’ 2014 Ecommerce Benchmark Report, half of all revenue comes from the top 15% of customers, with the top 1% of customers spending 30x as much as the average customer. These top customers are going to be the ones first in line to download your app and keep it on their device.

Accordingly, this input is the one that often gives retailers the biggest headache. The question is, if you’re siphoning off your most valuable customers from the web into an app, doesn’t that mean you’ve just taken revenue out of one channel and put it in another?

The answer is yes…which is why it’s so important to calculate the increase in conversion rate as well, and therefore get a better understanding of the net-new revenue that will be created.

What numbers to use:

At Mobify, we use the rule of thumb that 10% of your most valuable mobile traffic will head to the app. In the case where apps are offered across both iOS and Android, this number is closer to 20%. From this point, you should be able to roughly calculate how much revenue you’re transferring from web to app.

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Input #4: Development cost

One of the biggest detractors from the the profitability of your app is the cost of building and maintaining it in the first place. This input can change fairly dramatically based on the scope of the app and the development route taken.

If you’re looking to work with an app vendor, you’ll need to budget for an initial build fee as well as an ongoing service fee. If going in-house, you’ll need to think about the additional salaries of your app development team and the time a project of this scope will take away from other business priorities.

What numbers to use

These numbers will be some of the hardest to track down. Since every app comes with a different scope, and each approach to app development has very different costs, it really is just a case of speaking to vendors and colleagues in the industry with existing apps in place.

There is a lifeline though! If you’d like to understand how much it will cost for a mobile shopping platform like Mobify to build your app, you can always speak to one of our in-house e-commerce business analysts.

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Input #5: Increased Customer Lifetime Value

One of the biggest draws of an app is the impact it has on customer lifetime value – they can be a significant driver of customer loyalty.

As Arpan Podduturi, Etsy’s Group Product Manager says, “We look at mobile web as top of the funnel for mobile users; it’s the introduction to our product and a critical part of our mobile experience. But our app users engage more deeply with us and have proven to be more valuable over time.”

Retaining your customers in an app is incredibly important, which is why we’ve also put together a tactical guide to make sure you’re keeping your brand on your most important customers’ homescreens.

What numbers to use

Calculating an increase in customer lifetime value can be tough. Depending on your business model and the methodology you use to measure lifetime value these numbers can change wildly.

Unfortunately, you’re on your own with this one!

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Input #6: Annual User Growth

Annual user growth is a fairly simple input – it’s the rate of people who are likely to become app customers over time. These numbers can vary fairly significantly depending on marketing spend and app promotion.

What numbers to use

At Mobify, we typically plan for a 10% annual increase in user growth. 10% is a fairly conservative estimate, but it’s better than overestimating (and it’s difficult to guarantee marketing spend to promote the app!)

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BONUS #1: App acquisition rate

Apps are typically viewed as a retention tool to drive customer lifetime value. However, they can also become an inexpensive vehicle for user acquisition. According to Facebook, it currently costs around $4.10 to acquire an app customer from their platform.

Compared with other acquisition channels, such a low CAC is definitely worth giving some extra attention. If customers have even a minor awareness of your brand, the right ad with the right offer might just be enough to get the download and kick off the relationship.

BONUS #2: The In-Store Effect

While this post has been created primarily for online retailers only, it can nonetheless be applied to omnichannel retailers as well. With geolocation features, low-energy bluetooth and a host of other native features, your app can go a long way to supporting the customer journey both in-store and outside of the store.

Conclusion: Start crunching those numbers!

So that’s it! It’s time to start warming up your spreadsheets, overcome that app paralysis and get a definitive answer on whether an app is the right call for your business in 2015. It may not make sense yet, but you might also get an idea of when it’s likely to make sense in the future.

And remember, if you need help with the numbers, or want to drill into more specifics, Mobify’s e-commerce business analysts are here to help!

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