But let’s look at the numbers to make sure we’ve got the basic facts right:  there are more iPhones sold everyday than Android phones. How do I conclude this?  In Google’s Q1 2010 Earnings Call, Jeff Huber reported 60,000 new Android activations per day. Sounds impressive.  But consider that Apple reported 8.75M iPhones sold this past quarter.  A quarter is three months long or ~87 days which means Apple is moving 100,000 iPhones a day.

So Apple continues to sell nearly twice as many phones as Android. Now add in the fact that Apple sold close to 11M iPods too (unclear what % are the iPod Touch, but it’s safe to assume a majority) and it’s clear that Apple continues to be the big winner in terms of mobile OSes. In fact, to date apple has sold 85M iPhones and iPod Touches. Android is nowhere close: even if we generously annualize the current sales figures and add a year, android’s user base would still only be at 21M.

So how the heck did Techcrunch just run a headline reading “AdMob: Android Passes iPhone Web Traffic In U.S.”?

Simple answer: the methodology itself has a major flaw.  AdMob is simply reporting the ad request that runs through their advertising network.  These figures heavily depend on the adoption of Admob’s services — i.e. the relationships they’ve formed with app publishers and websites.  And the adoption of Admob’s services across platforms varies widely.  Also, Android apps are twice as likely as iPhone apps to be free (which generally correlates with ad supported).  So Admob’s ad impressions are simply NOT a good proxy for the overall state of the market.  Especially seeing as Comscore pegs Apple’s share of the smartphone market as 25.4% vs Android’s 9%.

For now the underdog hasn’t won.  They haven’t even come close.  And everyday Apple continues to add more users than Google.  Until that changes, the real usage figures won’t be anywhere near each other.

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The most basic principle of business is that profit is revenue minus costs.  Try considering all fixed costs as a rate — especially a daily or hourly rate — and then look around you.  You’ll find you have more insight into existing businesses or the potential of new ventures to succeed. 

And you’ll find that some business ideas simply don’t make sense.

Don’t plan on building a business by selling a product for $2 that takes an hour of time to produce unless you’re superhuman and don’t need sleep.

Don’t franchise a mobile RV arcade for “between $89,000 and $200,000″ a year which can fetch “$300 to $350 for a two-hour party appearance” without carefully considering the math — that you’ll need to book somewhere between 250 to 650 clients just to break even on your initial upfront investment.  I don’t know too many kids who have birthday parties on Monday nights..and there’s only so many hours in a weekend and only 52 weekends in a year.  You’re might be paying off these costs for eternity…and the high tech games will certainly have become stale by then.

And please don’t build an SMS mobile coupon company on an assumption that you’ll get a salesperson to hit up every local business selling your $10 service (so cheap that nobody will say no!).  As mentioned in my article about SMS coupons, an entry level salesperson earning $50,000 a year is a cost of $1000 a week or $200 a day or $25 an hour.  Make sure a sales person would earn more than they would cost.  If the numbers don’t work, your business won’t work.

But wait!  It’s not all gloom and doom. Thinking in terms of daily sales can actually be really inspiring for a first time entrepreneur:

If you’re quitting a job to start your own company, consider what it will take in daily earnings to replace your salary.  Better yet, consider how much you honestly need to be ramen profitable.

Most recent college graduates in NYC working a full time job are probably earning somewhere between $35,000 – $80,000 depending on industry and skill set.  Consider that $100/day for 365 days is $36,500 annually.  This is a livable wage for most scrappy 20-somethings (assuming you don’t have a family to support and you’re not drowning in school debt).  Consider that $200/day is a rather comfortable annual salary of $73,000.  (And yes, these numbers are based on working 7 days a week.  And they don’t take into account the unpaid time you’ll put into an initial product launch.)

If you need inspiration to get started, never forget just how ‘small’ a start can be: just get to $100 a day.  Consider it milestone number one for your first entrepreneurial venture.  Let’s say you have a product idea that you think would sell for $20 with a 50% margin.  Ask yourself: “Can I sell 10 per day?”  Consider that again: 10 per day.  Consider that there’s six billion people in the world,  is it really so hard to find 10 customers each day?  Or if you’re working with a partner, 20 customers?

So consider David Heinemeier Hansson’s amazing advice (that I have echoed above) and stop thinking about your next billion dollar startup.  I believe first time entrepreneurs (of which I am one myself) should start small.  Go for the lowest bar of success: the $100/day idea.  Once you’ve conquered that, go for the $100,000 idea, then the million dollar idea, then the billion dollar idea.  Along the way you’ll meet fantastic people, gain skills and confidence, and maybe even have some fun.

Now if only my 2c could be put towards rent…

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(this piece also appeared on Silicon Alley Insider)

As a number obsessed techie and ex-management consultant, market sizing and research were a big part of my launch preparations for Exit Strategy NYC. Since launch, I’ve received many questions from people struggling to estimate the market for their iPhone app ideas.

I’ve put together this document as a guide for entrepreneurs considering developing an app. Below, I’ve compiled some up-to-date numbers about Apple devices. I’ve also laid out a framework for estimating what kind of sales can be expected from a paid app.

The Basic Facts

• 45 million iPhone and iPod Touch devices [Apple Earnings Announcement]
• 54% of iPhone and iPod Touch users are in the US as of June 2009 [Admob Mobile Metrics Report]
• The iPhone comprises 68% of worldwide iPhone OS devices and the iPod Touch makes up the other 32% [Admob Mobile Metrics Report]
• Only 75% of users actually download apps [Pinch Media]
  • The most frequently downloaded free apps reach approximately 30% of devices [comScore]
  • The most frequently downloaded paid apps reach approximately 3% of devices [My calculations - explained later]

Right off the bat, there’s a few back of the envelope calculations to make: 54% of the 45M devices are in the US which means ~ 25M devices. The US has about 300M people.  That means about 8% of the general American population has one of these devices.

How To Use These Numbers

Combine this data with your own numbers about how large of a market your product is addressing. For Exit Strategy NYC, our addressable market consists of all subway riding New Yorkers. In 2008, there were about 5M weekday riders and about 3M Saturday riders [MTA's ridership numbers]. The Saturday number is the more relevant one as it better captures subway usage by NYC residents rather than regional commuters. Neither number counts unique riders though, and given that there are 8M residents of NYC our addressable market size is probably somewhere in between these numbers. Let’s say 6M subway riders.

New Yorkers probably skew more techie than average, so let’s assume 10% (rather than 8%) have an Apple device. Also, Exit Strategy NYC works on both iPhone and iPod Touch devices. If your app requires phone/gps/camera/internet to work well, exclude iPod Touch users from your calculations.

How many Apple device toting subway riding New Yorkers are there?  Well 6M subway riders with 10% penetration = 600,000 potential users.

“But How Many People Will Actually Buy My App!?”

Entrepreneurs are optimists by nature, and it’s tempting to think that 100% of people will buy your product. After all, your product is awesome, right? But reality is a quite different story. In fact, only about 3% of users have purchased the most popular paid apps. To determine that number, I used sales figures from one of the all time best selling paid apps, Firemint’s Flight Control game. According to Firemint’s Alexandra Peters, sales to date have been 1.4 million. As a percentage of the 45M Apple devices, this is ~ 3%.

You should expect a similar upper bound of 3% to apply to whatever market vertical you’re addressing. Of course it’s possible that your app meets some crucial compelling need and therefore achieves a higher penetration rate in your vertical. But don’t count on it — it’s equally possible that your app gets lost in the noise and can’t get traction. Flight control has held a constant spot on the top paid app list for months now. Few others have this advantage.

Realistic Unit Sales Calculations

Returning to the Exit Strategy NYC figures, we knew that if we had an effective marketing and press strategy, we could probably achieve something close to this 3% penetration figure — perhaps higher as many New Yorkers are very passionate about the subway (see? there’s that ever-present entrepreneurial optimism!). 3% of the 600,000 subway riding devices would mean 18,000 unit sales. Does this translate to $18,000 total sales? Our maximum penetration figure was based on a 99c app, but what effect would Exit Strategy NYC’s $1.99 or $2.99 price point have on total sales figures?

Factoring in price into market sizing is difficult. Based on our own informal market surveying, we estimated that the most profitable price point would be $2.99 or $1.99. Around 75% of people willing to pay 99c would also pay $1.99 or $2.99. So 75% of 18,000 units at those prices works out to an ballpark range of around $27k – $40k. Like all software, the app’s unit costs are zero, it’s important to focus on maximizing dollar sales rather than unit sales.

A Growing Platform

One thing to remember is that the user base for apps is growing by leaps and bounds. In their latest quarter, Apple sold 5 million iPhones and 3 million iPod Touches. This means that the potential market for an app grew by more than 20% in only 3 months!

Non-Apple Platforms

One last thing to note: The iPhone certainly dominates headlines, but it’s not the only game in town. In fact, Blackberry outsells the iPhone every day. And in a town dominated by Wall Street, it seems like everyone and their mother owns a Blackberry. Realizing this, we carefully designed Exit Strategy NYC to be easily portable across different mobile platforms. Our app is available for iPhone, iPod Touch, Blackberry Bold, Curve, and Storm, Android Phones, and even as an e-book on Amazon Kindle.  Combined, the Exit Strategy App reaches a significant portion of New Yorkers.

But are device sales a good indicator of a platform’s expected app sales?

Stay tuned to Back of the Envelope to find out.

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To understand why naive first-time developers have this mindset, you only have to turn to the figures being tossed out by the major iPhone ad networks.  Last summer, Admob was talking about $30 CPM brand ads and calling that “low end.”  Similarly, Medialets talks about their Dockers ads which paid in the $20-30 CPM range.  Even in today’s tough advertising market, Admob company continues to cite rather high “$12 to $14 average CPM” figures.

Ready for the brutal truth?  Most iPhone ads networks today pay around $0.50 CPM. In case you don’t know how to digest that statement, I’ve rewritten here in plain english: 1000 people have to look at your application’s ad just to earn you a measly 50 cents.  What about those $30 CPM figures?  They’re just marketing fluff.

If you want the truth, ask the folks on the front line: actual developers.  Bo Wang’s Galaxy Impact, an ad supported app with over 160,000 downloads, showed an eCPM (effective CPM) of $0.23.  App developer John Kelsey says he sees about $0.50 CPM. Pinch Media CEO Greg Yardley’s “appstore secrets” presentation reports a typical CPM range of 50c – $2 CPM (slide 24) and then in the comments section, Greg quotes developers saying ad rates had dropped to $0.38 CPM. Another developer running CPC ads says he sees $0.01-$0.03c / click.  The truth is that “Most Ad-Funded iPhone Apps Don’t Earn Enough To Buy A Sandwich”

Why the discrepancy?  Fill rate is partially responsible.  Even if a $30 CPM premium ad does exist, it’s not going to run in your app 100% of the time.  In fact, most of the time apps displays remnant (ie NOT premium) ad inventory.  As one developer says “NO ONE can maintain the fill rate at decent cpm”.

Additionally, every ad network wants to attract app developers bad.  Really bad.  So they pitch journalists with juicy stories of high CPMs and ‘case studies’ on developers making sick amounts of money.  Greystripe gets a press piece penned about an “iPhone Beer Pong App Making $7,000 A Month From Ads.”  Adwhirl gets Techcrunch to write “Just How Much Money Can Free iPhone Apps Make? Quite A Bit” which claims apps can make $5000 a day.  And Medialets highlights their $20-30 CPM Dockers ad.  These are the exceptions rather than the rules.  It’s marketing as usual.

The purpose of this post isn’t to point fingers at the ad networks or accuse anyone of lying.  I love ads and I love free apps.  And I love the entrepreneurial spirit in these impressive iPhone ad network companies.  But there’s an important message here for first-time app developers: if you’re considering quitting your cushy job to make $5,000 a day with a fart app, don’t do it.  Always run your back of the envelope calculations first, and don’t assume your app will get anything higher than a $0.50 CPM. Basing your assumptions on $30 CPMs will leave you high and dry.

As usual, readers, I love hearing your comments and questions.  So don’t be shy!

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!

Originally, I installed this plugin to help me learn more about SEO (search engine optimization).  But it’s been useful in a way I wouldn’t have predicted: knowing the number of inbound links helps me quickly make decisions based on popularity.  It helps separate the signal from the noise.
Let’s say you need an online bookkeeping solution.  You ask friends for a recommendation but get none.  So you google “online bookkeeping solution”.  The results are overwhelming and confusing.  You poke around a bit more and stumble on a Techcrunch article that mentions a bunch: Outright.com, Xero.com, Saasu.com, Lessaccounting.com, Fastdue.com.  How do you decide between them?

You’re a busy person. You don’t want to spend the entire day researching and reading reviews.  You need to pick one quickly and get on your way!  You visit each site and keep an eye on the SEO toolbar which instantly shows you the inbound links for each of the sites:

Outright.com: 2,000 inbound links
Xero.com: 11,000
Saasu.com: 2,000
Lessaccounting.com: 2,000
Fastdue.com: 284

You quickly identify that Xero.com has the most inbound links.  It’s probably the most popular because it’s the best product (this point is discussed in more detail later).  Maybe you do a quick twitter search to double check that people are in fact saying good things about the site.  Everything looks fine.   You sign up.  Decision = done.

Inbound link information is also extremely helpful for figuring out roughly how different competitors size up against each other.  Camelbak versus Nalgene? 31k links versus 6k.   Turbotax vs TaxAct?  340k vs 8k.  Google.com vs Live.com vs Ask.com?  515M vs 66M vs 9M.  Trying to figure out if anyone else has heard of some (seemingly obscure) website/startup that a friend has told you to check out?  Drop.io perhaps?  110k inbound links — “whoaaa, well ok then, I guess drop.io is worth taking a look…”

On a similar note, this information can help you avoid scams and phishing attempts.  If for some godforsaken reason you should land on http://www.ie-internet-explorer.com/landing/ie/ie-internet-explorer-browser.php or http://msie.com, the toolbar shows that these sites both have a total of THREE inbound links.  Obviously, if they were legitimate sites owned by Microsoft they would have a few more links — so you should probably stay away from them.

Quickly assessing the legitimacy of a site is especially important if you arrive via an advertisement.  Anyone can throw up a seemingly legitimate looking website and buy search/banner ads to drive traffic there.  But getting a few thousand links?  That’s a much harder task.

Having information about inbound links at my fingertips help me separate the wheat from the chaff and figure out what’s worthy of my attention and my time and perhaps my credit card number.  It’s basically a lifehack.

Using Popularity to Judge Quality
The decision making process I described above uses popularity as a proxy for measuring quality.  In most cases, popularity is a suitable enough measure for quality, especially when a decision needs to made quickly.  After all, “nobody ever got fired for buying IBM.” This method of decision making does however discourages you from trying anything other than the market leader.  What if second place truly does “try harder” in an Avis sort of way?  What if this method causes you to miss some awesome new website or company that hasn’t received a lot of attention and inbound links yet?

Another issue is that this method reinforces a lock-in situation where the rich get richer.  But Google itself is guilty of this too: the results of the search engine page are largely dependent on inbound links.  More people find the sites with more inbound links.  And then they link to these same sites which leads to a self-reinforcing situation where only the top ranking pages get found — a phenomenon which has been labeled Googlearchy.  (also see the original academic paper that invented that concept/name [pdf])

The truth is that popularity is always used as a filter.  People watch the NYTimes Best-Seller list like a hawk to figure out what to read.  The iPhone Top 25 App list is the key to getting your app noticed — and downloaded.  And popularity is frequently a selling point: automobile companies brag about their “bestselling” models.  Why?  Somehow it’s comforting to know that you’re not alone in your decision to purchase this particular car.  Millions of other people have done it.  They can’t all be morons, right? right?

(P.S.  This is where the sociologists come in.  If you’re interested in this topic — popularity as a decision-making tool — read some of the research of Duncan Watts, a former sociology professor of mine at Columbia.  He has one particularly interesting experiment where researchers tweak how ‘popular’ different songs are in an fake online music store and test the relationship between preceived quality and stated popularity.  Full research paper is here: Experimental study of inequality and unpredictability in an artificial cultural market [pdf])

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Greg Yardley, CEO of Pinch Media gave a fascinating presentation at last night’s NYC iPhone Developer Meetup.  Greg’s slides were chock full of numbers and data gathered by Pinch Media’s iPhone analytics platform.  As you might expect, I was in heaven.

Greg demonstrated his evidence that a free ad-supported app rarely earns more than a 99c app. After Apple’s 30% cut, this 99c becomes 70c.  So what does it take to make 70 cents through advertising?

The Pinch Media numbers show that free apps, as a category, tend to be used 6.6 times more often than paid apps (this figure incorporates both the increased download popularity of free apps and also the slightly decreased frequency-of-use of free apps versus paid apps).  On average, free applications are used heavily at first but usage levels off quickly — the average app lifetime is 12 runs.

So compared to a single paid app, making an app free results in 6.6x more app uses and at an average lifetime of 12 runs/app = 80 sessions. Remember that the paid app makes 70c.  So the question becomes “Can the average free application make up 70c in advertising revenue across 80 usage sessions?”

Greg’s answer: “Hell No.” Assuming one ad is shown per each session, this requires a CPM of $8.75.  Unfortunately, typical CPMs are 50c – $2.00, far below the point required to match the paid app’s revenue.  Unless your app can serve 18 ads per session (assuming a worst case 50c CPM), or there’s some especially ‘sticky’ property that makes users reliably use your app repeatedly, Greg concludes that charging for your app is generally a good idea.

Slides from the presentation below:

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Trick or Treat!

Our block consists of brownstones packed side-by-side, each about 18 feet wide.  As I watched the trick-or-treaters make their way down the block from house to house, the following occurred to me:  I was witnessing the most efficient candy collecting operation imaginable. Most homeowners were waiting on the bottom step with candy for the trick-or-treaters.  The rate of candy collection must have been upwards of 30lbs/hour!

Would you accept candy from these people?!

Most of my childhood Halloweens were spent in suburban Pennsylvania where the houses are spread far apart.  The amount of candy collected on Halloween Night was constrained by a limited window of opportunity (typically from 5:30pm to 8:30pm) and the maximum distance we were able or willing to walk before we started getting blisters on our feet!  We probably collected candy at about 1/5th the rate that I witnessed last night in Brooklyn.

The main limiting factor in Brooklyn, or any residential neighborhood with tightly packed residential units, is essentially the size of the candy bag or the willingness of the child to carry the increasingly heavy bag.  Perhaps Brooklyn trick-or-treaters stop at home throughout the night to empty their candy bags?

Late in the evening, the candy started running low. Why don’t I “take a quick trip around the block and restock our dwindling supplies?” half-joked my miserly landlord…a brilliant strategy, but one that certainly wouldn’t work in suburbia!

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