How Much Should You Spend on Ads for a Mobile App?

 The amount you should spend on ads for your mobile app depends on several factors, and there isn't a one-size-fits-all answer. However, there are some guidelines to help you determine an appropriate budget and the analyses that can support your decision.

Relevant Template:

1. Set Clear Objectives:

Before diving into the budgeting and analysis, it's crucial to define what you want to achieve with your ad campaign:

  • User acquisition: Drive new app installs.
  • Engagement: Encourage existing users to use the app more often or use certain features.
  • Monetization: Promote in-app purchases or subscription sign-ups.

2. Understand Your Metrics:

Here are some essential metrics to understand and measure:

  • Customer Acquisition Cost (CAC): The average cost to acquire a single user through advertising.
  • Lifetime Value (LTV): The average revenue you expect from a user over their entire time using the app.
  • Retention Rate: Percentage of users who continue to use your app after a certain period.
  • Return on Advertising Spend (ROAS): Revenue generated per dollar spent on advertising.
This section is really important and there are more calculations to figure out. For example, what is the lifetime value of a customer relative to the total cost to acquire that customer? If it takes $75 to acquire 1 customer, and that customer is worth $300 over their lifetime, then the ratio is 300 / 75 (a ratio of 4.0). Generally, if you can get that ratio up to 6-8, it is considered great. 8 would mean a customer cost you $1 and spend $8 over their lifetime interacting with the app. You can use gross profit per customer or total revenue per customer, but in my opinion it is better to use gross profit as the basis for the customer value. This takes into account the direct costs (servers / hosting / customer support) that are 100% essential in order for the customer to use the app.

3. Determine Your Initial Budget:

Start with an initial budget based on:

  • Market research: Look at what competitors or similar apps spend on advertising.
  • Affordability: What can you comfortably afford without jeopardizing your business?
  • Testing budget: This allows you to experiment with different ads, platforms, and audiences to determine what works best.

4. Conduct Analyses:

  • Break-even Analysis: Determine the point at which the LTV of a user equals the CAC. This tells you when you start making a profit from a user.
  • A/B Testing: Compare different ad creatives, landing pages, or app store listings to see which performs better.
  • Cohort Analysis: Group users based on when they were acquired to track behavior and revenue over time.
  • Channel Analysis: Determine which advertising platforms or channels (Facebook, Google, influencers, etc.) are delivering the best results.

5. Optimize Your Spending:

Based on the data you gather:

  • Scale Up: If your CAC is significantly lower than your LTV, consider increasing your ad spend to capitalize on profitable user acquisition.
  • Refine Targeting: Focus on audience segments that yield higher LTVs or lower CACs.
  • Diversify Channels: If one advertising platform is saturated or becoming too expensive, look into other channels.

6. Re-evaluate Periodically:

The mobile app market is dynamic, and user behavior, competition, and advertising costs can change. Periodically reassess your budget, campaigns, and analyses to ensure continued effectiveness.

In conclusion, start with a budget you're comfortable with, focus on data-driven decisions, and be ready to adapt based on the insights you gain. It's better to start small, learn, and then scale than to spend a lot upfront without a clear understanding of the results you're getting.