Four factors determine how much a Facebook app is worth

Many people have been asking what a facebook app is worth.

Andrew Chen at MDV says in an interview with Insidefacebook that a facebook app user is worth about 1% of a user on your website.

Read Write Web points to the acquisition of the Favorite Peeps and Extended Info apps as evidence that real value is being created and predicts that there will be more acquisitions to come.

Over at Valleywag, a Facebook Application Developer complains that no matter what an app is worth, it’s no longer worth the effort to develop apps for Facebook now that virality has been turned down.

Marc Andreessen counters, says its only been five f______ weeks since the platform launched, the best is still to come.

Charlie O’Donnell at Oddcast concurs, he says to app developers “Facebook doesn’t owe you a business model” – you still have to figure that out on your own, and points out that the customer acquisition is a pretty big benefit. As I’ve blogged about in the past, open platforms and distribution are two sides of the same coin.

This discussion is all useful qualitatively. However, it’s also helpful to take a “first principles” look at how to quantitatively value the user of a facebook app. I’m going to assume a media business model for now, although some digital goods facebook apps have been launched as well. I know of at least three companies with apps generating over 100m PV/month across their user base (not widget impressions), so there does seem to be the potential to build media businesses off of the Facebook platform. Lets take a look at how we can calculate value:

Value of a Facebook app user

= RPM x lifetime “pageviews” generated by user and subsequent invitees

= RPM x lifetime “pageviews” generated by user x virality factor

= RPM x “pageviews” per user per month / monthly churn rate x virality factor

(note that I use the term pageviews although they are really iframe views; the important factor is that the app developer can insert an IAB standard ad unit. )

So value goes up as RPM goes up. RPM goes up depending on how targeted your traffic is; whether you’ve got endemic advertisers, demographically targeted users or just broad reach.

Similarly, value goes up as PV/user/month goes up. This argues that apps with high ongoing engagement (ie some aspect of ongoing utility) will be more valuable. Some apps (including some of the most popular ones such as Top Friends and Horoscope) don’t generate very many pageviews at all because all the value is delivered in the widget on the profile page, so few iframe pageviews get delivered. These fall mostly into the self expression or communication categories. Apps such as iLike on the other hand, generate a lot of ongoing engagement and PVs.

Value goes down as monthly churn goes up. One of the factors that reduces churn and increases “stickiness” of an app is how much “archive” value is built on top of the app. The more you commit to adding information to an app, the stickier that app will become. Pets is a great example of this – as you “level up” your pet and get more equipment for it, you become less and less likely to get rid of it. Fortune Cookie is an example of an app where there is little archive value and its easy to either switch out to a new app or get rid of it altogether.

Finally, value goes up as virality goes up. Although Facebook has turned down the virality of apps recently, certain apps, primarily those with a communication and self expression component, tend to be more viral in nature. Lance and Jia of Rockyou (a Lightspeed portfolio company) did a good interview with Venturewire where they talked about how to get viral on Facebook.

All Facebook apps are not created equal on these four dimensions. If you’re building a Facebook app, it’s worth while thinking about your app using this framework to figure out how important it can be to your business. I’d love to hear from developers of Facebook apps to hear what they think about this framework, and how their app measures up against it.