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Four factors determine how much a Facebook app is worth July 3, 2007

Posted by jeremyliew in advertising, business models, Consumer internet, facebook, social media, social networks, user generated content, viral, viral marketing, web 2.0.
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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.

Comments»

1. paul - July 3, 2007

good job. very well said

2. Jay (living in First Life) - July 3, 2007

Or they are worth nothing since churn will go crazy when you try to monetize.

3. Cogblog » Blog Archive » Do advertisers want widgets? - July 3, 2007

[…] I once again cannot resist commenting on Jeremy’s widget monetization post.  This makes me think about the last post I did about Jeremy’s last post discussing facebook […]

4. Brent - July 3, 2007
5. Top Posts « WordPress.com - July 3, 2007

[…] 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 […] […]

6. Charlie - July 4, 2007

@Jay … If you’re monetizing with ads, as Facebook does now, why would churn go up significantly? I think we’re all used to seeing ads on the web, as long as they’re not too obtrusive.

7. Jon / BlogThot.com - July 5, 2007

There has to be some kind of successful rubric for figuring this all out but, as of right now, there’s only been one sale (as far as I know) and it was for only $60,000.

8. Facebook Growth Spurt « METAMash: Social Media, Startups & Cultural Anthropology - July 6, 2007

[…] So far, only a few quirky apps have enjoyed significant attention.  At least one observer has posted on the promise of app monetization.  With the upcoming release of Facebook’s Wallet, a […]

9. June Link Mania « Vinu’s Online Cloud - July 9, 2007

[…] Determine how much a Facebook app is worth « Lightspeed Venture Partners Blog […]

10. Dave McClure - July 9, 2007

i think one thing everyone is missing in the “how much is a facebook user relative to normal user” discussion is that facebook users are INHERENTLY MORE VALUABLE than the normal web user, because of one simple fact:

*** their network of friends is built-in to the facebook API info, and it’s very easy to get a referral to occur ***

normally, this is a significant amount of information to acquire from a regular “web user” — what are the emails for any/all of their friends, and how do i get them to refer — but in facebook, it’s pretty simple.

while i would agree there are other differences that make Facebook users more challenging than normal web users, in this particular aspect they are HUGELY MORE VALUABLE, and this point should not be overlooked.

for more thoughts on startup metrics, see my post on “Web Strategy for Pirates” with some example metrics & charts.

– Dave McClure
http://500hats.typepad.com/

11. lawrence - August 1, 2007

Jeremy, not only are not all Facebook apps created equal in terms of virality, neither are all Facebook users created equal in terms of their ability to spread an app. I wonder if we’ll see your portfolio company Rockyou start tracking users who are most effective at spreading an app, and charging a premium accordingly.

12. What is a Facebook app worth? - - mathewingram.com/work - January 12, 2008

[…] Liew of Lightspeed Partners says there are a number of factors that determine what a Facebook user is worth. Greg Thomson of Toronto has developed a number of […]

13. joe - April 1, 2008

Can you please tell me what RPM is?
Thanks

14. jeremyliew - April 1, 2008

@ Joe,

RPM = Revenue Per Mille (Thousand). Typically advertising is sold on a CPM (cost per mille) basis (e.g. $10 CPM means to buy one thousand impressions of your ad you will pay $10). RPM generalizes that concept to factor in the sell through rate (e.g. perhaps only 20% of your ad inventory is sold) and the fact that there can be more than one ad on a page to create a measure of the revenue derived per page view

15. Open Minds Theatre Company - October 3, 2008

Very interesting! I work for a Childrens’ charity and we have just developed a facebook application (game) to promote our fund-raising activities. The links on the game are to direct traffic to our campaign sites. Time will tell whether it is successful. I haven’t seen any other apps fromm charities out there. The application is at
http://www.new.facebook.com/apps/application.php?id=27833808923 to promote http://www.makingadifference.tk


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