Hey Rizzn-ites,

As I’ve mentioned several times on the show, I was simply amazed at how easy it is to create Facebook applications using the same tried and true backend web technologies we web programmers all use day-to-day. So, you know it was just a matter of time before I looked at a Facebook programming venture as a business idea. Since I first started writing this article, however, the rules have changed in a significant way, so it is important that if you read this article more than a couple weeks after I’ve written it, you search for more recent documentation to augment what I’m saying. Facebook is a new New Media promotional avenue, and as such, it’s rules are going to be in flux for the forseeable near future.

This isn’t going to be a 1-2-3-Profit article, just some salient points and interesting studies I’ve seen that will help the capitalist programmers out there participate in the Facebook API landgrab.

Valuation of an Application
Shepard Method
There’s a fellow that hangs around the Facebook Developer Forums named Tim Shephard who claims to have brokered four Facebook application transactions (that is to say, brokered the sale of four Facebook programs to those interested in owning said apps). He asked each buyer if it would be OK if he published some stats in aggregate. Three of them agreed, while one declined.

Of the three that agreed to include their stats, the sold prices ranged from $0.25 per user to $1.83 per user, with an average of $0.34 per user when averaged by total amount / total users. Total users ranged from around 300 users to around 40,000 users.

It is worth noting that these sales took place before the recent metrics changes Facebook enacted recently.

Shepard also noted that Lee of Altura Ventures is now talking about $1.00 per active user and not per directory user. He defines an active user as a user who visits the canvas page once per week. According to Shepard, this settles in ranges from 20-30% of total users in most applications, with up to 40% tops in high engagement applications.

Kincaid Method
Tom Kincaid, a Facebook app developer, also had theories that were similar in terms of valuating an app for sale. According to Kincaid, all you really need are four numbers to give you a valuation of dollar per user. Impressions per user per month, CPM, growth rate, and required return. Expressed as a valuation equation, it would look like this:

DollarPerUser = ((CPM / 1000) * MonthlyImpressionPerUser * 12) * (1 + AnnualGrowthRate) / (RequiredReturn – AnnualGrowthRate)

It’s the last two that can be tricky. What is the growth measuring? User growth or revenue growth. The first number can be quite spectacular, especially in the early days of an App (100% of 2 is 2) – over 100% a day in some cases. As for the the second number, the required return, who knows?

Required return on an application that one guy made in a weekend and costs $100/month to host is very difficult to gauge.

He gives a for-instance:

Using some ballpark estimates, we can plug in numbers and get a valuation. CPM $0.50 which is a good AdSense return, impressions per user per month 30 or 1 a day, some people use it a lot and some don’t user it at all, growth 15% which is a good business, required return 30% which is quite high, but around credit card rates if someone were to fund their business that way. The result: an app is worth $1.38 per user.

Which Method is Best? What about Sleepy Hollow?
I think both methods are valuable, but who you are determines which method you’ll use. A required return is something an in-the-trench programmer isn’t going to really think about, but a Slide.com definitely will. If you’re on the buying side, you’ll definitely want to apply the Kincaid method, as you’ll have a clearer picture of what an application needs to make. If you’re a developer, the Shepard Method will be more applicable to someone like you.

None of this takes into account ways of valuating an application that doesn’t intend to make money off of advertising monetization. Kien Lee makes an excellent point in his “Sleepy Hollow” example:

You have the Sleepy Hollow application, which has 400 users, practically the whole town, ex-cows and one cat. When the headless horseman comes, and someone sees, they log on to Facebook, return a couple of pokes and clicks on that application. The town goes into alert and lockdown. Everyone is safe, except the pussy.

Is your 400 user application worth $1.00 peruser? or $2.00? or 3? No! It’s worth much more because you’re a monopoly that’s effective.

So obviously, the formulas in practice today aren’t a one-size-fits-all, but they are a good guage of a one-size-fits-most. This current round of land-grab seems to be for eyeballs, and particularly fingers that click on ads. That isn’t to say the next round of applications that are en vogue aren’t going to be highly utilitarian in nature, and designed less around the profile page, and more around the usability of Facebook as a Web 2.0 operating system.

Hopefully this boom at Facebook will continue, so we’ll have more interesting topics generate off this.

I’m looking to connect up soon with some prominent movers-and-shakers in the Facebook developer community, talk with them, and see if there are other topics that warrant exploration here. So stay tuned for more!

Did I leave something crucial out? Did I totally miss the mark on something? Want more information on some of this? Leave a comment or email me @ guesswho@rizzn.com.

/rizzn

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