Sub Club — "Why Most Apps Hit a Revenue Ceiling (and How to Plan for It)"

Guest: Patrick Falzon, The App Shop
Hosts: David Barnard, Jacob Eiting
Date: December 11, 2024

Episode Overview

In this episode, David Barnard interviews Patrick Falzon, co-founder of The App Shop and previously a key figure at Mosaic Group (now part of Bending Spoons). The conversation centers on why most apps plateau at a certain revenue threshold, the importance of thoughtful market sizing, strategic approaches to feature and app expansion, realities of user acquisition and LTV, and how to plan for a future exit. Patrick draws on his extensive experience both acquiring and operating top-grossing subscription apps to offer candid, actionable insights for indie developers and seasoned pros alike.

Key Discussion Points & Insights

Patrick’s App Industry Journey [01:41–03:43]

• Patrick’s career split between investing and operating roles; joined Mosaic during their transition from paid downloads to subscriptions.
• Led acquisitions of key apps (iTranslate, RoboKiller) and later operated those businesses as GM.
• Experienced the “infinite growth” of early subscription apps and now sees a far more mature, competitive ecosystem.
• Takeaway: The app business is harder now; requires more deliberate execution, but foundational opportunities remain.

Thoughtful Market Sizing & App Acquisition Strategy [05:40–12:14]

Finding Large, Defensible Markets

• Depth over Breadth: Mosaic focused on apps that could scale to tens of millions in revenue, avoiding portfolios of numerous 'zombie' apps with little lasting value.
  • “You can easily end up with a portfolio of like 50 to 100 apps... but it is really complex managing that many apps... and you have this long tail of kind of like zombie products.” — Patrick [05:49]
• Competition & TAM Trade-off: Big markets attract big players. Sometimes being a “big fish in a smaller pond” is strategically superior.

Concrete Examples

• RoboKiller: Chosen for broad appeal (everyone receives spam calls), strong independent leadership in its niche, and lack of serious competitors entering from adjacent markets. [07:59]
• What Mosaic Avoided:
  • VPNs (highly competitive, dominated by massive UA budgets)
  • Budgeting/Finance (banks have much higher LTVs, making customer acquisition economically unviable for third-party apps)

Existing Demand vs. Building New Categories

• Tapping existing demand is less capital intensive but more competitive; building a new category can be costlier and riskier as you need to educate the market.
  • “If you have to go out and build a new category... you're probably running at a loss for some period of time while you go out and do that.” — Patrick [11:07]

Feature Expansion & Secondary Product Market Fit [12:14–15:34]

• Avoid "Cool but Useless": Many teams build what they find cool rather than what users actually want.
  • “At no point do they talk to the users and try and understand what do your users want.” — Patrick [12:59]
• Feature vs. Product: Favor “slimmer products” with focused functionality. Sometimes spinning off a new app (adjacent use cases) is better than making one app cluttered.
• Core Feature Rationale: Every feature should be designed to either increase ARPU or retention. If it does neither, reconsider building it.
  • Example: RoboKiller added data broker removal as an upsell to boost ARPU.

Why Most Apps Hit a Revenue Ceiling [16:01–21:50]

The $10–30 Million Ceiling

• Organic User Acquisition: Limited by App Store search volume and ASO rankings. Eventually, everyone hits their keyword ceilings.
• Paid Acquisition: Capped by the relatively low LTVs in mobile. High CAC and stagnant LTV mean you can only scale paid UA so far before it’s no longer profitable.
  • “Most people are operating under a hundred dollar subscriber ltv. So there's only so much you can then pay to acquire a subscriber...” — Patrick [16:50]
• Portfolio approach: Owning multiple ~$30M products may be better for growth and risk diversification.

Breakout Exceptions

• Apps like Duolingo or Spotify stand out, usually because they maintain huge free user bases that fuel adoption and brand. Most paid-only apps cap out earlier.
  • “There are not very many paid only subscription products… that really gain traction without that substantial free user base...” — Patrick [20:44]

Retention, Stacking Cohorts, and Growth Dynamics [21:21–23:39]

• Strong retention helps, but only so much: Even stellar retention means half your cohort leaves annually (50% yearly retention is “doing pretty well” in mobile).
• Cohort Stacking: Sustained growth comes from high retention in later years and consistent, evenly-sized new cohorts, not unsustainable UA spikes.

Exits: Strategic, Private Equity, and Maintenance Mode [24:11–33:11]

Exit Scenarios

1. App Portfolio Acquirers: Most active, but rigorous valuations.
2. Private Equity (PE): Only interested in scalable, multi-app businesses with unified tech stacks and clear, sustainable cash flows.
3. Strategic Buyers: Rare these days; more about deep product fit or acquisition funnels (e.g., Rocket Mortgage buying Truebill).

• Expect only 5–10 possible strategic buyers for any app; the rest are financial buyers (portfolios, PE).
• For some, “maintenance mode” and recurring cash flow may be better than aiming for exit.

Preparation

• Build a clean, professionalized business; discipline in financials and ops makes acquisition far smoother.
• If targeting strategy/PE, tailor your brand, user base, and profitability accordingly (“build towards that goal”).

User Acquisition, LTV, CAC, and the "LTV is a Terrible Metric" Rant [34:39–48:36]

The Murkiness of LTV

• Early-stage apps: LTV is a guess, not a fact. Use scenario analysis with ranges (e.g., +/-20%) and update regularly as retention data matures.
• Realized/Capped LTV: Calculate by period (e.g., 12 months, 24 months), not “lifetime.” Long tails (users retained for years) make actual LTV hard to meaningfully estimate.
  • “You have to get paid back at some point so you have to care about your payback period... Not to get too finance nerd on people. There is a time value of money.” — Patrick [38:51]
• Use tighter payback periods early (need cash fast); can lengthen as your business matures and has more cash.

Leading Indicators & Forecasting

• Engagement in core product actions (ideally 1-2 per product) is a key predictor of retention.
• Annual plan price changes need careful A/B testing; impact on retention can be lumpy and unpredictable.
  • “Retention as a general rule decreases as price increases. So you should think of those as inversely correlated.” — Patrick [47:11]

User Acquisition Channels & Measuring CAC [55:20–70:11]

Organic vs. Paid

• Both should be tracked separately and in a blended model.
• Paid UA often has diminishing returns; can juice organic for a while (ASO uplift, social proof), but only up to the point of keyword saturation.

ASO & App Store Dynamics

• More than 50% of installs come from keyword searches; top 3 rank is essential.
• If entrenched competitors dominate, new paid spend may only yield marginal improvements.

Beyond Paid & ASO: Other Acquisition Levers

• Examples: SEO for web, community-building, brand partnerships, unique content.
• RoboKiller built brand/media presence by leveraging proprietary spam data with journalists and regulators.

Portfolio Approach Benefits

• "Owning three $30M products" = more stability and (maybe) more upside than one $90M product due to diversification.

Practical UA Measurement Tips (Post-ATT)

• Run multiple analyses across channels (MMP-reported, blended, channel-specific).
• Launch new channels sequentially to better isolate impact.
• Ground decisions in blended P&L performance, not just black-box channel reports:
  • “I yearn for the days of pre ATT… but those days are gone... always be grounded in the blended has to make sense.” — Patrick [69:38]

Timestamps for Notable Segments

• [05:40] – Market Sizing, TAM, and Competition
• [07:59] – Acquisition Targets: Why RoboKiller? Why no VPNs/Finance Apps?
• [12:14] – Feature Expansion: Feature vs. New Product, the Power of User Feedback
• [16:01] – The Revenue Ceiling: Organic, Paid, and Why Growth Plateaus
• [24:11] – Planning for Exit: Portfolio Acquirers, PE, Strategics
• [34:39] – LTV, CAC, Payback Periods, and Why LTV Predictions Are So Tough
• [47:11] – Price, Retention, and Annual Subscription Insights
• [55:20] – Customer Acquisition Cost, Blended vs. Channel-Specific, Creative Rotation

Notable Quotes & Memorable Moments

• On Overbuilding Features:
  "It's really easy to just keep building what you think is cool and... those features never get used and they get lost in the shuffle and you end up with kind of a crowded product on the other side of that." — Patrick [12:59]
• On the Revenue Ceiling:
  "I tend to think most apps will hit that ceiling and it's actually very hard to break through it." — Patrick [16:01]
• On Free User Base & Breakout Apps:
  "There are not very many paid only subscription products… that really gain traction without that substantial free user base." — Patrick [20:44]
• On Strategic Exits:
  "If you haven't built a thing yet and you want to build a thing to get acquired, have that be part of your selection criteria of what you're going to build." — Patrick [30:26]
• On LTV Estimation:
  "You need multiple years of data realistically to be able to reliably predict that. So that’s okay. In my mind you just have to know where you’re at in that cycle." — Patrick [34:39]
• On Feature Value:
  "All of your features should fit into one of those two buckets [ARPU or retention] because I’m not sure what the other rationale for releasing a new feature is." — Patrick [14:05]
• On ASO & User Acquisition:
  "It is really critical … understand what are the relevant keywords for your product, understand what is your ability to rank on those keywords." — Patrick [57:32]
• On Measurement Post-ATT:
  "Run multiple analyses and look at the aggregate of those analyses... I yearn for the days of pre ATT... those days are gone." — Patrick [67:46]

Summary & Final Thoughts

Patrick Falzon’s experience at the nexus of M&A and mobile app operations gives his advice added gravitas: plan for realistic ceilings, optimize products for user value, don't chase “sexy” features, expect paid UA to plateau, track LTV conservatively, and accept that success now requires more thoughtful, harder-won execution than ever before. Exits do exist—but plan for them deliberately, not by accident.

The era of infinite mobile app growth is over. Best-in-class apps win by picking battles they can actually dominate, building meaningful products for specific users, and using data as a strategic reality check, not wishful thinking.

Patrick's New Venture

At the end, Patrick introduces The App Shop, a new consultancy/agency from ex-Mosaic colleagues, offering app growth, monetization, and marketing expertise for companies seeking help navigating today's app economy. [72:22]