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Traffic: While all traffic is not equal, can the average of top ten pay-per-click bids on the site's primary keywords give a fair idea as to the value of traffic the site is generating. If the average value is, say, $0.25 per click and the site gets 500 unique visitors every month then the value of traffic can be estimated at $125 per month or $1500 annualized. Is the annual value fair or it should be calculated for a longer period?
Revenue: If the site is earning a net profit of, say, $100 per month from the sale of its products or services can we annualize the value at $1200. Again, is the annual value fair or it should be calculated for a longer period?
Product/Service: The valuation of the product or the service itself sold or provided by the site will, in all probability, require a separate and equally complex valuation. This may not be applicable to all sites.
Content: Original and exclusive content on the site or a database of useful information or of users/subscribers/customers, if present, can make a lot of difference and add substantial value to a site. However, over time, the quality of the content or the database will surely reflect in the traffic figure calculated above.
Domain Name: Although domain name values have declined substantially compared to the pre-bubble days, in general, one-word generic and type-through .com names are still a rare a commodity. If a site is built on such a domain, it will command a substantial premium.
Based on the foregoing this is a sample evaluation of a PPC Search Engine:
Cost to create a site: $1000
Traffic: 500 unique visitors per month at an average of $0.25 per click on, say, Overture.com - 500 x 0.25 x 12 months = $1500
Revenue: $100 per month in PPC bids x 12 months = $1200
Product/Service: None - Not applicable
Content: Database of 1200 advertisers - value estimated $1.00 each = $1200
Domain Name: $500 at least
Total Value: 1000 + 1500 + 1200 + 1200 + 500 = $5400 - Rounded off to $5000.
Is this an acceptable way to calculate? What else needs to be considered?
Your comments solicited.
If the average value is, say, $0.25 per click and the site gets 500 unique visitors every month then the value of traffic can be estimated at $125 per month or $1500 annualized. Is the annual value fair
Here's a few more thoughts:
The risk of assigning annualized values for traffic might vary quite a bit, depending on where visitors were coming from. Looking at a site's traffic stats is a good place to start, but you'd also need to evaluate the traffic's probable stability. Many people around here will testify that traffic can fluctutate wildly for reasons outside the website's control, so making projections that go very far into the future is difficult.
Exampe: Someone might have a site for sale that ranks well in a major search engine for a profitable term, but there's zero guarantee that the same term would be sending visitors next month.
On the other hand, if a good portion of the site's traffic came from relevant links on other quality sites, that would be more stable and it might be safer to make an annual projection for that portion of the traffic.
I don't agree with valuing traffic on the basis of top links in a PPC search engine. I hardly ever bid to be #1 when I'm managing my own or my client's campaigns, so I'd be unwilling to assign that as a value per visitor if I were buying a website with existing traffic. In my experience the #1 PPC position is seldom the most cost-effective, if it's sustainable at all. A more realistic benchmark (at least from the buyer's point of view) would be to watch what the experienced bidders are doing who cruise for months in a lower position. Because the level they're bidding at is sustainable, it's likely a truer reflection of the traffic's value than the top place bid wars.
<added> Hmmm, I just re-read what you wrote, and I need to clarify, did you mean taking the top bid for ten keywords and averaging those, or taking the top ten bids for one keyword at a time and averaging those? If you meant the latter, then we're closer in our thinking than I was thinking (?!) when I wrote my last paragraph.
You'd need to beware of the effects of bid wars on the PPC bids and come up with a way to screen out the bids that were seriously out of line before taking your averages. I've seen cases where the top few bids were several dollars higher than those that followed, because people got into a bidding war. Inexperience? Ego trip? Trying to play games to harm competitors? It's hard to say why it happens, but sometimes the top bids have little to do with sound business judgement and ROI calculations.
Example: if the top two bids were 1.91 and 1.90, and the next dozen that followed were in the range of 40¢ or 50¢, I'd say to leave the top two out of your calculations, and take an average of the next ten that follow.
On the other hand, if the progression went something like #1 - 53¢, #2 - 52¢, #3 - 48¢, #4 - 46¢ and so on, you could be more confident that the complete range of bids was based on ROI and not something else.
You cannot simply add those numbers.
Cost to create the site would not be a part of the value as buyer will not be concerned about how much or how little you spent.
Also can you count traffic and revenue both separately. Unless the traffic has some other value .. the revenue is the only thing ultimately you get out of that traffic.
P/E is one method but I don't know how successful it is for some thing as intangible as websites .. ie. arriving at a fair P/E might be very difficult.