# How much are your users worth?

As anyone who runs a website knows, your userbase constitutes one of your most important assets.

Putting a "value" on "users" and keeping track of this value makes a lot of sense, even if you're not looking to sell your website. Yet putting a value on users can often be difficult.

So what's the best way to do it? There are several methods.

First Things First - What's a User?

Before we look at how users are valued, we must define "user."

Two easy definitions:

• If your website allows individuals to register, you can define "user" as an individual who has registered.
• If your website doesn't allow users to register, you can define "user" as each unique visitor.
• If your website has subscribers, you can define "user" as each subscriber.

Obviously, many websites have both, and in this case, it's worth breaking down your valuation for both.

Revenue Per User

If your website generates revenue (which we hope it does), one of the best ways to assess the value of your users is to look at the amount of revenue each one generates over a defined period of time (i.e. monthly, annually, etc).

Such a calculation is quite easy if you have a single revenue stream - simply divide total revenues by the total number of users.

If you have multiple revenue streams, you may want to assign users to different groups. For instance, if you have 100,000 unique visitors that generate \$2,000 in advertising revenue each month, each one of them is worth 2 cents per month in advertising revenue. If you have 100 users that generate \$5,000 in subscription revenue each month, each one of those users is worth \$50 per month in subscription revenue.

Profit Per User

If your website is profitable, profit per user is calculated in the same fashion as revenue per user except you're obviously dividing total profits by the number of users.

Naturally, profit per user is the best metric available, right? It depends.

"Profit" can be tricky.

Case in point: let's assume that a website is owned by a corporation that is owned by two business partners and profits are considered to be the profits reported on the corporation's tax return.

The profits may appear to be very small (i.e. \$10,000/year) but if the two owners, for instance, took \$75,000 in combined salary and paid themselves a \$50,000 combined year-end bonus, the \$50,000 would be considered by a professional appraiser as part of a valuation.

The Difficulty of Multiples

Of course, when calculating revenue per user or profit per user, you may be less interested in how much each user is worth over a defined period of time and more interested in how much each user could reasonably be worth to someone who was interested in buying your website. As such, you need to look at acquisition multiples.

This is tricky because there are few hard and fast rules when it comes to multiples.

Some businesses may sell for little more than 2 times annual revenues while others may sell for 3 times cash flow. Typically, businesses in different industries are valued differently because the characteristics of businesses in those industries is different. This is true for websites and web-based businesses.

It's a good idea to research acquisitions of websites like yours to see what multiples were. Do note, however, that treating valuation in a nuanced fashion is important if you find yourself looking to negotiate a sale of your website for more than a token amount.

How fast revenues are growing, how healthy your margins are, etc. can all play a significant role in justifying a higher (or lower) multiple than what seems "typical."

Thus you should never assume that the standard is "two times revenues" or "three times net income" even if that's what you're told and even if that's what your competitors have been sold for.

Comparable Acquisitions

Amongst some early-stage startups I've done consulting for, I've noticed that a popular method of assessing value is looking at comparable websites, especially for the purpose of projecting potential value if the business succeeds and a sale attempted.

If you run a social network for instance, you could divide the acquisition prices of MySpace and Bebo, for instance, by the total number of users they had at the time of acquisition to arrive at the amount paid for each user.

The problem with calculating how much your users are worth in this fashion, however, is that your social network probably isn't MySpace or Bebo and it's highly unlikely that News Corp. and AOL, respectively, valued those properties on a per user basis.

For this reason, I don't recommend using comparable acquisitions as a base for assessing the value of your users because in most cases it is highly unrealistic, especially if you are looking at hot markets like social networking that have seen a small number major acquisitions that are based on more than just financials.

Fair Market Value

Of course, in the final analysis, your website (and your users) are worth whatever somebody is willing to pay for them. If a professional appraiser tells you that you have a business worth \$100,000 but, as part of an attempt to sell it, you have one interested party who isn't budging at \$50,000, the fair market value of your business at that time is \$50,000 - even if you think it's worth more.

Conclusion

Even if you're not looking to sell your website, assessing the value of your users in some form or another on a regular basis can be useful. It produces a metric that you can monitor and measure progress off of, even if you don't use the same sophisticated methodology a professional appraiser would.

2:34PM on 24th November 2008

Another thing to consider is how active those users are. For instance I worked for a company that would regularly claim to have in excess of 1 million registered users, which in the literal sense was true. But in reality less than 5% of those users had visited the site in the last 3 months, which casts a slightly less glowing spin on the numbers.

2. Aleksandar

8:26PM on 24th November 2008

Interesting point. And different niches have different users values, too, I would say.

3. Patrick Oak

Blogger at Econsultancy

9:06PM on 24th November 2008

That's a good point. I was involved in the sale of a popular message board a couple of years ago and the activity levels were a big factor. The size of the community and the activity levels helped convince the buyer to pay a bit of a premium but the acquisition price was still based on a sane (if not slightly rich) revenue multiple.

Obviously, most of the time you'd expect revenue to be an indirect indicator of activity levels. If someone claims 1 million registered users but is generating only \$1,000 in revenue each month, that'd be a huge red flag.

In most acquisitions, it does come down to the bottom line. That's not to say that there aren't times when a buyer may believe in his ability to take a userbase that isn't producing a whole lot of revenue and turn it into a userbase that is generating a lot of revenue but most of us don't get lucky enough to be involved in highly speculative acquisitions. :)

Pat

4. Anthony Sharot

Search Marketing Director at http://www.marketappeal.co.uk/

9:02AM on 26th November 2008

How are agencies and consultancies usually valued, particularly in their early stages?

The value per customer for an SEO company is quite high, typically several thousand pounds over six to twelve months.

Ironically, many don't generate significant business directly from their website due to a lack of time (starting a few years ago always helps) and other resources to fight the big boys, but if they do then how is the website valued?

Does getting leads from their website, as opposed to say referrals, change the valuation of an online marketing company?

At the moment SEO is a relatively high margin industry due to it's fast changing nature and the limited number of experienced professionals, if nothing else.

Demand is growing steadily, so there are great growth prospects, however, obviously for early stage companies there are risks as well. Any insights into early stage valuations would be much appreciated.

5. Patrick Oak

Blogger at Econsultancy

5:40PM on 26th November 2008

Anthony,

I'm not an "expert" appraiser and I have never been involved in the sale of an SEO business but the methodologies used to value companies are typically similar and they're all based on the same sorts of metrics - revenue, profits, margins, growth rates, etc. Almost any business (or asset) that generates cash can be valued in some form.

You asked about early stage companies - they're always difficult to place a value on because business is usually growing at the fastest clip in their early stages. That means the buyer has to predict where growth will peak, how far the company is away from that point, how long substantial growth will last, etc. For instance if you have a company that is growing very rapidy and will likely to continue to see rapid growth, a buyer might be willing to pay a premium for the business. On the other hand, you don't want to pay a significant premium for growth when the company has likely reached its peak and will likely see slower growth ahead.

So in the case of an SEO business, if you know you have x customers and the average customer generates y pounds in revenue and profit over the course of a year and you can chart some reasonable projections for future customer acquisition based on the current and past growth rates in this area, you should be able to value the business as well as any other type of business.

The hardest businesses to value are those with "potential" that hasn't been realized in the form of revenue.

Pat