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.
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.
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.