Traffic Value - Valuing a site based on the traffic it gets

[Clinton]

This has come up often in the past at various blogs, siteflipper sites, Flippa and elsewhere. Some have recommended that one way of valuing a site is to value it based on the free traffic it gets. That traffic is usually from SEs but can be from other referrers as well.

The theory is that you estimate the cost of that traffic as if you were paying for it and value the site based on how much that traffic would have cost if it were bought. The calculation is [Traffic Volume * Cost of Keywords = Traffic Value]. Some even advise multiplying that by a fraction to decide how much to pay for the site and even suggest very exact figures such as 0.45 i.e. [Traffic Value * 0.45 = Fair Price]

Your thoughts?

When buying a site would you be willing to pay based on "Traffic Value"? If yes, can there be a standard multiplier, what fraction would you use?

[benitez17]

The problem with that method is that you have no idea how the traffic converts.

When I look at sites that are unmonetized, I usually start from the assumption that I am throwing generic CPM ads on it and then begin negotiating with the seller.

Ideally, you can get the seller to place your ads on their site as a test run, but then you have to trust that they aren't doing anything to artificially boost the results.

[Thomas]

What a load of rubbish. I'd be very surprised if anyone has ever bought a site based on that "formula". The Google Keyword tool is notoriously inaccurate. I have bought sites in a similar way to this, but only when I have sites I can benchmark against that are very similar traffic wise (from the Google Analytics breakdown). Different traffic sources can convert completely differently, different countries have different values etc. When applying a "discount" to what I think I can make from the traffic, it would be about 50% for me to cover some of the risk.

Either way... "valuing" a site this way is one thing, but actually getting a buyer/seller (depending which side you are on) to agree with your valuation is a totally different matter.

If you're a buyer and you value a site you want to buy this way, the seller is either going to get way more than they expected (if the site has no income and they are realistic) or your offer is going to fall way short of the valuation they have come up with based on the "potential" of the site.

TL;DR - what a load of rubbish.

[David S]

I have a client who paid well over $100K for a site in his industry based on the traffic. Like meathead1234 said he has done, my client had an existing site with very similar traffic that he could benchmark against. He has been very satisfied with his purchase.

It's really just one more unknown factor that you would have to take into account. The more uncertainty there is about whether the traffic can be converted into a revenue stream, the higher the discount you would take from the expected value of the traffic.

In the offline world, I have had several transactions where clients have essentially bought or sold traffic. Usually there were revenues but the concept wasn't really that far off. For example, I had a client who sold a magazine to a competitor who planned to shut it down and offer its subscribers to substitute a subscription to the buyer's publication. The price was basically based on the number of subscribers the buyer thought it would retain, multiplied by its average cost of acquiring a new subscriber. The latter number is something almost any magazine CFO can quote you for their magazine.

Years before that, I represented a grocery delivery company that bought a competitor in a different geographic market. Again, the purchase price was determined largely based on the known cost to acquire a new customer. At about the same time, AOL was buying up local dial-up ISPs based on its own customer acquisition costs, which were generally estimated to be about $50 a customer. Those were the days when you would get a constant stream of AOL software disks and later CDs in the mail, so the costs were pretty high.

If you search "customer acquisition cost" on Google, you can find about 50,000 hits on the exact term. There are some very good articles explaining how major companies, even Internet companies like eBay and Paypal, make decisions based on customer acquisition cost.

If I could find the right site in an area that I felt I could benchmark, I would buy it in a flash if the price were right. Obviously, a site with 60,000 monthly unique visitors and revenues of $1,800 a month is worth more than 60,000 UV's and $200 a month, even if they are identical sites with traffic from similar sources. I would certainly expect a significant discount on the one earning only $200 a month. On the other hand, if you have two nearly identical sites, both earning $200 a month, and one has 10,000 UV's and the other has 60,000 UV's, I'd be willing to pay much more for the site with more traffic if I had a similar site earning 9x the revenues on similar traffic numbers.

[Clinton]

If you search "customer acquisition cost" on Google, you can find about 50,000 hits on the exact term.

Maybe, but what does customer acquisition cost have to do with traffic?

Advocates of "Traffic Value" have one goal: to give you traffic stats - possibly completely worthless traffic - and have you extrapolate acquisition costs based on no extensive experience of how comparable traffic converts and no comparable data.