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Web Site Value Based on Accurate View of Profit

Stored in Website Management and tagged

Web site profit is a popular topic on message boards around the Internet, and the postings often focus on revenue as a way of establishing a site’s worth. But revenue is misleading.

A number of Web sites provide calculators that claim to show the value using publicly available information such as estimated audience from Alexa.com, a site’s presence in the search engines and other factors. Those numbers are misleading as well.

The best way to determine Web site value is with an accurate view of profit.

A common measure of the value of a company on the major stock markets is price divided by earnings, or the price/earnings ratio. The average ratio usually ranges over time between 15 and 20, meaning that the company is valued at 15 to 20 times its profit.

A small Web site that generates $1,000 a month in revenue and has $900 a month in expenses has a profit of $100. At 15 times its annual profit, the site is worth $18,000 or $100 x 12 x 15.

Why is revenue misleading? What if a second small site also has $1,000 a month in revenue and $1,000 a month in expenses. It is left with no profit at the end of the year. Why would someone pay $18,000 for a site with $1,200 in profit and someone else pay $18,000 for a site with no profit?

An online publisher who is thinking about buying a site, selling one or just wonders about the value of a current site should start with profit as a way of determining its value. Once that value is established, the publisher should look at revenue, audience and value of the domain name, among other considerations.

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