Website Value Best Determined By Its Profit

© 2016 by Scott Bateman

Web publishers often debate website value, but they tend to focus on the wrong number.

A common practice is to base the value almost entirely on revenue, but it is profit that reveals much more about a site’s true worth.

The price for a publicly traded stock of a major business is about 25 times its earnings or profit at the time of this writing.

Corporations also measure value using revenue. But the revenue metric doesn’t matter so much when a company is losing $1 billion a year. A website is a business and is best measurable the same way: profit first and revenue second.

Profit Versus Revenue

As an example of this valuation strategy, imagine two websites. One has $5,000 a month in revenue and so does the other. The total for each is $60,000 a year.

If the value of these sites is based entirely on revenue, then they should be bought or sold for the same amount — such as 2.0 times annual revenue or $120,000 apiece.

But now look at the site profit. If the first site has $4,000 a month in expenses and the second site has $4,500 in expenses, the first site clearly has greater value because it is more profitable.

Site A should command a much higher price as a result than Site B.

Website Value Based on Profit

Stock market valuations offer a guide to pricing a website. For the example above, use the annual profit multiple of 15 to establish the value of both sites.

Site A clears $1,000 a month or $12,000 during the year. Multiply the $12,000 in profit by 15, and the site is worth $180,000.

Site B clears $500 a month or $6,000 during the year. Multiply the $6,000 by 15 to get $90,000 or half the value of Site A.

Using a revenue multiple at this point brings a new perspective to valuing a site that way. Site A is worth $180,000 and delivers $60,000 in revenue, which gives it a revenue multiple of 3.0. Site B is worth $90,000 and delivers $60,000 in revenue, so the revenue multiple is only 1.5.

The two sites end up with the same multiple for profit but a much different multiple for revenue.

Website Value Based on Audience

Profit and revenue matter most to a typical business. In media, three numbers matter most: profit, revenue and audience.

Three common audience analytics are:

1. Visits
2. Page views
3. Unique visitors

Visits give a more accurate number for measuring total site audience because the unique visitor is vague due to cookie deletion, family usage of a single computer and other factors.

Page views have value for their ability to deliver advertising impressions.

Sites A and B have a similar number of monthly visitors at 100,000 apiece. So from that point of view, they have the same value.

But site A has two pages per visit while site B and four pages per visit. Site B has double the advertising inventory and therefore double the revenue potential even with the same number of visits.

Site B is twice as valuable as site A based solely on page views.

Other Factors

Other factors are worth examining once a baseline value is established using profit first, revenue second and audience third.

They include domain name appeal and the amount of money the market is simply willing to pay for such a site. That willingness swings over time based on the economy and other reasons.

Growth rates also matter. Even if two sites have the same profit, revenue and audience, the faster growing site has more future value and should command a higher price.

Stock markets measure the stock price of companies based on their future value. Websites are no different.