This article is part of our Internet Business Valuation series, in which we provide you with information on what makes your particular business model unique when it comes to valuation. For more in-depth reading on valuation, see our post How to Value a Website or Internet Business.
If you’ve been running a site that makes its revenue from advertising, you already know that this business model has certain qualities that make it unique from other businesses. Perhaps unsurprisingly then, advertising website valuation also takes some special consideration.
The value of your advertising business depends on a number of factors. Let’s take a look at what’s unique when it comes to valuing advertising websites.
Passive vs. Direct Advertising
We deal primarily with two different types of advertising businesses: passive and direct. Some businesses utilize a mix of both models.
An example of passive advertising is Google AdSense. The only things needed to make money are a website with traffic and an AdSense ad. Once those two things are in place, the rest of the process is fairly passive. Aside from testing different ad layouts to find the best performing ads, the only other thing you’ll be doing is monitoring your account and analytics. AdSense is primarily a set-it-and-forget-it model of generating revenue.
Direct advertising takes more work on the site owner’s part. It entails building strategic partnerships with other businesses through outreach (from cold calls to in-person meetings), negotiating rates and ad maintenance. Building a network of advertisers alone can be a bigger time commitment than many buyers would be interested in taking on.
Another factor to consider with direct advertising is concentration risk. For example, if your site earns $50,000 per year in revenue and 100 percent of that comes from a single direct advertiser, then there is a high degree of concentration risk for a potential buyer. This is because that advertiser could choose to pull their ad at any time, leaving you without revenue. Even to a lesser degree, they may want to renegotiate the price based on the results they are or aren’t getting.
The bottom line is this: The more passive the business model is, the higher the valuation is likely to be. Additionally, if your revenue sources aren’t diversified, your business will be worth less because there is greater risk for the prospective buyer.
Another important factor in your advertising business valuation is CPMs.
CPM stands for cost per mille, which is the price a webmaster pays to run an ad on Google, or the revenue that a site owner can earn per 1,000 clicks from a passive ad on their site. The average CPM is getting harder to calculate because of the multitude of ways content and ads are now served and consumed – email, mobile devices, videos, and so on. Nevertheless, it is important to know your average CPM for benchmarking.
CPM rates will vary depending on the quality or perceived value of your traffic (i.e. what percentage of your visitors convert into customers). One of the biggest factors is the niche that you are operating in. In lucrative niches, such as insurance and education, each lead is worth more to the advertiser, which means they are willing to pay a higher amount on a per lead basis. This means that you will see a higher CPM on a site that talks about different insurance companies, compared to video game fan sites, which have notoriously low CPMs.
A website with a high CPM will need far fewer visitors to make the same amount of money than a site with a large amount of traffic, but a low CPM. Let’s look at a quick example of two different sites, one with a high CPM and one with a low CPM.
- $50 CPM
- 10,000 unique visitors per month
- This site makes $500 per month
- $5 CPM
- 10,000 unique visitors per month
- This site makes $50 per month
These two sites get the same amount of traffic, but since the CPM varies between the two, there is a large difference in monthly earnings. It’s safe to say that sites that benefit from high-value CPMs are likely to be worth more than others. The same can certainly be said for high-quality traffic, but it will only play into your valuation in extreme cases, such as when you have extremely low-quality traffic, or really high-quality traffic.
Organic Search Traffic
Advertising sites are typically reliant on organic search traffic, which means there are certain factors that you should look at to determine the health of this traffic.
Things such as the site authority, backlink profile, and how your site is positioned in search results will factor into your valuation. If you have an aged domain with plenty of strong links pointing to it, a high number of your pages and posts are ranking well for your keywords, it’s fair to say that you have a more valuable website with less potential risk.
The more sustainable (good site authority and a strong backlink profile) and diverse (many pages contributing to traffic and keyword rankings) the higher your site will be valued.
Quite simply, a site with 100 percent passive advertising revenue and a strong backlink profile is going to be valued more highly than a direct advertising site with a weaker backlink profile.
Mobile optimization could also play a part in your valuation, as buyers will be looking for sites that are easy to use on smartphones and tablets. In a recent study by comScore, there are now more mobile internet users than desktop users.
Due to this, now is the time to start optimizing your site for mobile users. This will pay off in both the valuation and increasing the overall engagement on your site.
Many investors are now focusing on acquiring display advertising websites that are monetized through Google’s AdSense program and switching them to higher paying programs elsewhere (or switching to affiliate models).
Another focus has been to adopt more direct advertising agreements. While these do rely on business owners to build relationships and concentrate on service and ultimately returns, the rewards can be worthwhile as the CPM rates achieved are far higher, as the traffic is likely to be more targeted to the advertiser in question. Therefore, display advertising websites with a very clear focus, audience and community following (i.e. email lists) can often yield higher valuation multiples if it can be proven that there is a history of converting these elements into higher paying direct advertising relationships that have stood the test of time.
While AdSense doesn’t always offer the best CPM, it’s a safe bet. You can depend on reliable payout and performance, plus it caters to a number of niches to serve relevant ads to your site, a big plus for user experience.
These partnerships are not just limited to online businesses; many have been observed partnering with offline businesses seeking a greater direct access to end-users. This is an area of particular focus for investors, many of which come from traditional backgrounds and may have existing relationships to leverage.
As you can see, there are a few different components that are likely to have an impact on your advertising site’s valuation.
From a big-picture perspective, you’ll want to evaluate and analyze the advantages and disadvantages of passive and direct advertising, what your average CPM is, the quality of traffic coming to your site, the authority and backlink profile of your domain, and mobile optimization. These are the factors you can weigh when considering an exit, but once you become serious about selling your site, you should get a valuation from a professional advisor.