Valuing organic traffic can be tricky, whether you are looking at your own sites or looking to acquire a new one.
There is a tendency to regard organic traffic as ‘free’, in the sense that you are not paying for each visit, and so it’s often overlooked in budgets for digital marketing. In addition, organic traffic is often overstated or overestimated when sellers attempt to determine the value of their website.
In this article, I’ll give you a relatively easy way of assessing the monetary value of organic traffic.
The Basic Formula
In order to calculate the value of organic traffic, we’re going to use the following formula:
Estimated monthly value = Total monthly searches * CTR[Position] * Value per visit
To be clear, the terms we are talking about here are:
- Estimated Monthly Value is the total value created (per month) for a particular keyword.
- Total Monthly Searches is the monthly search volume of a particular keyword.
- CTR[Position] is the estimated click-through rate for a keyword, based on the current or target page rank.
- Value per visit is an estimated value per visit.
This seems pretty straightforward, right?
The only slight issue is that some of these terms can be a little difficult to calculate in themselves. So let’s go through them one at a time.
1. Total Monthly Searches
Calculating the average monthly searches for a keyword is probably the easiest part of this process, and if you are an experienced SEO marketer you likely already know how to do this.
There are two tools that can be used to do this: Google AdWords’ Keyword Planner, and the Ahrefs Keywords Explorer. The Google system is free, but won’t give you so much data. The Ahrefs tool costs $99 / month, but will give you a lot more detail.
Let’s assume you are using Google Adwords. The process is pretty simple: just tell the system which search terms you are interested in. The results will look something like this:
The data we are interested in here is in the “average monthly searches” column. As you can see, Google will only give you a range, rather than a specific number. Ahrefs will provide the actual number.
In any case, make a note of this number, and also the ‘suggested bid’ value, because we will use that in step 3.
Now we will calculate the click-through rate (CTR). A higher rank on Google will translate to a higher CTR, but up until now it was a little difficult to see the exact numbers.
Now, though, Advanced Web Ranking (and other rank trackers) has made a great tool that tracks search rankings versus the click-through rate (CTR). This tool will tell us what percentage of searchers are likely to click on our link, based on the position that the site achieves in the Google rank.
At this point, you’ll notice that the site that is ranked #1 will get a huge amount of the CTR for a particular keyword. In fact, for most keywords the top-ranked site will take 35% of the clicks, and an additional 31% on top of that if you have the featured snippet. (SEO a winner take most game.)
So let’s say that the site you are looking to acquire is #1 for a particular keyword. You know now the monthly search volume (from step 1) and the CTR.
Let’s say that the monthly search volume for your keyword is 14,000, and the CTR for the site’s position is 35%. We can put these into the equation we started with:
Estimated monthly value = 14,000 (Search volume) * 0.35 (CTR[#1]) * Value per visit
We’re getting there… But now comes the difficult part.
3. Value Per Visit
The value per visit is necessary in order to put a dollar value on organic traffic, but it can be tricky to calculate. In recent years, the best eCommerce platforms have started to calculate this figure for you, but in an acquisition you’ll have to calculate it by hand.
There are a couple of ways of doing that, but I’ll show you a simple one:
Take the figure that we saved from Step 1, the ‘suggested bid’. This is what Google thinks traffic is worth for your keyword, and it calculates this based on the money you would have paid to get those visits to your site.
As a result, this method only quantifies how much you would pay for a PPC campaign to get similar traffic to your website. But it does not ascribe any value to the actual revenue that you generate from it.
Still, this method has the advantage that the numbers are easy to obtain, so let’s run with it for now.
Let’s say that the suggested bid value for your keyword is $0.64.
Now we have everything we need to calculate the value of organic traffic for a site.
Putting It All Together
So let’s pull all these numbers together into the formula we started with. The original formula was:
Estimated month value = Total monthly searches * CTR[Position] * Value per visit
And now we know these numbers:
- Total monthly searches = 14,000
- CTR[Position] = 35%
- Value per visit = $0.64
So now do the math:
Estimated monthly value = 14,000 * 0.35 * $0.64
= $3,136 per month
The Bottom Line
Though we’ve done this process for just one keyword, it’s worth working through the math for a few different keywords in order to see which are most valuable, and give you the best ROI.
Once you’ve done that, it is fairly easy to work out if the money you are planning to spend on an acquisition is worth it. By comparing your investment with the value of the organic search traffic we’ve just calculated, you can see how many months it will take for you to make a return on your investment.
These days, many of the most popular companies across the globe are entirely web-based, meaning all of their products and services are offered over the internet. Like real estate in the real world, websites are now thought of as investment opportunities with the potential for their monetary worth to grow substantially over time.
The marketplace for website transactions is constantly growing, with both buyers and sellers looking to get in on the action. No matter what side of the trade you are involved with, you will want to be sure that the website up for sale is a valuable property with strong technology behind it.
In this article, we’ll discuss several software categories that matter most when buying or selling websites. Upgrading to new tools will show a commitment to growth and stability.
1. Cloud Hosting and Storage
Image courtesy of Hello2Hosting.com
Today’s website investor is only interested in properties that are hosted in the cloud. They don’t want to have to worry about setting up and maintaining their own servers or managing a data center. With the cloud, those responsibilities are outsourced to a hosting provider and paid for at monthly rates, making it an attractive – and secure – model for many business owners.
To show your website in its best light, it needs to be optimized for speed and performance. If not, the value of the website can sink due to the fact that visitors are unlikely to spend much time or money when pages don’t load reliably.
Different cloud hosts specialize in different types of websites. If your property is primarily a blogging enterprise, then it makes sense to use a platform like Kinsta, which was specifically designed to manage the WordPress content management system and provides support for migrating WordPress content across hosting solutions.
The bottom line is that, depending on your present hosting arrangement, an upgrade in this area may significantly drive the value of your website up.
2. SEO Optimization Software
Image Courtesy of TemplateTrip.com
Website buyers want assurance that the property they are investing in has a good reputation and looks strong in Google’s eyes. This is what makes search engine optimization (SEO) so critical before and during website sales. Though not cheap, options like a subscription to Ahrefs or SEMRush should be mandatory.
Poor or inattentive SEO will leave the website floundering on the second or third (or worse) page of search rankings, meaning fewer visitors will find it and – all together now – driving down the value. A new website owner may feel forced to spend more on advertising to try to attract users and that expense is coming out of the sale price. Strong SEO metrics does the exact opposite, acting almost like free marketing and making the site a more valuable asset.
In the early days of the internet, improving SEO was as simple as researching good keywords in the content for search engines to index. With the considerably stiffer competition these days, more expertise is required and upgrading to a pricey keyword tool can help reduce the time and increase the effectiveness of the process.
3. Marketing Tools
During negotiations of a website sale, often the most critical factor is the marketing performance and related metrics. Buyers want to see strong return on investment (ROI) and conversion rates, which track how often the content results in a desired action by a customer or visitor – we’re talking about blog post visits, clicks, purchases, or email list signups.
Third party tools like Sumo can help to strengthen marketing efforts and make websites more appealing in transactions. It’s important to show traffic and revenue growth, as investors want to have confidence that any website they purchase is on an upward trend rather than flat-lining or dropping.
Website investors want to see modern, proactive strategies in place when it comes to marketing. Active email campaigns (which need their own tools to be done properly – MailChimp and Mailerlite are leading solutions), actively growing your blog, a strong social media presence, and content that includes video can make a property more valuable as it points to growth rather than decline.
4. Cybersecurity Software
Image Courtesy of LehighValleyChamber.org
Cybersecurity is no longer an esoteric topic reserved for high level computer science classes at the local university. The incredible growth rate of hacking attempts and successes has created an environment that forces any website owner to make security a priority or suffer the consequences. The bad news is that there isn’t much demand for a site that’s infected with viruses, malware, or has recently suffered a data breach.
The good news is that you don’t have to be a cybersecurity expert to put into place strategies that incorporate effective security software that make it harder for hackers to compromise the website. The three critical areas to pay attention to are firewalls, a virtual private network (VPN), and an anti-virus/anti-malware security suite. And don’t forget to install new updates as soon as they become available. The following is a quick review in case you’re not familiar with these security software tools.
Firewall: A firewall sets up a sort of perimeter defense that separates trusted from unknown traffic and filters out the latter. Actually, it does a lot more than that but here’s a quick rundown on why you want one.
Virtual Private Network: If the website collects or stores any sort of private data (and most do), recent GDPR regulations related to privacy make choosing a VPN any time you connect to the front or backend almost mandatory. The bottom line is that the encryption and IP address cloaking are an excellent defense against the rash of continuing data breaches.
Security Suite: There are a handful of effective choices in this part of the online security industry, any of which provide solid anti-virus and anti-malware protection. To choose not to use one is virtual suicide, particularly if you’re using trading software or working with sensitive financial data. With the average small business site being probed by hackers 44 times per day, an infection is almost certain if you don’t take this precaution.
5. Customer Service Software
Acquiring new customers is a great way to grow an online business, but unless you keep those users happy, you will not build a valuable property. The goal should always be to retain current customers and find ways to boost their activity on your website. Poor customer service will hurt a company’s reputation. Nobody wants to buy into a bad service experience.
When it comes to online stores and service providers, customers expect fast, accurate answers to any questions or issues they encounter. A tool like Intercom helps to funnel all customer communication into a single stream so that you can manage it from a central location. Intercom offers real-time chat solutions that can be easily integrated with your existing platform.
6. Activity Tracking Tools
When a website if first put up for sale, potential buyers want to see fundamental data about past performance. If key metrics like unique visitors per month are not available, then it is very unlikely that a deal will be done. So before trying to sell any online properties, make sure to have an activity tracking solution in place. The further back it goes, the better.
Third-party tools like Crazy Egg take care of most of the grunt work. You simply add a few lines of code to your website and let it track all of your visitor activity, making it one of the easiest software upgrades on this list. Crazy Egg also leverages machine learning algorithms to automatically make suggestions on how to improve your website performance and retain more users.
The Bottom Line: Essential Software Upgrades
Websites can be great investment opportunities. It’s like a store that’s open for business 24/7/365. But in order to take full advantage of this business strategy, you have to understand what drives the price of a website up or down. As we’ve just discussed, some factors include marketing performance, SEO metrics, and customer service reputation.
Like a house flipper, you want to seek out opportunities to boost a website’s value in a hurry. Upgrading the software behind a website can prove to potential buyers that there are significant growth opportunities. You don’t need to find the next Amazon or Netflix in order to make a nice profit on a website sale; you simply need to identify a property with high potential and strong marketing fundamentals.
Most people get a thrill out of buying a business whether it be to expand their existing empires or as a stand-alone operation. Thrills aside it’s an investment so like any other, whether real estate, shares or traditional business, it is never totally risk-free. That said, our experience says it’s unwise to be tentative and overly risk-averse. Instead, go for the business you want and offer to buy the business on ‘creative terms’.
So, you have finally settled on an online business you’re really interested in acquiring. You’ve done your due diligence, meticulously analysed the net profit figures, and thought through the rightness of the ‘fit’. It all seems good and you’re ready to go ahead. Now it’s a matter of negotiating and deal structuring. This is the most critical part. How many times have you seen institutional investments and acquisitions go wrong? Even the most seasoned make mistakes so while it’s a time for excitement it’s not a time to become overly emotionally-invested in the acquisition. Be crystal clear on the value you are placing on the business…this should be on the basis of its analysed profitability and potential.
Get to know the seller
Good negotiation produces a win-win settlement in which both you and the seller come away with what you need. Understanding what the seller wants, including the reasons for selling at the present time, the seller’s valuation and reasons underpinning it, and the payment timeline wanted by the seller, are all critical to your effective negotiation.
Building trust with the seller is vital. Assuming you are acquiring an established business with a record of profitability and on a growth trajectory (and, if not, why are you buying it?), then the seller will have authentic reasons for the sale which are important to understand. Assuming, also, that you are looking at a high six or seven-figure purchase price, then the way the deal is structured is vitally important to its success and you should go to the negotiating table fully understanding what you want to achieve.
For obvious reasons it will almost certainly be in your interests to negotiate only a partial up-front payment. It would be unusual for a seller to agree to a 40% delayed payment, but withholding up to 30% until an agreed final settlement date is common. This is technically a form of balloon payment ‘loan’ as the seller continues their equity investment during an agreed period, characteristically only a few months, during which the seller continues to provide expertise, advice and training. It also enables testing of external relationships and links on which the business depends and which are supposedly being transferred with the business.
The Earn-out Agreement
A more complex form of temporary ‘seller retained equity’ is an Earn-out agreement. For substantial businesses with a high six-figure or higher purchase price, this form of arrangement may be essential to negotiate. (Ongoing seller retained equity arrangements are different altogether and are used to enable a mutually desired continued involvement of the seller in the business over the long term.)
So, what is an Earn-out and how does it work? Essentially it involves a partial upfront payment at the time of transfer to the buyer. The proportion of upfront compared to delayed payment is subject to negotiation, but around 70% is a general guide. The remaining 30% is then paid in instalments according to negotiated performance criteria such as achieving the seller’s predicted milestones, or minimum monthly profit projections.
To illustrate with a simplified example. You have agreed to purchase an online business for $300,000, based on an audited net profit averaging $10,000 per month. In real terms the monthly profit figure could be seasonal rather than regular, and this would be factored in to the agreement. But for simplicity here let’s assume a regular monthly net profit. It has been agreed that the upfront settlement payment will be $210,000. The remaining $90,000 will be settled on the basis that each month $15,000 will be paid, but entirely contingent on achieving the projected $10,000 net profit in that month. There are any number of possible intricacies, such as no payment being made in a ‘shortfall month’ or more commonly payment on a sliding scale reflecting the percentage of the projected profit actually attained. This entails a higher repayment in a higher performance month.
This may sound complex, particularly if we factor in that the total purchase amount in this scenario could be finalised earlier or later than the approximately 6-months timeframe envisaged for the Earn-out period in the situation described above. In a nifty variation on this approach, some Earn-out agreements fix the time frame itself rather than the instalment amounts, with the effect that if the business fails to perform fully to expectations the final price paid is somewhat lower than initially envisaged and conversely if it performs better then the buyer finally pays a little more in total than initially anticipated. Few buyers would be concerned about this as it is a win-win situation all-round.
Given the complexity of the Earn-out detail to be negotiated, why do it? The advantages for the buyer are immense. Firstly, the obvious one of delaying full payment and the interest costs of investing 100% from settlement day. But more important is securing the self-interest of the seller in actively ensuring that all goes to plan, the projections are achieved or exceeded, and there is a smoothing of any potential bumps created in the transition process while migrating service provider accounts and supplier and client relationships.
While a six-figure or higher business acquisition will always involve a legally binding agreement, at the end of the day if there has been a 100% purchase payment made at the time of transfer then it will be close to impossible in practice to achieve compensation for any shortfall in predicted performance or for any unanticipated hurdles in migrating accounts. Retaining a proportion of the final payout figure provides real leverage to engage the interest of the seller in ensuring the smoothest transition. Leverage beats lawyers hands down.
Finally, honest relationships are the key to success. If the seller won’t agree to an Earn-out provision find out why. There may be a compelling reason for the seller’s position. If so, then that loss of leverage at the very least justifies you offering a somewhat lower purchase amount to offset the downside of settling in full at the time of transfer.
Negotiation needn’t be stressful. It’s a matter of understanding the seller, while remaining crystal clear about your own needs as a potential buyer.