How do you determine the value of your online business?
Valuing a business online is challenging because it lacks physical assets. But, just like any other business, this business is also subject to the same profit and income considerations. With these reliable methods, you can determine the value of any online business.
Determine revenue model
Different online businesses have different revenue models. Understanding how a company makes money helps to know it. Analyze your business and determine how it makes money. Do you generate revenue from advertising, subscription and lead generation or product sales? This will help you to know where the money is coming from and you will be able to determine if that business is valuable.
Analyze the income of the last 12 months
Professional analysts value companies by looking at gross revenue figures for the past few years. Add these income. You can get this data from company balance sheets.
Multiply by 3 or 6
Is your business commercial? Then multiply the revenue for the last 12 months by 3. If it is a content business, generating revenue from advertising and donations, then multiply the revenue for the last 12 months by 6. Compare it to similar businesses to see how is doing.
Estimate annual expenses
Discount the value of the business according to its costs. Expenses include advertising, merchant fee, hosting fee, administrative fees, and bank fees. For an online business, there is no formula for how much to deduct. However, know your expenses if they are 75% of income.
Traffic is the key factor of an online business. Without traffic, an online business is worthless because it won’t make any sales. Therefore, traffic plays a crucial role in determining the value of your online business. What matters is quality traffic.
To determine the quality of traffic, use the Revenue Per User (RPU) method. This helps to know the value of each visitor. This is the best measure to determine which traffic channel works best.
When looking at traffic statistics, consider concentration. This will help to know how diversified the traffic channels are. Does 70% of traffic come from organic search or are there different channels that bring in small chunks of traffic? When analyzing traffic, the higher the quality and diversification, the higher the value of your online business.
An active customer base will increase the value of your online business. Having an active customer base means you have repeat customers and people keep coming back to buy. This is an indicator that you have great products and have built a strong relationship with your customers.
Here consider the following factors:
How does your business gain customers?
What is the cost of customer acquisition?
How exclusive is your customer base and at what rate is it growing?
How many competitors do you have?
Do you have an established mailing list?
What is your abandon rate?
To get the true value of your business, look at the big picture.