At the start of this year, I began consulting with a manufacturing company based in Germany, to help structure a deal to acquire a UK based ecommerce business.
As a manufacturer of a commodity product, the acquiring company had developed a new strategy to go direct to the consumer, and concluded that buying an existing online operation already doing the same in various European markets was a good way forward. Working with their finance team (who as far as the numbers were concerned, did all the heavy lifting – thanks TM ) gave a great insight into the fundamental differences between acquiring an offline business and an online one.
Buying a business offline, whether it’s acquiring the local garage or laundrette through to investing by way of stocks is primarily focused on ratios, as this gives a benchmark by which investors can identify potential issues, and decide where future improvements, or even concessions will need to be made. These apply to buying an online business too, but is often flawed or difficult for a few reasons
1. Web Businesses with a value of less than $50K rarely have all the historic information required to perform conventional ratio analysis. Often, this is simply because of the age of the site, in an industry where it’s possible to grow a $250,000+ turnover business in less than a year with little capital expenditure.
2. The nature of smaller web business means some numbers are much less relevant, for example few web companies have significant current liabilities, stock or debtors.
3. Often, the information just isn’t available. When I first started buying businesses online I was very sceptical because I came in with an offline mindset. I missed out on some incredible deals simply because the owner didn’t have all the information I wanted them to have available and so couldn’t make a decision in time. Whilst ideally you should always conduct thorough DD, especially on sites over $10K, we have to be realistic in the fact that we won’t always have the information we need to do this, and so have to work with what’s available.
This all led to the revelation (ok, revelation is a little rich as it’s not really new information, but indulge me for a second…) that we need a new set of ratios for quickly assessing the health of an online business, that are in some ways unique to an online operation and can also be benchmarked if we collect enough data. Initially, I’ve found two ratios that are both easy to calculate, and always seem to have the data needed to calculate them readily available. They are
1) Revenue per unique user (RPU)
2) PPC Break Even (PPC BE)
Whilst some of these are probably more relevant with certain business models than others (e.g. PPC BE is great for ecommerce) they can be easily applied to most online businesses, and with the data that’s readily available, benchmarked too.
Revenue per Unique User
RPU is somewhat of a no brainer, and something I assume most of you already calculate, however it takes on a new dimension when used for benchmarking. This figure is fundamentally how much revenue the site earns for every unique user it attracts, and is calculated as
Total Gross Revenue / Total Unique Visitors
The following table shows the average RPUs calculated across 72 sites that had recently (last 9 months) sold. 18 were from private brokered transactions (all > $100K) and the remainder from Flippa auctions with a final selling price above $2K.
Before being included each one was
• Hand selected, checking the auction to remove businesses where there was a possibility that extra income came from outside of the standard model (e.g. selling consultancy as an add on, or income from other sites where the traffic numbers had not been included)
• Checked it had in fact sold, as a way of weeding out the chances of the supplied information being wildly inaccurate which meant the sale wouldn’t have gone through (not perfect, but a start)
Type of Site / Niche
Average RPU (USD)
|Digital Product Creators and Sellers||$1.18|
|Affiliate and Lead Gen||$0.62|
|Web Applications, Scripts and Software||$0.24|
|Marketplaces, Directories and Listings||$0.20|
|Adsense and Advertising Only||$0.06|
* the average across all sites was $0.48
In essence, RPU when compared against a norm, is simply a measure of how well monetised a particular site is. I’m still unsure as to how practical this is for ecommerce sites; on the one hand, the data could be meaningless as a site that sells high value items would theoretically have a much higher RPU than one that sells low value items, with everything else being equal. However a site selling a higher value item would theoretically need more unique visitors before making 1 sale and hence should balance out again. (If anyone has any opinions on this, I’d love to hear them).
You can also use RPU as a quick filter to find potentially undervalued sites if you know the average in the niche you are looking in. For example, to find potentially under valued clickbank sites you could use the following setting in FlipFilter on the Websites for Sale page
Search Keyword: Clickbank
RPU Max: 0.62
Revenue Min: $50 (increase to suit whatever scale you’re looking for)
Age: at least 3 months (try to weed out one-hit-wonders)
Traffic: min 10,000 uniques per month (or greater depending on your budget)
In layman’s terms, this will give you all Clickbank sites that theoretically could generate more revenue, by simply changing on page factors or the affiliate programs used in order to better monetise the existing traffic. (I use the word theoretically, as it could actually depend on many other factors like the niche, or the main product being sold, but the idea is to give an indication of ’could I do better with this existing traffic’ ).
PPC Break Even
Given a site that generates $30K per month for example, purely from organic traffic (and hence no ‘marketing costs’) versus one that generates the same but has a monthly pay per click spend of $5K, I would ALWAYS opt to purchase the latter, assuming that $5K is responsible for the bulk of the converting traffic.
Buying a site that has great rankings and lots of organic traffic is never a bad thing, but if the business relies solely on this traffic and doesn’t utilise any other method to generate revenue, then you’ll have two immediate problems
1) A change in fortune like being banned for whatever reason, or a change in Google’s algorithm can see your site lose most of its revenue overnight.
2) It’s much harder to predictably scale a business without buying traffic. SEO is still not an exact science and growing visitor numbers through organic traffic can be ‘hit and miss’.
PPCBE works on the premise that if you know the maximum amount you can spend on recruiting one paying user to the site, based on its current conversion ratio, then you can compare this to the average CPC for your keyword terms and decide whether it’s feasible that you could incorporate a media buying campaign into a business that doesn’t currently have one.
You need to know
RPU for X period
Cost of Goods for X period
Adwords CPC data for the site’s main keywords
X can be any duration long enough to yield reliable data, but must be the same for both Revenue and Cost of Goods. The formula is not as complex as it looks (and could just be my failure to simplify an equation)
( (Gross Revenue – Cost of Goods ) / Gross Revenue ) * (Gross Revenue / Unique Visitors)
Take this example; widget.com sells a range of widgets which are dropshipped from various manufacturers. They have a month’s gross revenue of $23k and show a total payment to all of their suppliers (cost of goods) of $18k for this period. This gives them a margin of approximately 22%. If they receive, for example, 30k visitors each month, this gives them an RPU of $0.77. (23,000 / 30,000). Widget.com will effectively receive $0.17 profit (0.22 * 0.77) for each unique visitor, and so must be able to pay no more than this to attract each one in order to break even.
You may find that the margins on a potential buy are so low, Google PPC is not a viable option for main keyword terms. There is still hope in buying cheaper clicks (Long Tail PPC, Google Content Network, Direct Buys, Facebook and Bing Ads) but often, this can help conclude that the business is not easily scalable without making changes to increase the RPU, or net margins for the current business model.
Whilst this figure is very relevant for ecommerce, it also applies to web applications and membership sites alike. People can make the mistake of assuming that without a fixed cost (cost of goods) associated with each sale, pay per click is an almost ‘dead cert’, but this isn’t always the case. Take this example from a job site listed on Flippa, where users pay $7 monthly to access premium features.
Monthly unique visitors = 16,543
New Signups = 212
Average length of membership = 2 months (figure quoted by seller in reply to a potential buyer’s question)
Average lifetime value of 1 premium user = 2 * $7 = $14
Total revenue from 1 month (accounting for future spend) = 212 * $14 =
Cost of Goods = $0
PPCBE = (2968 / 2968) * (2968 / 16543) = $0.18 (i.e. they need to spend max $0.18 per click to break even)
In this case, the PPCBE is simply the RPU as there are no ‘cost of goods’. The owner claimed they had made a start with Adwords, but abandoned it due to a lack of time and other commitments. With the average CPC for their niche being around $1.00, it’s fairly easy to see why their Adwords venture failed to ‘take off’.
Undoubtedly, there are many other ratios we can use to assess the strength of a potential purchase, however they’ll all differ with the type of internet business in question and the information you have. Using RPU, and the ‘benchmark’ values we already have, it’s possible to do a swift calculation, that can lead to you to the right questions to ask, which could potentially limit your loses or help you discover an untapped goldmine.
Occasionally, when I spot confirmed sales that seem ‘representative’ for sites within their niche, I’ll add the figures to the data and create a ‘live’ page in the stats section. Naturally, the averages should increase in accuracy with time and serve to create a useful benchmark for a variety of different sites.