You must have stumbled upon that cute application which tells you how much you blog is worth by multiplying a link to dollar ratio. I’ll risk it and say anyone of us bloggers would gladly sell his blog for half that amount. That multiplier has obviously been proven as un-economic at the least. However, the question remains. How much is a blog worth?
The financial foundation
If a blog is about making money it is very much like any other profitable endeavor or project and as such should be valuated using the same principles (with the correct adjustments). Finance theory teaches us a very simple lesson. If you want to know how much a certain project (or a company) is worth you have to examine the expected future cash flow this project or company will yield and adjust it to time and risk. Now, since we don’t always have the time to study each company thoroughly we often take shortcuts to the end. These shortcuts are the multipliers we use in order to get a “quick and dirty” rough valuation or ballpark (sometimes very rough and most of the times incorrect). Using multipliers is essentially inducing from other cases on our case and hoping it’s the same (clearly AOL isn’t going to buy our blog using the same link to dollar ratio it used to buy Weblogs). More on discounting cash flow and using multipliers can be found here.
That was semi-interesting, now what about my blog?
It seems we have two choices. Either go the long way and use DCF (discounted cash flows) or take shortcuts and use multipliers (is it safe?).
Let’s have a look at an example to make things a bit more clear. Let’s assume our small yet aspiring blog has the following statistics:
1. 250 unique incoming links.
2. 200 average unique visits a day with 300 page views.
3. 300 posts of at least 400 word each.
4. 25$ a month average adsense revenues.
5. 100$ a month average advertising revenues.
That little applet I mentioned would probably tell you this blog is worth around 120,000$. How much would you be willing to pay for it?
Option #1 – Discounting cash flows
Very simply put when valuating using discounted cash flows we need three important parameters:
1. Future growth
2. Risk (or discount rate)
3. Cash flows
These three parameters basically embody all the major assumptions and data available on the project. Growth represents how cash flows will behave in the long term. Usually long term growth is stabilized and it is very hard to achieve more than 3-6% long term growth (natural growth is around 2%). Short term growth can be and is much higher as the project evolves and market share increases. As everything in life the improvement curve is exponential leaving very little at the end.
Our current yearly cash flow stands at: (100$+25$)*12 which are 1,500$. If we assume growth we need to adjust the numbers. Let’s assume away that the cash flows from our blog will evolve as following:
Year 200X – 2,500$
Year 200X+1 – 5,000$ (100% growth in revenues)
Year 200X+2 – 8,000$ (60% growth in revenues)
Year 200X+3 – 10,000$ (25% growth in revenues)
Year 200X+4 and forever – 4% growth in revenues annually
On to the discount rate: In order to value a projected sum of money we need to transform it into “today’s” money. 100$ today are worth 100$(1+ interest rate) a year from now. If the interest rate is 5% then 100$ today are worth 105$ a year from now (and vice versa 105$ a year from now are worth 100$ today). In finance the discount rate represents risk or: “what is the return I expect on my investment?”. Since blogging is a risky industry a proper discount rate should be much higher than the FED’s interest rate for example. Let’s assume our discount rate should be 12%. How much is our blog worth?
2,500$/(1+12%)^1 (discounting for 1 year) + 5,000$/(1+12%)^2 (two years from now) + 8,000$/(1+12%)^3 + 10,000$/(1+12%)^4 + 10,000$/(12%-4%) discounted by 1.12^5 (long term cash flow – cashflow/ discount rate – growth rate).
If we add everything up our blog is worth: 89,196$.
What happens if our blog has, more realistically, reached 2,500$ annually and will only grow at 2% yearly? Then our blog would be worth: 25,000$ = 2,500$/(12%-2%).
Growth and discount rate assumptions have a very significant impact on the final result. Have a look at the sensitivity analysis for a blog with annual revenues of 1,000$ and changing risk and growth assumptions (the value is the result):
Naturally many other assumptions have been made in these very simplified calculations. Sometimes value should be added for synergies that might be created for example (a blog’s content completes another’s content to create a classic case of 1+1>2).
I hope you get the general idea.
Option #2 – Using multipliers
Easy and fund multipliers give us instant results. Sadly there are hardly any two companies, project and even blogs which are similar to each other. Each has its own circumstances and characteristics which will guarantee the result of using multipliers will be swayed at best.
However, as I’ve written, we don’t always have the time to go through the process DCF requires. Let’s have a look at multipliers then.
Multipliers are essentially indicators of a certain project or company’s value which use its main revenue generators to conclude the total value. In case of blogs these revenue generators might be incoming links or page views, subscribers, unique visits and more. Here are some examples
1. Unique link multipliers (used by that application) – Take the number of unique link you have and multiply it. By what? AOL and Weblogs are said to have used a 490$ a link multiplier. It doesn’t really matter though. A 490$ link multiplier means our blog is worth around 122,500$! Wow. Take a quick look up the post and see which cash flows might justify this value.
2. Unique visits – let’s assume that in my blog each unique visit generates 0.01$. We can combine DCF and this multiplier now since my annual revenues are 720$ a year (200*0.01*360). All that is left is to use the proper growth and risk parameters.
3. Number of posts – Since we have some knowledge of how much each post might be worth (around 7.5$-20$ using helium, associated content, constant content and other content buyers and publishers, depending on quality of course) we can take the number of posts and multiply them: 300*(7.5$-20$) = 2,250$ – 6,000$ (value increases as the number of posts increases).
I think the general idea here as clear as well.
So, how much is your blog worth? I hope you have the tools now to experiment some more with your own statistics and estimates on growth and risk. As always I’d love to hear your thoughts and your results.discounted cash flows, finance theory, half that amount, profitable endeavor, valuation approach