Affiliate Marketing Website Worth Valuation
That article is part of
our Valuation of Business Model 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. To get a valuation from our
expert team, click here.
Affiliate websites are popular
business models among online business owners, and for good reason. They’re
relatively easy to get started, and, when done properly, can be very
profitable. Content businesses have key drivers which determine the value of
the business. Here is an overview of the main valuation drivers used:
Depending on the strength of the
above drivers will determine where an affiliate business’ multiple falls within
the expected range of 2.25x-4.25x: We’ve advised in the sale of affiliate
businesses across various niches and income levels, so we’ve learned quite a
bit about the factors that contribute most significantly to a high valuation.
Here’s what we’ve come to understand:
High Risk Factors
The nature of the affiliate
program will likely have an impact on the valuation. Any business that has been
built to promote a single affiliate product is at risk of losing revenue
because there is a chance that the product will change, go away or simply lose
appeal with customers. This has been demonstrated well by Amazon in recent
years. Being too reliant on a single revenue source is always risky.
Conversely, if an affiliate business is promoting multiple offers and the
revenues are well diversified, the business will likely receive a higher
valuation.
In addition to product
concentration, it is also important to consider the overall growth patterns of
the business. For example:
·
Is your business growing or shrinking?
·
How products being promoted?
·
How large and established is the affiliate partner?
·
How long has the business been a part of the affiliate program?
·
Can the terms of agreement be transferred over to a new owner?
Will the new owner have to negotiate on their own?
The more sustainable and reliable the affiliate program is, the higher the valuation multiple is likely to be.
Product Category
As with any business, the niche
plays a big part in the attractiveness of the opportunity for a buyer. You’ll
want to examine product trends, seasonality and the overall staying power of
your affiliate products.
Generally, evergreen niches will be valued higher than trending niches, even if the latter seems more appealing upfront. For example, healthcare products like diapers will always be in demand. Therefore, an investor will assign a premium valuation to an evergreen product that will remain profitable, and where there may even be room for additional long-term growth.
Promotions and Seasonality
Seasonal businesses can be very
profitable and even considered evergreen if they’re something customers will
demand year over year. However, seasonality definitely plays a part in how you
need to present your financials for valuation.
Let’s use electric fireplaces as
an example. You’re likely to see higher sales in the fall and winter, and
numbers will naturally be low in the spring and summer.
If this business generates
$5,000 per month October through March, but just $500 per month the remainder
of the year, it wouldn’t make sense to base a valuation on the financials from
your high-income months. Instead, you would present your average monthly income
for the year, which in this case would be $2,750.
The same is true for Christmas
or Black Friday, which tend to be lucrative seasons for affiliate sites. This
means there may be considerable spikes in commissions and revenue that should
be averaged into year-round revenue.
Commission Tiers
Depending on the affiliate
program, there may be commission tiers that are tied to the volume of sales
through the affiliate account. While not volume-driven, the most well-known
affiliate program is Amazon’s
affiliate program, where the commission rates range based on category (this used
to be on sale volumes, which Amazon changed over time).
Below you can see the different
category-based commission tiers that Amazon uses for its affiliate program:
Affiliates can also earn
commission via Bounty Events and the Trade-In Program (in the United States).
To see a full list of Amazon’s commission rates, visit their Fees
Schedule here.
There are many examples of
variable commission tiers across affiliate partners and it is not uncommon for
business owners to agree custom rates with larger partners. This can provide
above-average concentration and transfer risk to a new owner.
Please refer to our article
on Amazon FBA Policies to see all changes
to European commission rates.
Link-Building & SEO
Affiliate sites usually target
keywords with high buyer intent (i.e. “best espresso machines” or “top 10
espresso machines,” which heavily indicate that a user is looking to buy an
espresso machine).
Because of this, some affiliate sites rely on SEO tactics that fall afoul of Google’s policies, and Google regularly updates its algorithms to ensure these sites are short-lived.If the link profile is heavily anchored around one or two high buyer intent terms, it could pose a risk.The image below shows what a natural backlink profile looks like in terms of anchor text. Notice that the bulk of the anchor text is the name of the website—this is a good indicator of the site gaining natural backlinks and not trying to manipulate Google rankings.
Affiliate sites that are built
on private blog networks or purchased backlinks are worth less than those with
natural link profiles. Sites that use PBNs or purchased links to generate
search engine rankings also generally will have less history than their natural
counterparts at the same income level. A combination of short history and high
penalty risk can have a large effect on the valuation of an affiliate website.
Quality Content
High-quality, long-form content
is the most effective way to rank for relevant search terms and for turning
readers into buyers, both of which are very important to the success of an
affiliate website.
One of the best ways to determine the quality of the content is to see if people are engaged with posts or product reviews. Affiliate sites with hundreds of long-form articles are more likely to rank and as such this creates a defensive moat that is highly prized by investors. While other websites may come along and disrupt the search engine rankings for short periods of time (through inorganic links), Google is continuously investing time and resource into rewarding content that is in line with its vision, and these well-built sites will prevail in the long term—a factor that is key for investors and reflected through higher multiples.
You’ll want to assess the
quality of your site’s content by your own subjective measures, but you may
also hire an editor or freelance SEO consultant for a second opinion. If you’ve
been outsourcing your content creation, you should consider using a tool such
as Copyscape to confirm that there aren’t
any duplicate content issues.
Standard Valuation
Factors
In this article, we mainly
focused on highlighting the different valuation factors that were unique
specifically for the affiliate business model. Below you can view a checklist
that contains all of the valuation drivers that we consider when valuing an
online business. You should use the valuation drivers below in addition to the
ones that we highlighted throughout this article.
Organic Traffic Health
For most affiliate sites,
organic traffic is the main source of customers. This means that the more
sustainable and consistent the organic traffic is, the better.
Tools like Google Webmaster Tools, SEMrush and Ahrefs are invaluable in assessing keyword strength and can help shape the opportunities and upside to investors by demonstrating areas of relative strength, as well as areas of improvement to gain additional upside.
An important factor considered
in valuations is diversity of keyword rankings. Similar to platform risk, this
reduces the reliance on any one key term which if lost would be detrimental to
the earnings potential of the affiliate site.The image below shows how SEMrush
displays the keyword diversification of a website. It looks at the percentage
of total traffic that is driven from that specific keyword:
The image above shows that the
highest-ranking keyword brings in just over 2% of the traffic. This is
desirable in terms of diversification. If a single keyword accounts for more
than 50% of the traffic, the affiliate website may be at risk longer term and
the valuation will suffer.
Diversified traffic sources
demonstrate that an affiliate website has desirable content which is
well-received by end-users (and industry peers) and often linked to. This leads
to higher valuations. The next way to look at the organic health of your site
is to view the diversification of organic traffic by the page. This is found by
going to the “Pages” section in SEMrush.
Within the “Pages” section you
can view the pages that account for the most traffic to the site. Once again,
the more diverse the traffic amongst the pages, the better.Take a look below at
the percentage of traffic for the top few pages The top page drives over 21
percent of the total organic traffic, which is not bad. Try to avoid having
pages that account for more than 50 percent of the total organic traffic.
Relying on a handful of keywords
or one page to drive the bulk of the traffic is not smart. If for some reason
those keywords or pages were removed, the site would become practically
worthless.
Conclusion
In summary, the valuation of an
affiliate website is highly contingent on the terms of the affiliate program
and its longevity, the product category, the seasonality of the product,
commission tiers, content quality, and the backlink profile. Affiliate websites
that can score well in all of these areas will likely have above-average earnings,
margins and longevity which proves attractive to investors. Obtaining an
accurate valuation can both ensure that you maximize your profit and are able
to sell your business in a timely manner.
