Digital Website Value
Digital product businesses are often a great opportunity for
aspiring online entrepreneurs, and with good reason. The startup time for this
model might take a bit longer than an affiliate or Amazon Associates business,
but it also offers a great scaling opportunity once that initial product launch
uncovers what improvements can grow the net profits further.
When compared to an
eCommerce or Amazon FBA business model with inventory and storage fees, digital
product businesses offer much higher margins, as these types of fees are not
applicable. Other than creating the product itself, your time or the expense
involved in outsourcing the development of the product you plan on selling is
usually the biggest startup investment required.
These digital
products might be the latest search engine optimization (SEO) plugin for
WordPress or a complete hosting service with optional paid upgrades. Investors
enjoy the simplicity of these digital product monetizations due to the
opportunity to capitalize on a huge exit in any market conditions.
Before we dive into
how we determine the value of a digital product asset compared to similar
models we’ve sold on our marketplace in the past, we should first discuss the
different types of digital product businesses that are on the market.
Example:
With so many options
to choose from when it comes to selling digital products online, it might be
difficult to determine what a digital product business is.
Digital products
come in all shapes and sizes, from diet guides to WordPress plugins. There are
hundreds of successful businesses capitalizing on the digital product
marketplace. Here are a few that showcase what digital products look like in
digital property form.
ThemeForest
ThemeForest, which
is a branch of the Envato marketplace, offers 1,000s of WordPress themes and
website templates for marketers and web designers all in one place.
The Envato
marketplace has been around for quite some time now, and shows what a great
digital product business looks like while diversifying its product line.
Expanding into offering various audio, image, graphic, and other files outside
WordPress and website templates meant that this business scaled with what users
were looking for most.
A few other digital
products sold online outside the WordPress marketplace include various image
and vector design graphics, which leads us to another great company within this
digital product business model.
The
Pros of the Digital Product Business Model
There are a ton of
benefits to managing and owning a digital product business. What many returning
buyers have told us is that the great profit margins these assets offer keeps
them coming back and looking for more.
This is to be
expected when you consider the lack of fees associated with the delivery of the
digital product to the end-user: there are none of the fees associated with
shipping physical products, such as taxes and duty fees.
Without the worry of
dealing with logistics and shipping (since the customer will often download the
product or gain access to a library of products they have already purchased),
you won’t experience the headache of dealing with physical product management.
When you buy a quality
digital product business that solves the end-user’s problem with fast,
affordable solutions, you are skipping the uncertainty felt by many during the
beginning stages within this specific business model. Yes, there are plenty of
benefits to this model, but there are a few drawbacks as well.
The
Cons of the Digital Product Business Model
While great profit
margins are a huge part of what makes this business model so lucrative for
digital property investors, there are common operational protocols that you
should understand.
As refund rates are
often higher than physical product returns, you should have your refund policy
sorted by the time you start scaling your asset. Having inexplicable spikes in
returns will not help increase your valuation should you decide to exit when a
larger than average return rate occurs.
This is where having
an excellent customer service team, frequently asked questions (FAQs) page,
troubleshooting and support pages, and any type of community forum helps in
resolving issues before they become unrepairable.
When it comes down
to it, people buy digital products because they are affordable, fast, and solve
a very specific problem. Bundle similar products, like one of the marketplaces
mentioned earlier, and you have some great scaling potential.
What
you need to Know before Buying a Digital Business
To begin with, it is
important to remember that every buyer on our marketplace must perform their
own due diligence on any asset that comes to our marketplace. While our vetting
team does an amazing job in reviewing the financials and making sure that the
numbers are what the seller claims them to be, it is still up to the buyer to
perform due diligence on the asset to ensure that it aligns with their business
goals.
You want to make
sure that the business is in a growing niche offering plenty of opportunities
to expand or grow into offering other products as the business scales over
time.
A buyer should be
somewhat familiar with the niche so that they have a more in-depth
understanding of the market trends. For example: offering a meal planner
template could be a great opportunity on which to build a business model, but
think of all the lost potential should you not be familiar with planning your
own meals to begin with.
Since the product’s
solution is what drives the revenue for this business model, having an
understanding of why and how this solution fits your customers’ needs is
something that can only benefit your future development. Digital products often
receive huge spikes in sales right after a product launch and remain stable
afterward. Check what the business profits are during the “slow time” between
product launches, and that way you can gain a better understanding of what the
actual profits look like on a regular basis.
How
to Sell Your Digital Product Business
Let’s start from the
beginning.
If you’re looking to
sell your digital product business, you should first have solid financial proof
and all proof of earnings and traffic metrics organized and accessible. In
addition to this, you will need to gather your average refund rates from all
your products, as some buyers would like to know this information from the very
start.
Be sure to have your
Lifetime Value of a customer (LTV) and Cost Per Acquired Customer (CPA) numbers
available as well. LTV can be a strong indicator of whether your customers are
purchasing a product only one time, or are purchasing new products repeatedly.
Another metric many investors are interested in for digital product assets is
CPA, the total cost to acquire each new customer which can offer great
potential should this number below.
Before you begin
gathering your analytics and important documentation for potential investors to
review, you should already have systems in place to make the migration of the
asset as smooth as possible. The more you can automate on the backend of your
business model, the more desirable your asset becomes to all the potential
buyers searching our marketplace for digital product businesses.
Offering training
support after the sale can help speed up the sales process, as the buyer knows
that some type of walk-through is being offered to ease the transition.
How
Do We Value Digital Product Businesses?
Now that you have a
better understanding of which metrics buyers are most interested in knowing
before they start their due diligence on any asset, we should cover how to
determine the value of these monetizations.
As the largest
curated marketplace for
online businesses with the most deal flow in the industry, we
have the data and experience to give every customer the best possible valuation
for their business. Depending on the seller’s needs, we offer two types of
valuations after determining what your digital product business is
worth compared to other similar sites we’ve sold in the past.
Using the figure
below, you can determine a ballpark estimate of how much your digital product
business is worth:
A more detailed formula we use is:
sales price = monthly net profit X multiple + discounted assets (if any) +
wholesale inventory (if any).
Net monthly profit
is usually determined by looking at the average of 3 to 12 months of revenue,
subtracting any costs (COGS, marketing/advertising, hosting, virtual
assistants, content, etc.) and dividing by three. In some instances where the
business is seasonal or has been around for a long time, we’ll use a 12-month
average instead to reflect seasonality, which is clearly mentioned in each
listing. The greater the number of months we can use to calculate the average,
the larger the multiple will usually be (along with other proprietary factors
we take into account).
To determine the
best possible valuation for any digital property submitted to our marketplace,
we first give a typical valuation multiple. This multiple is backed by hard
sales data and offers the seller the best possible multiple / valuation that
offers the shortest acquisition time.
We also give an
absolute valuation of the business. This is more theoretical and offers the
seller the option to list at a higher than typical range if they wish to hold
out for a bigger offer, or lower than the typical range for a seller wanting to
make a quick sale.
This can be
explained in more detail by one of our business analysts when you submit your
business, but for now, all you need to know is that we give you a valuation
range depending on your exit goals.
A few more factors
that we take into consideration when determining what your listing multiple
will include how long your business has been around, the amount of new and
existing traffic you receive, your LTV and CPA numbers, among others.
If you don’t already
have a digital product business and are looking for a way to fast-track your
move into owning one of these great models, consider purchasing an already
established business. When you skip the startup time required to get this model
up and running, you can focus on more important benchmarks in scaling and
marketing growth.
Growth
Strategies from Real Buyers on Our Marketplace
Having built the largest curated
marketplace for online acquisitions, we’ve gathered a great
amount of data from both buyers and sellers we’ve had the pleasure of working
with over the years.
As you may have
noticed in our latest return on investment (ROI) study for
the lesser-known monetizations, a few buyers had given us some great
feedback on the opportunities these types of business models offer. These
digital product buyers told us about some of the key improvements that helped
them gain a positive ROI from their acquisition, including:
- Adding new products
- On-site improvements (like SEO and CRO)
- Optimized PPC ad campaigns
- Adding additional monetizations
Expanding into other
marketplaces and reaching a larger audience using other platforms was something
a few digital product buyers also mentioned as a growth strategy in the coming
years. This is important to mention, as again, the more diversified you are
with your revenue streams, the better off you will be in terms of avoiding any
unforeseen risks.
After you have grown
your digital product business to what you believe is its full potential, make
sure you’re not missing out on your own low hanging fruits before listing your
business for sale. Giving the key improvements mentioned above a once-over in
your own business structure might give you a more profitable exit without much
effort needed when properly planned and executed.
What
Is the Future of Selling Digital Products?
There is plenty of
information out there on how to sell digital products, but not much outside
what you will find here on our blog on the subject of turning this opportunity
into a viable business model.
To be honest with
you, this monetization might be easy to develop and launch from a beginner /
intermediate standpoint; however, maintaining a consistent revenue-generating
digital product is not as easy as one might think.
This is why the
option of acquiring an established revenue-generating business is perfect for
those looking to skip the beginning process and jump into scaling something
already in motion.
Are you interested
in acquiring a digital product business of your own? Check out our marketplace listings to
find the one that matches your business goals.
If you have been
optimizing a digital product business like the ones mentioned in this article
and are looking for that big exit, submit your site to
receive a more custom valuation tailored to your exit planning goals.