How Traffic Sources Affect Website’s Value and Longevity
Few weeks ago Thomas Smale from FE International wrote about Google’s latest Panda update. In his post, he also quickly touched the subject of Google not being the safest traffic source. Quoting Thomas:
One of the metrics we use internally when valuing web businesses is the percentage of traffic that comes from search engines (particularly Google) as this is arguably risky compared to other forms of traffic (such as an opt-in email list). Generally speaking, the higher the percentage of organic traffic, the lower our valuation will be – although there are a number of subjective points built in such as the quality of the link profile and the site history.
Whilst I don’t fully agree with Thomas that an email list is necessarily a good traffic source, as at the end of the day an email list needs to be grown and maintained, which is why we need to look for external traffic sources to determine where the site’s growth really comes from, I do fully agree with him about organic search being one of the least “valuable” traffic sources, and have also blogged about it before.
His post triggered me to take a further look at popular traffic sources though, and put together a quick analysis on the pros and cons of each, to help buyers and owners of online businesses see beyond their RPU and bottom line and be able to better evaluate the actual longevity of their traffic, and therefore their business.
Organic Search / Google
Google is arguably by far the most popular traffic source for online businesses today, and that’s perfectly understandable considering that it processes over 3.5 billion searches per day. But even though it’s the most popular one, it’s certainly not the safest.
- Free traffic. It’s always good to get something for nothing, and that’s exactly what organic search traffic is.
- Easy to manage. Assuming you’ve reached your search rankings in a natural way and not through gaming SEs and having them believe your site is “worth” more than it is, it doesn’t take any time to “manage” your rankings.
- Free Traffic. Ironically, this is both in the pros list and the cons list. Whilst free traffic itself isn’t a bad thing, something that we see often is websites being dependent on free traffic. This means that the site’s business model only lets it remain operational as long as it keeps getting free traffic, which is clearly a quite flawed business model.
- Being at Google’s mercy. The good old “don’t keep all your eggs in one basket” saying applies here to its full extent. By building your business around Google’s traffic, it essentially means that Google (a third party, for-profit organisation) has the ability to drown your business immediately, without even having to explain it. And with Google’s frequent algorithm updates, this happens more often than many would think.
- No scalability. With most paid traffic sources, it’s possible to scale up every campaign that you see is doing well. With search traffic however, you’re getting as much traffic as Google decides to send your way and have no influence over it what so ever.
Pay Per Click Advertising (Google AdWords / Bing AdCenter)
Pay Per Click ads (again, mostly via Google) are another popular traffic source, and even some very large businesses depend either partly or entirely on PPC ads. Many active buyers in the industry swear by PPC and only acquire sites that are or can be promoted through this channel, but there are also some risks to bear in mind.
- Simplicity. Even though it takes some time, effort, and knowledge to set up a profitable PPC campaigns, once the campaign is up and running, it’s relatively simple to manage.
- Scalability. PPC can, in most cases, be easily scaled up, either through extending one’s ad budget, adding in more keywords or starting to use more PPC providers (Google and Facebook aren’t the only ones around)
- Under Control. With PPC, you get what you pay for, and have an exact overview of your customer acquisition cost at all times, allowing you to better plan the future of your business.
Whilst not often talked about, PPC does come with its dark side.
- Low Barrier to Entry. Due to the nature of PPC ads, nearly anybody can get an exact overview of all of your campaigns (thanks to tools like SpyFu and KeywordSpy), meaning that it’s fairly simple for a competitor to nick your campaign and/or outbid you.
If your competitor manages to deliver their service at a lower cost than you then they can outbid you to the extent that competing wouldn’t be profitable, but even if your costs are similar – an overly eager competitor can fairly easily bump the bid price up to a break-even level, resulting in neither of you turning a significant profit.
- Third Party Dependence. Even though there are many PPC providers out there, the largest two are still Google and Facebook. As such, many businesses use either one or both of these sources exclusively for their marketing, making them fully dependent on these providers. Should Google and Facebook decide tomorrow that they don’t like your niche any longer – you’re out of business.
Other Display Advertising (BuySellAds, direct media buys)
Display marketing has been around for a long time, however recently I’ve witnessed it gaining more and more popularity, likely due to more people realizing how dangerous Google-dependence really is.
- Targeting. With display ads you can typically target the exact site or sites that you want to. This allows you to make sure that your ads don’t appear on undesirable sites, as well as to pick the sites that are most likely to get visitors that your product or service appeals to.
- Uncertainty. With PPC, you pay for traffic, but with display ads you (typically) pay for impressions – that is, you pay a certain fixed amount for every 1,000 times that your ad is served. This means that you need to do a whole lot more of testing, optimising and planning in order to launch a profitable campaign.
- Workload. Most display ad campaigns require significant effort to set up. Not only do you need to have all of the creatives designed, you also need to carefully choose the properties on which you advertise, as well as negotiate the ad deals.
Traffic from social media (Facebook, Twitter, Pinterest, and other channels) has been gaining a lot of popularity over the last few years, and it’s nowadays the primary traffic source of many sites, and even some high-revenue businesses.
While there isn’t anything wrong with getting traffic from social media, it’s important to understand that many of the risks that I covered above when talking about organic traffic apply here too.
- Free Traffic. Similarly to search engine traffic, organic social traffic is free of charge, making your customer acquisition cost effectively zero.
- High Engagement. Social media traffic typically shows higher engagement rates than most other traffic sources. This is typically due to the fact that incoming traffic already has some background information about your site before clicking on your link, which isn’t so for most search or ad traffic.
- Dependence on Third Parties. Like with search engine traffic, you’re at the complete mercy of one or more third parties (Facebook, Twitter, etc.) and should the “traffic provider” ever decide to start disliking your site, they can “pull the plug” without any warnings or explanations.
- Uncertainty. In social media, trends tend to change quickly and what’s considered “hot” or “trending” today can be considerably different from tomorrow. As such, even long history of steady traffic gives few guarantees for future traffic levels. It’s rare to see a site getting steady levels of social traffic for longer than a year or two.
- Workload. Whilst some sites achieve social media traffic organically, in many cases it’s the result of a lot of work being put into updating the site’s social accounts, releasing new materials, engaging with people via social media, etc. This can easily be a full-time job, which obviously increases the price of this “free traffic” considerably.
Whilst not really a true traffic source, with almost every site out there we see Direct Traffic contribute at least a certain percentage of its traffic.
Direct traffic is supposed to represent type-in traffic (i.e. where the visitor directly types the URL of your website into their address bar), however a more accurate definition would probably be “any traffic that the analytics software was unable to track for one reason or another”.
Direct traffic can typically be broken down into the following main categories:
– True type-in traffic, originating from either word-of-mouth marketing, offline marketing or in some cases, the visitor making a typo. Type-in traffic can also include returning visitors / existing clients.
– Tracking errors, which are common with Google Analytics, especially in cases where the referring site uses SSL (https) but the target site doesn’t.
– Fraudulent traffic, where the true origin of the traffic is masked.
Even though type-ins in their nature are typically very good and word of mouth marketing is often a highly sustainable traffic source, we’re obviously facing the problem of not being able to verify those sources.
For this reason, those online business owners looking to exit should take a close look at their direct traffic percentage at least 3 months before the sale and do their best to accurately track this traffic. But few do.
As a buyer of a web business, it’s important to bear in mind that every site has a certain percentage of direct traffic (if it doesn’t, beware!), however as a general rule you would want to avoid sites where this percentage is suspiciously high without a good explanation.
Similarly to Direct Traffic, referral traffic isn’t a true traffic source, as it makes a significant difference whether your referral traffic originates from bought links (in which case it would fall under advertising) or organically acquired links, whether it’s one referring site sending you 10,000 visits per month or 1,000 referring sites sending you 10 visits per month each, as well as whether those links have been “built” or acquired naturally.
In general though, leaving bought or otherwise manipulated incoming links aside, the following usually applies to referral traffic:
- Targeted Traffic. With some exceptions, referral traffic is typically highly targeted, as links are placed for a reason and an irrelevant link wouldn’t do any good for either of the parties, or generate any clicks. Because of this, referral traffic often shows great engagement.
- Free Traffic. Again with exceptions, incoming links are typically free of charge.
- Measurable. It’s easy to tell which sites are sending referral traffic and if necessary, engage in a conversation with the owners/webmasters of these sites. Referral traffic can also be highly sustainable if it originates from a large number of links.
- Difficult to verify. In many cases, it’s anywhere from difficult to impossible to verify whether a particular link is placed for free or in exchange for a payment. This is especially true if referral traffic originates from a large number of sources.
- Uncertainty. In cases where only a few sites are responsible for sending the majority of referral traffic, the owners of these sites deciding to remove the links will have an immediate and severe effect on your site’s traffic.
As I mentioned above, I don’t consider mailing lists a true traffic source. This is mainly because each mailing list subscription has a certain retention rate, and without new subscriptions any mailing list would eventually die – the only question is whether it will die in 3 months or 10 years, but it *will* die unless new subscribers are acquired on constant basis.
Because of this, when looking at a site that gets the majority of its traffic from a mailing list, it’s important to determine the *true* traffic source(s) of new client acquisition, which usually falls under one of the traffic sources covered above.
As you can see, there aren’t any traffic sources that are absolutely perfect, as each come with their own pros and cons.
Because of this, arguably the most important consideration when buying an existing site or preparing the traffic acquisition strategy for a new one is variety.
Variety is what determines the overall sustainability of the site’s traffic, as the more traffic sources a site has, the more likely it is to survive unforeseen events.
Generally speaking, one should try to avoid sites that are heavily dependent on only one primary traffic source, as no matter how stable the traffic source, there are always risks involved.