What is Startup Valuation All About?
Like any industry, internet companies have unique startup valuation metrics that analysts look at to value companies. In this guide, we will cover the most important e-commerce valuation metrics you should know.
Download this Startup Financial Model Template from CFI Marketplace.
To learn more about how to build a financial model to value an e-commerce company, please check out our e-commerce financial modeling course. In this course, we build a model for an internet company together from scratch, including all formulas, functions, and outputs.
What can these metrics be used for?
- To value an e-commerce company
- To value an internet business
- To value a Software as a Service (SaaS) company
- To value a website
What are the main e-commerce valuation metrics for internet businesses?
Starting at the top of the sales funnel and working our way down, below we will outline each of the most important startup valuation metrics in detail.
#1 Monthly Unique Visitors
Formula: Sum of all visits from all channels on a website over the period of a month
Monthly Unique Visitors is where it all begins with internet businesses. This is how companies measure their reach, at the broadest level. Having a high number of unique monthly visitors doesn’t necessarily mean a site is making a lot of money, but it is a clear indication of how big their audience is and how much they could potentially earn.
To help calibrate your sense of scale, here are some estimates of monthly visits to a few websites, based on data from SimilarWeb (2017).
- Amazon – 2,400 million visitors per month
- Flipkart – 108 million visitors per month
- Blue Nile – 1.8 million visitors per month
#2 Customer Conversion Rate
Formula: No. of signups per month / monthly unique visitors per month
Once visitors are on your website, the next task is to convert them into customers. This doesn’t necessarily mean they are paying for your product or service (i.e. Facebook) but it means they are taking action to become a member or signing up for something by providing personal information.
Different companies measure conversion in different ways. To some it may be placing an order, to others it may mean signing up for a newsletter or simply clicking on a link.
Customer Conversion Rate is expressed as a percentage, i.e. 3.2%
To learn more about internet valuation, check out our internet financial modeling course.
#3 Bounce Rate
Formula: No. of visitors who clicked the back button or closed their browser / No. of site visitors
Another important e-commerce valuation metric. Bounce rate measures the percentage of visitors to the website who leave without taking any further action. For example, they go to your homepage and then press back the “back” button or close the browser without taking any action on your site.
For example, an average bounce rate could be anywhere from 20% (low) to 80% (high).
#4 Average Order Value (AOV)
Formula: Total revenue from orders / No. of orders placed in a period
Once a site has customers placing orders for products or services it’s important to measure the Average Order Value (AOV). This e-commerce valuation metric is equal to total revenue divided by the total number of paid orders (it’s common to exclude free products/services from the number of orders)
For example, a website has $10 million in revenue and 50,000 orders in 2017. The average order value is equal to $200.
In our e-commerce valuation course, we break AOV down in more detail in an Excel model.
#5 Monthly Active Users (MAU)
Formula: Sum of all users who logged on the website in a month
Monthly Active Users (MAU) is a metric that measures the number of users that were active on the website or the software in a month. Being active means they either logged to their account or engaged with the site/software in some way. This metric is a measure of engagement and a company with a large number of users that never log in to their accounts will have a low MAU number. This metric is important across a wide range of internet, SaaS, and website businesses.
#6 Average Revenue Per User (ARPU)
Formula: Revenue / No. of active users in a period
With Average Revenue Per User (ARPU) non-paying customers are taken into account. To calculate ARPU, the total revenue in the month and divided by the number of Monthly Active Users (MAU).
Average Revenue Per User is particularly suitable for SaaS companies or internet businesses.
#7 Monthly Recurring Revenue (MRR)
Formula: Sum of all revenue that automatically renews on a monthly basis
Monthly Recurring Revenue (MRR) is equal to the value of monthly revenue that’s recurring, meaning the users are on a subscription or plan so their revenue will continue until they cancel their membership. This is a common metric used in e-commerce valuation for subscription businesses like Netflix, for example.
#8 Revenue Run Rate
Formula: Monthly revenue x 12
This is important for fast-growing start valuation. For a startup business, revenue run rate is equal to the most recent month’s revenue multiplied by 12. For a fast-growing company, it may be more meaningful to talk about revenue run rate, as simply adding up the last 12 months of historical revenue would result in a figure that much lower than the most recent month multiplied by 12.
#9 Contribution Margin per Order/Customer
Formula: (Revenue – Direct variable costs) / No. of orders
Contribution Margin (CM) is a very important part of unit economics in e-commerce businesses. This metric is calculated by taking the revenue per order and deducing any variable costs per order.
For example, a company has $25 million in revenue, cost of goods sold of $12 million, and shipping/fulfillment expenses of $8 million. In the time period, the company received 1 million orders.
The contribution margin per order is equal to ($25M – $12M – $8M / 1 M orders
CM = $5 per order
Our e-commerce valuation and modeling course will walk you through this step by step.
#10 Customer Acquisition Costs (CAC)
Formula: Marketing expense / No. of new customers
Customer Acquisition Cost (CAC) is another one of the most important e-commerce metrics. In order to calculate it, we need to know what type of marketing programs the company uses to acquire customers.
There are three main types of marketing spend:
- CPM – Cost per 1,000 impressions (M in CPM stands for the Latin symbol “m” that means thousands)
- CPC – Cost per Click
- CPA – Cost per Acquisition
A simple example of CAC is as follows. A company spends $10 million on marketing and acquires 1 million new customers. The CAC, therefore, is $10.
Things get more complicated, however, as some of this marketing may have been directed towards existing customers that are simply returning to the site. It’s important to strip that part of the marketing spend out, if possible.
#11 Contribution Margin After Marketing (CMAM)
Formula: Revenue – Direct variable costs – Marketing expense) / No. of orders
Contribution Margin After Marketing (CMAM) is similar to the simple CM metric above, however, it specifies that marketing is included in the variable costs. If someone refers to “contribution margin” they may have to clarify if that includes marketing spend or not. With CMAM, it is clear that marketing spend is accounted for.
#12 Churn Rate
Formula: No. of lost customers / Total customers
The Churn Rate is the percent of customers who “churn” out of the business (are no longer customers) in a certain time period (typically, annual). For example, a company had 20,000 customers last year, adds 2,000 new customers in the year, and at the end of this year has 17,000 customers.
The Churn rate would be equal to (20,000 – 17,000 + 2,000) / 20,000
Churn rate = 25%
This is one of the core points covered in our e-commerce valuation course.
#13 Burn Rate (and Runway)
Formula: Average amount of cash lost per month
Cash Burn Rate is the value of cash a startup loses per month. The cash burn rate can be used to determine the company’s runway, which is the total cash balance divided by the monthly cash burn rate. This figure tells investors and management how many more months the company can continue to survive at its current burn rate.
To learn more about startup valuation metrics, check out our startup financial modeling course.
#14 Lifetime Value (LTV)
Formula: CMAM / Churn rate
The Lifetime Value (LTV) of a customer is total value, on average, that a business can expect to earn. This is one of the most subjective e-commerce metrics, as there are many different ways to think about “value”. This is an important e-commerce valuation metric.
One of the most accurate ways to think about value is Contribution Margin After Marketing (CMAM) per customer, per year. Be wary of any LTV calculation that uses revenue as the measure of value (are there no variable costs in this business?).
Once we have defined value, we need to know how long this customer will remain active, before they have Churned. To account for this, we take the observable Churn Rate over time for the business.
The detailed LTV formula is:
LTV = CMAM (annual) / churn rate
For example, a company has an average CMAM of $30 and a churn rate of 25%.
LTV = $30 / 0.25
LTV = $120
We dissect LTV in more detail in our startup financial modeling course.
#15 LTV/CAC Ratio
Formula: (CMAM / Churn rate) / (Marketing expense / No. of new customers)
Once we know the LTV and CAC (see examples of both above), it’s helpful to look at the LTV/CAC ratio between the two so that a comparison can be made between different companies, and trends can be analyzed over time.
For example, a company has a customer acquisition cost of $10 and the lifetime value of each new customer is $40, then its LTV/CAC ratio is 4x.
The higher the ratio the better (all else being equal).
To learn more, see our course on e-commerce valuation metrics.
#16 Payback (# of orders, or time)
Formula: CAC / CMAM
For many e-commerce businesses, the first order a customer places is not profitable for the company, and it may take several orders to repay the cost of acquiring them. For example, a company has a contribution margin before marketing of $10 per order and it costs $20 to acquire a new customer. In this case, it would take 2 orders to “payback” the customer acquisition cost.
It should be noted that a major assumption is that no money is spent to reacquire that same customer in the future. This can be a challenging assumption to make, as repeat customers may click on paid ads when they come back to make future orders.
We cover the nuances of Payback in more detail in our startup valuation metrics and financial modeling course.
#17 Viral Coefficient
Formula: No. of existing customers x No. of invitations sent per user x conversion rate / No. of existing customers
The viral coefficient represents the degree of exponential growth a company experiences by looking at the number of invitations or referrals sent per user, the conversion rate of those invitations, and the total number of current users.
For example, a company determines that on average each user sends out 7 invitations for new users to join, on average the conversion rate of those invitations is 20% and there are current 1,000 customers. The viral coefficient is 1000 x 7 x 0.2 / 1000 = 1.4.
The higher the number the better, all else being equal.
More Internet Metrics and Resources
We hope this has been a helpful guide to e-commerce and internet valuation metrics. In order to continue expanding your knowledge startup valuations, we highly recommend the following free resources: