How much is a user worth?

Peo­ple talk about the val­u­a­tion of com­pa­nies like Face­book and Twit­ter and invari­ably men­tion user growth. But how much is a user val­ued at? In this entry, I crunch the num­bers on the com­pa­nies that have gone pub­lic or are about to.

What num­bers?

I decided to look at 3 dif­fer­ent val­ues for com­pa­nies that have gone pub­lic already: Their mar­ket cap­i­tal­iza­tion (or expected mar­ket cap) on the first day of trad­ing, their reported num­ber of users, and their reported revenue.

For the mar­ket cap­i­tal­iza­tion num­ber, I either looked at the first trade num­ber if the com­pany has already gone pub­lic or took the aver­age of low and high val­u­a­tion that peo­ple have men­tioned for the com­pa­nies that have not yet gone to mar­ket. So, for exam­ple, if a com­pany is esti­mated to be fetch­ing between 15 and 20 bil­lion dol­lars at IPO time, I trans­lated that value as 17.5 billion.

For the rev­enue and user num­bers, I picked up the rev­enue from the last reported year of oper­a­tion and got the num­ber of users listed in the S-1 (if an S-1 was not avail­able, I took those and aver­aged out across 3–4 reports I could find cov­er­ing the immi­nent fil­ing for a company).

Based on the val­ues I gath­ered, I decided to esti­mate the value of an indi­vid­ual user by tak­ing the mar­ket cap and divid­ing it by the num­ber of users. I also decided to cal­cu­late the aver­age rev­enue per user (ie. ARPU) by tak­ing the rev­enue num­ber and divid­ing it by the num­ber of users. This gave us two indi­ca­tors that can be use­ful in that it pro­vides both the longer term expected value of a user as well as the cur­rent rev­enue per users, which is a more con­ser­v­a­tive measure.

All data included here was com­piled from pub­lic sources, I did not use any inter­nal infor­ma­tion for any of those com­pa­nies so you’re free to go and Google for sim­i­lar data.

Pick­ing the companies

I picked 5 com­pa­nies that have or are going pub­lic this year: Pan­dora, LinkedIn, GroupOn, Liv­ing­So­cial, and Zynga. The rea­son for pick­ing this list is that they are either the most rep­re­sen­ta­tive com­pa­nies for the web 2.0 trend and they are among the most antic­i­pated offer­ings of the year in the sector.

There are cer­tain odd­i­ties that arise out of these picks, how­ever, and I’ve yet to fig­ure out how to account for them. First, while all of the com­pa­nies are derv­ing the major­ity of their rev­enue from the inter­net, most of them have rad­i­cally dif­fer­ent busi­ness mod­els and rev­enue sources, mak­ing it poten­tially dif­fi­cult to truly draw con­clu­sion from the aggre­gated data. Sec­ondly, because we are deal­ing with some val­u­a­tion that are not yet fixed for over half of the model, there might be some vari­ance if the market’s mood changes.

On to the table

But I’m sure that most peo­ple will have skipped the pre­vi­ous parts to get to this sec­tion, the one with the num­bers in it. So here we go.

Look­ing at this chart, the first thought that has come to my mind is that the aver­age rev­enue per user does not seem to be hor­ri­bly out of line with what is expected of an inter­net busi­ness (I’ve often heard that one should strive for at least a $2 ARPU on average.

Another thing that is inter­est­ing is how much more sub­stan­tial the value that GroupOn and Liv­ing Social derive from their users. It shows that the coupon busi­ness is, at least for now, a license to print money. By con­trast, Pan­dora shows that the online radio busi­ness is still a tough one where mon­e­ti­za­tion is much more dif­fi­cult to achieve.

Trend­ing the data

While I know that these are only very few data points, I wanted to get a rough idea of what some trends might look like. To do so, I decided to take an aver­age and a median for the data:

So based on this, one might con­sider that it is pos­si­ble to gen­er­ate between $3.57 and $4.58 per users per year. By the same token, it could be pos­si­ble that a user is worth between $106.46 and $126.24 over the user’s life­time to a pub­licly traded web 2.0 company.