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  Ben Kunz

  1 year ago

  I think there are two main levers that drive valuation. Trouble is most analysts miss the second.
  
  The first = number of impressions. This is the classic measure of most media (CPMs in print or online, GRPs in broadcast), and the potential "virality" of social media is what gets so much hype. The hope that a message will go viral and make millions of impressions at almost no incremental cost is what gets people so excited about social networks.
  
  But the second measure = responsiveness of the audience. This is where social media falls down, because on a scale of 1 to 100, responsiveness is probably around a 1 or 2. A good example of responsiveness on the other end of the scale is Google search results, where a consumer is actively seeking a service, say "media planning," sees a text ad offer said service, and so is very likely to respond (or click). The "mode" of that user is active hunting.
  
  In social media, however, people are doing something completely different: being social. Their responsiveness to any ad message is very low, because the message is peripheral to the dynamic at hand. People chatting on Facebook or Tweeting on Twitter are like close friends socializing in a bar. A widget or banner ad offering a service, even if targeted to the demo, is reaching people when they are not in the mode to respond.
  
  This doesn't mean that social media can't have value. It does mean that the valuation of a social network must factor in both impressions (all that hype about virality) *and* the propensity of each impression to create a response.
  
  A simple way to calculate value would be to examine the potential profit derived from ad sales in a social network, calculated as responses times profits. Or:
  
  SNV = [(total users) * (total response rate)] * (close rate) * profit per sale
  
  A social net with 1 million users that had a *total* 2% response rate among *all offers* extended to its customers annually (say, each campaign had a 0.10% response rate and customers were exposed to 20 such campaigns a year) would generate *20,000 total responses*. Then, at a 10% average close rate, and $100 average profit per sale, the net would thus be "worth" $200,000 ... or about 20 cents per user. You could extrapolate this to the lifetime value of users, but given the short trends of social media, that timeline might be just 1-2 years.
  
  But hey. Who knows?
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