Where Is The Sweetspot For Growth?
One of the questions we get the most from potential investors, is whether larger sites have less opportunity for growth than smaller sites.
For example, right now we are in discussions with our investor list about pooling funds together in order to buy bigger websites. Rather than have 10 people each buy a $50k website, we’d all group together and buy 1 $500k website. (We’ve since taken this to a new level, pivoted Onfolio into a holding company, and are actively buying larger sites. You can own a share in this once our shares are listed on the US OTC Markets).
There are many reasons why buying larger sites is a good idea, but the question that comes up the most is, does scaling vertically like that eliminate some of the room for growth?
It’s a good question to ask. If a site has already grown 10x from $50k to $500k, what room is there for it to grow 10x again to $5,000,000? Theoretically, there’s less likelihood of this happening.
In this article, I’m not only going to discuss how true that theory is, but whether it even matters at all.
As an aside, the size of a site itself is often subjective. Some people ask us if an $80k site is too large to have room for growth, whereas others ask us if $1MM is too large.
For the purposes of this article, we’ll consider $50k as small, and $500k as large.
Finding The Sweet Spot With Growth
While no one website deal is ever really the same, there’s definitely a sweet spot in terms of finding the balance between growth potential, risk, and the ease of achieving that growth.
Take a $500 site for example.
On paper, a $500 site (essentially a site in its infancy) has the potential for the most ROI of all. You can grow it 100x just before it reaches the $50,000 range…
…but how much effort does it take to get a site from $500 to $50,000?
And there’s no guarantee it will even scale at all.
A $5,000 site on the other hand, (usually) has a bit more momentum behind it and is more likely to scale to $50,000 than its $500 sibling, but there’s still no real guarantee, and the majority of sites this size never kick on and grow much in revenue.
A $50,000 site however, already has a lot of momentum behind it. A website of this size is already earning 4-figures monthly, and is on its way to becoming highly established. The doubt about its ability to achieve a level of success is reduced, and the site theoretically still has plenty of room to grow.
What’s more, the increasing number of sites for sale for $500,000 suggests that many $50k sites do have an ability to scale significantly higher too. Otherwise, we’d never see $500k site sales.
Naturally, as the valuation rises, the number of sites reduces. There are significantly more $5,000 sites available than $50,000, and significantly more $50,000 ones than $500,000 ones..and therefore significantly more $500,000 sites than $5,000,000 ones.
So when you look at these numbers, it makes sense to assume that a $50,000 site has more room to grow than a $500,000 site.
We could take this further by looking at how many $50k vs $500k sites there are available, and then compare that with the $500k to $5MM ratio. Doing this would probably lead to the conclusion that $50k sites do indeed have more room to grow.
However, in neither case is growth a guarantee, or there would be an equal amount of larger and smaller sites available.
As well as considering a site’s size then, we need to look at what else effects growth.
What Affects The Growth Potential
We’ve so far covered how the size of a site can affect its growth potential, but there are a number of other factors to consider too:
- The breadth of the niche
- How much that width has already been covered
- The traffic volume and traffic potential
- The monetization opportunities
- Conversion rate optimization opportunities
- Social media expansion opportunities
- Email opportunities
- Paid media opportunities
Now, you COULD say that a site that is $500k has likely optimized a lot more of the above than a $50k site (which is how they got to a $500k valuation in the first place), but in our experience that is not always true.
For example, a site large enough to be valued at $500,000 will usually have a significant amount of traffic. This opens to doors to adding an eCommerce or FBA element to the business, and using the traffic to kickstart that channel. A smaller, $50,000 site still doesn’t have enough audience to leverage for a strategic move like that.
The same could be said for launching a digital product, or a membership element to the site. If all else were equal, a larger site would have more potential in this situation.
Further, I recently looked at a site valued at around $250k which is monetized exclusively with the Amazon associates program. Not only that, but it is a very broad topic site with a lot of room to expand.
The traffic is large enough that the site could make good money with Display Ads, and some of the topics it covers will perform well on social media sites like Pinterest, yet there isn’t any Pinterest marketing being done.
There’s a lot of room to grow, and the more different ways to grow there are, the more likely you are to succeed.
Compare that to a $45k site I looked at recently. This site is in a very narrow niche, and has already covered most topics in the niche. Not only that, but it already ranks very highly in Google for those topics.
While it’s definitely a good site, the scope to expand is limited, because it’s too narrow in nature, and has tapped out most of its potential (no wonder it was for sale really).
This is just a small sample size for comparison, but it demonstrates an interesting point.
The ability to grow a site is more dictated by its scope for growth than its current size.
Every site has its own unique ceiling.
Every 5 million dollar site was once a $500k site, so there’s no guarantee that you can’t grow a $500k site.
However, it’s also clear that the majority of sites don’t have the scope to reach that kind of valuation, and therefore the smaller sites on average will have more room to grow.
It’s important to learn to spot growth opportunities so you can figure out whether a site is tapped out or not, rather than aiming for a certain size because of a general rule.
What Else You Should Consider
At the start of this article I asked the question whether it even matters about the growth potential of a site.
Of course you want there to be growth potential, so yes it does matter.
However, is it the most important thing to consider?
How About Risk?
I’ve said it many times (at least once per article so far), the first thing I look for when evaluating a site is its stability.
The first rule of investing is to not lose money. Warren Buffett has said that repeatedly, and it applies to websites just like everything else.
As a general rule, a $500k website is going to have a lot less risk, a lot more history, and will be a much better purchase.
Website multiples are low enough to afford you a very good ROI even if you don’t grow them after purchase. As such, it may make a lot more sense to sacrifice some growth opportunity in exchange for much less risk.
And in many cases, as demonstrated above, you don’t have to sacrifice any growth anyway.
Ease Of Achieving That Growth
You also need to look at how easy it is to actually achieve any growth that you’ve identified.
Found a site that ranks number 3 for all of its keywords? Great, you can grow it by improving those rankings to number 1.
But why didn’t the seller do this first?
Maybe it’s because the sites in position 1 and 2 are behemoths that will require a lot of time, energy, and resources to beat.
Think you have an opportunity to improve a funnel and potentially 2 or 3x a site’s income? Great! How easy is it to improve the funnel though?
It’s important to not only understand what growth opportunities exist, but how easy it is to achieve them.
In our experience, the size of a site does not always correlate to the ease of growth.
Some big sites are so well established, that all you have to do to grow them is keep adding more content. That’s a lot easier than expanding the scope of a smaller site, for example.
Smaller sites DO tend to have more quick wins than bigger sites, but not always. You have to dig deeper and analyze each opportunity on its own merit.
Scale & Expenses
One final point is this; at scale, larger sites are much better. A $500k site will have a lot more of its expenses baked into the P&L, and a lot more outsourcing taking place.
This means that for someone building a portfolio or working with a team like us, you don’t have to take a hit on the ROI by incurring more expenses when you first take the site over.
With a $50k site, this isn’t always the case, as many of the everyday tasks the site requires are performed by the seller.
The point of this article was to address whether growth opportunity reduces as site valuation increases. I’ve demonstrated that while in general this is the case, it doesn’t have to be. In fact, a lot of this article is clearly me arguing against this case.
You can still find plenty of larger sites with better growth potential, and that’s exactly what we look for in our acquisitions.
It’s also not possible to consider growth opportunity without considering risk, stability, and how these sites fit into a portfolio strategy. While any purchase should consider each of these things on its own merit, you also need to consider how they fit into the bigger picture together.
At the end of the day, it’s all about balance.