No matter how great and innovative your startup is, at the beginning of its journey you still need to build a solid foundation for customer acquisition. What is equally important is being able to correctly calculate and analyse the pool of potential customers. For all online businesses, this pool consists of the traffic coming to your website or landing page.
Without traffic, your website or app is as effective as a leaflet that never got sent out. For digital businesses, traffic is the key revenue generator, and the ability to forecast and manage it is one of the key prerequisites for growth. In our experience, startups often have difficulties with traffic calculation, analysis, and forecast; we can tell from the Excel files and financial models our clients send us for review.
Driven by the mission to help founders nail their financial models and enjoy success in fundraising, we are here to fill the knowledge gap by explaining all the peculiarities of calculating traffic for a startup.
What are the important reasons to track your traffic? How do you calculate traffic generated by different channels? In this article, you will find the answers. Let’s start!
Why is traffic so important?
Widely considered one of the core sources of potential customers, traffic also plays some other important roles. In order to unlock its potential to the fullest, it’s crucial to keep all of them in mind.
1. Traffic is a source of potential customers
The first reason is the most obvious and the most important. Online traffic growth is one of the core sources of leads for a company. Thus, to understand the scope of the demand (and, in turn, your future revenue), it’s critical to calculate your traffic correctly. If your marketing engine doesn’t work properly, your traffic size may not be enough to reach your desired revenue targets or could provide you with low-quality leads that do not convert into paying customers.
2. Traffic helps to develop brand recognition
Brand awareness is extremely important for every business, no matter what development stage it occupies at the moment. Traffic is an additional lever for increasing brand recognition; the larger it is, the more people know about your company. On top of that, brand awareness is instrumental in building trust and credibility for every business, and it’s a powerful foundation for word-of-mouth and organic growth.
3. Traffic helps analyse the performance of marketing activities
Analysing website traffic can tell you a lot about the performance of your marketing activities. Indicators such as the number of sessions, unique visitors, and conversion rates can help you understand whether your chosen strategy is working properly and keeping your business on track to meet its goals. A deeper analysis will show you not only what channels bring you the most customers but also which ones are the most effective in reaching your ICP (ideal customer profile).
This metric can tell investors three important things:
- Your company’s performance, compared with the competition/sector (don’t forget to check your CAC against benchmarks).
- Any changes in your CAC over time (whether it’s possible to decrease CAC over the years or it will increase, forcing you to come up with a way to compensate for it).
- The validity of your unit economics.
Sources of traffic
Traffic can be viewed in many different ways, but basically, it can be categorised by its sources or by whether it is free or paid. It’s never enough to just know how many people are visiting your website. You also have to understand where they come from and what every visitor costs you (if anything). Pinpointing different types of web traffic allows you to segmentise your audience and determine which of your strategies provides you with the highest ROI.
Let’s take a look at the main types of web traffic:
Paid traffic (digital advertising, affiliates, email marketing, paid search, etc.)
Paid traffic is a pretty simple concept, involving traffic generated through paid channels only. The main advantage of paid channels is that you can fully control traffic through various parameters and determine the audience you address by managing the budgets allotted to each channel and changing the characteristics of targeted visitors.
Another benefit of this traffic type is that it is quite easy to calculate, analyse, and forecast. Each channel has its own pricing model with particular metrics (e.g. Cost Per Click, Cost Per View, Click-Through Rate). With these metrics, you can derive the number of website visitors coming from every channel based on your budget per channel.
Organic traffic is basically free and includes website visitors coming to your website or landing page after doing a search on a search engine like Google, Bing, or Yahoo. In this case, you don’t have to pay when your future leads click on ads or any time an email is sent out to the prospects. However, organic traffic also doesn’t just arise out of nowhere; you must build and maintain brand awareness and apply SEO techniques to your website so that it has the highest possible position in search results.
Some customers can be brought in by your existing clients or partners. To make this a real possibility, you need to create incentives and reasons for the customers or partners to recommend your solution to others. For example, you could implement a program providing bonuses of some kind for each customer onboarded through a referral link.
Other types of traffic
Many sources also distinguish other types of traffic such as direct or offline traffic. The first is generated by website visitors who typed the URL of the website directly into the search bar or clicked on a link in a non-indexed file or email. To generate direct traffic, you need to boost brand awareness and word of mouth, and you cannot forget to make your website address easy to understand and remember.
Despite the fact that we have focused on digital channels, keep in mind that some customers can also come from offline sources. For example, you can use out-of-home advertising with a QR code or link to your website.
Traffic calculation – where to start?
Web traffic calculation can seem difficult and, if done badly, can be misleading, which is especially problematic if you need to forecast it in your financial model. However, if you use a systematic approach and familiarise yourself with our tips, you will have a clear understanding of its drivers, its logic, and some effective metrics. This comprehensive knowledge will enable you to provide a realistic and logical traffic forecast in your financial model.
Though every traffic type has its own framework for calculation, some elements are applicable to each one:
- Budget – You need to know whether your costs are based on the number of website visitors attracted or a fixed amount per month.
- Pricing model – Make sure you understand whether there is a connection between the budget per channel and traffic size as well as how that connection works.
- Conversion rates – It’s also important to calculate the percentage of clicks that convert into website visitors as well as the percentage of traffic that converts into users/customers.
Please note, if your startup has already been operating for some time, the best solution is to analyse your historical data and apply existing logic to your traffic forecast.
How is paid traffic calculated?
To determine your traffic volume that comes from paid sources, you need to follow these steps:
- Identify your core channels
- Analyse the pricing model for each channel
- Find out the key metrics used to derive the traffic volume based on the budget
- Benchmark all the metrics while considering the marketing channel selected and the peculiarities of your business
- Build your forecast
Benchmarks are an essential step of the process. We highly recommend studying some world-renowned startups or businesses; analyse their marketing strategies and traffic generation channels, and check their key metrics. This is an especially beneficial exercise if you don’t have any historical data to analyse or your startup hasn’t been operating for long enough to generate the volume of historical data necessary to build a credible forecast.
Let’s have a look at typical indicators used in the pricing models of paid channels:
Cost Per Click (CPC)
A metric based on the average amount you need to pay for each click on your ads on different platforms or social media channels. The amount is determined by dividing the total PPC campaign cost by the total number of clicks generated.
Cost Per Action/Acquisition (CPA)
A metric showing the average cost of acquiring one new customer or user. The amount is determined by dividing the total cost of conversions (budget per channel) by the total number of conversions.
Cost Per Mille (CPM)
This indicator reflects the cost of showing an ad to 1,000 users. To find the CPM, you have to divide the total cost of the campaign by the number of impressions (i.e., the number of times your ad was viewed).
Cost Per View (CPV)
This metric refers to the average amount you spend every time your video ad is watched. It is calculated by dividing the total advertising budget by the total number of times the video ad was watched.
To give you a sense of how this works, let’s look at the example:
You have a landing page and $1,000 to spend on GoogleAds campaigns. For your industry, it is common to have a CPC at the level of $0.25 USD. Therefore, from $1,000, we can get $1,000 / 0.25 = 4,000 visitors to the landing page, which is the traffic size for this paid channel.
How is referral traffic calculated?
The referral rate (i.e., the ratio between the new customers generated by referrals and the total new customers) is the ultimate measure of the performance of your referral program. However, a referral rate by itself means nothing. You need to track its dynamics over time and compare its value with the benchmarks in the same industry.
There are two main ways to forecast the traffic generated by referrals:
1. Top-down approach: multiplying the the total number of new users by the referral rate (the share of referrals)
For instance, a benchmark of the average referral rate in your niche is 15%. Your monthly target is 2,000 new users, so your number of referrals should be 15% x 2,000 = 300.
2. Bottom-up approach: determining an average number of referrals generated by one user or partner
For example, benchmarks for similar solutions say that, on average, 40% of users invite other people through a referral link, and one customer usually brings one additional user. Thus, if you have 10,000 users, the approximate number of the new users generated by referrals is 10,000 x 40% x 1 = 4,000. The same logic can be applied if you have a network of partners bringing you new users.
Don’t forget that referrals will typically come at a cost. For example, you may pay $5 a referral for every new user. Such costs have to be considered in customer acquisition budgets as well.
How is organic traffic calculated?
Calculating and forecasting organic traffic can be a challenging task since it doesn’t have as much of a direct connection to marketing budgets as the traffic from paid channels does, and it is not directly tied to the number of customers or partners as referrals. Regardless, this part of traffic must be included in your forecast to make your customer acquisition realistic and logical.
There are two ways to calculate the size of organic traffic in your forecast:
1. As a percentage of the paid/total traffic generated
For instance, we managed to attract 1,000 visitors using paid channels. Then, we assume (based on a benchmark in our niche) that organic traffic will give us 10% of the total number of visitors.
2. By applying a growth rate to the initial traffic size
For instance, you discovered that your competitors generated around 3,000 visitors per month on average during the early stage of their growth, with a month-to-month growth of 10%. Therefore, you simply assume 3,000 organic visitors at the start and apply a 10% monthly growth rate.
Keep an eye on the organic growth rates and make sure your calculation seems realistic. Remember that super high traffic growth rates are mostly inherent to the early stages of growth, and they tend to decelerate over time – the same way the revenue growth rate does.
Once all your traffic calculations are done, you can proceed to the next step: conversion to customers and revenue generation.
As an example, let’s talk about one of our cases in which we created a financial model for a B2C SaaS company. Initially, the startup didn’t pay much attention to its traffic generation logic and had only one line in its financial model named “Marketing expenses”. As a result, the amount of traffic was unrelated to the number of users or revenue. Actually, there was no traffic calculation at all. Investors were losing interest from the very first tab, and it seemed that the startup was planning to conjure up new customers out of nowhere. There was no strategy and no logic connecting marketing budgets and the number of new users. The task for Waveup team was to rebuild the financial model from scratch and to make sure it looks realistic and includes all the necessary calculations. As for the traffic, it was rebuilt into what is depicted in the image below:
As you can see, one row was replaced with a whole tab dedicated to fully reflecting every step of the marketing funnel related to traffic. It made the financial model more realistic and provided solid explanations for many of the questions investors usually asked.
Hopefully, we have managed to give you a better and more comprehensive understanding of online traffic calculation and why it is so important. Using our tips and tricks, you can optimise your marketing budgets, make your financial model more realistic and logical, and extract helpful insights about lead generation for your startup. On top of that, with the improved calculations, your model will become more an instrumental part of making business decisions or pitching to potential investors.
In 2021, all our clients raised almost $0.5B in total, and financial models played a solid part in that success. If you need any help with your financial forecast, our Waveup team is always here to help. Just leave us a message.