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Summary:

Based on statistical modeling, Rags Srinivasan believes there is only a .25 percent chance that Pinterest is making enough money to support its $200 million valuation. Here, Srinivasan considers all the scenarios — not just the most optimistic ones — to show us how much Pinterest earns.

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What kind of revenue numbers would justify Pinterest’s $200 million valuation? Atlantic writer Alexis Madrigal and others have used back-of-the-envelope math to explain this valuation. In his article, “Why Pinterest Is Playing Dumb About Making Money,” Madrigal puts Pinterest’s annual revenue at $45 million a year. Based on statistical modeling, I believe there is only a .25 percent chance that Pinterest is making that much money.

Considering all possible scenarios — not just the most optimistic ones — let me show you why and how much Pinterest earns.

Madrigal calculates Pinterest revenue from its only known source — affiliate fees from SkimLinks. “So, Pinterest has 10 million users,” writes Madrigal. “Let’s say that the average across all of them is that they buy items valued at $10 in a month through affiliate links on Pinterest. That’s $100,000,000 of sales for which Pinterest would get credit. That’s $3.75 million in monthly revenue, or $45 million of annual revenue.”

There are two problems with this calculation. One, no one verified whether Pinterest generates enough traffic to generate 10 million transactions per month. Two, revenue numbers based on broad assumptions have uncertainties that are not quantifiable. For example, how likely is it that each user is generating $10 a month?

Let’s look at the first problem. What kind of traffic should Pinterest generate to websites to deliver 10 million transactions per month? According to the Top 500 Guide: Profiles and Statistics of America’s 500 Largest Retail Web Sites Ranked by Annual Sales, the average conversion rate of website visits to sales is 4.3 percent. That means Pinterest must garner 232 million visits to result in 10 million transactions.

How does that compare to total traffic to all online stores? Data collected by Complete says online stores receive a total of 662 million visits a week, or 1,434 million visits a month. This means that in order to justify Madrigal’s estimates, Pinterest must account for 16.1 percent of all online retail traffic. That’s a tall order. According to Shareaholic, Pinterest only drives 3.6 percent of referral traffic. It is safe to say that Madrigal’s numbers grossly overestimate Pinterest’s page views, transactions, and hence its revenues.

Regarding the second problem with revenue models based on assumptions, let me clarify that it is not possible to avoid assumptions when it comes to privately held companies. However, we can start with smaller, more granular and better assumptions, and we can use statistical models to quantify the uncertainties in them. Instead of making such assumptions as 10 million transactions per month and $10 average transaction size, let’s build out a model from its components.

Sales from Pinterest links = Number of transactions/year X number of active users X transaction size

Pinterest revenue = Sales from Pinterest links  X percentage of affiliate fees

Each variable in these two equations are unknowns that must be estimated. Instead of assuming an average value for these numbers, we estimate the low and high values that we’re 90 percent confident about.  To be 90 percent confident about an estimate, we need to have a low and high value such that there is only 10 percent chance that the real value falls outside of the range.

Here are the numbers I used based on my research.

90 percent confident

Low

High

Number of transactions per user per year

1

18

Number of active users

1,000,000

5,000,000

Sales per transaction

$2

$18

Affiliate fee %

2%

4%

(Note: Pinterest has more than 10 million registered users. I generously estimated that they have one million to five million active users who click on product links and make at least one to 18 purchases a year.)

There are two advantages to this approach. First, we are estimating many smaller numbers. And secondly, we are quantifying our uncertainty in our estimates. As we gain more information about any one of the components, we can refine the estimates.

Once we have this range for each component, then we can calculate Pinterest’s revenue numbers using a statistical modeling method called the Monte Carlo method. It’s like imagining living your life 10,000 times to find out how many different lives have certain outcomes. For Pinterest, we’re trying to discover how many different scenarios yield different revenue numbers.

The results are stunning:

  1. Thirty-three percent chance Pinterest makes more than $10 million a year
  2. Twenty-five percent chance it makes more than $12 million a year
  3. One percent chance it makes more than $36 million a year
  4. Less than .25 percent chance it makes the $45 million number quoted by Madrigal
  5. Considering all possible scenarios, the expected value of its revenue is just $9 million.

A $200 million valuation based on high revenue numbers that have such a low chance of being true is a risky bet. Clearly, the VC firms focused on the most optimistic scenario — regardless of its chances — and didn’t account for the entire spectrum of scenarios. But that’s business as usual in the Valley.

Rags Srinivasan is a management professional who specializes in strategic marketing. He recently published, “To Group Coupon or Not,” and he blogs at Iterative Path and tweets at @rags

Featured image courtesy of Flickr user Mykl Roventine.

  1. Interesting analysis… Finally someone who isn’t blindly caught up in the Pinterest hype. It’s not such an amazing or unique product as people are making it out to be, and much less of a business model.

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  2. Loved the modeling approach to come-up with the estimated revenue. However, I disagree that Pinterest is totally overvalued. I believe when VCs enters a new round of financing they will be revealed with future plans of monetization ( other than affiliate links), some in depth numbers and some information that we don’t know about. For example, imagine that you can shop directly from Pinterest with one button right from each photo. Pinterest is already building good relationships with retailers and this idea doesn’t seem that crazy anymore.

    I agree that Pinterest didn’t nail it yet with the revenue model, however I believe they are way better positioned to monetize their platform than Facebook and Twitter. The user in Pinterest is already on the shopping mode starting from the first visit. On the other hand, FB and Twitter are desperately PUSHING to engage users with brands and products. However, users are not buying it!!

    Yes, Pinterest is an expensive bet. But, it should be, because Pinterest have a good chance to be the first e-commerce social network.

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    1. Alshalabi
      The articles poses and answers the question on realistic estimate of Pinterest revenue and calls into question current valuation.
      If there are future plans they come with uncertainties. All the scenarios you mention are possible but note that competition (Facebook, google, …) are not going to stand still. If you want to account for this future revenue flow then yet another model with its uncertainties is needed to find what is the likelihood of certain revenue levels.
      Netting it out, valuations seem to be based on most optimistic scenarios ignore everything else including what the competition will do.

      -Rags

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      1. Precisely. Using anything beyond what is known in terms of revenue/adjusted cashflow, and some reasonably correlated multiple based on other data (ie the market p/e) we essentially have what is the definition of speculation.

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      2. Actually, I think there are a couple of hypothesis on the distributions that need some fixing. In particular some distributions can come out negative. Please see http://bit.ly/HLvulG for an analysis of the Monte Carlo method in the Pinterest case.

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      3. OK, but all of you guys are valuing the company like a 409A valuations!!! While that work for established companies, it doesn’t really apply for Startups. You guys are saying we are using the data we have to remove all of the uncertainties!! I’ll say you built the whole model on uncertainties, you can’t value the Pinterest in it’s affiliate revenue model. That’s clearly not how the company will make money in the future.

        There are many other things that you ignored in your valuation:
        1- Users in Pinterest spend 89 min. each month. That’s 68min more than Twitter and just behind Facebook with 409min (data from Comscore).
        2- The website is on an invite only mode. Which means that it’s growing solely in WOM. Every invite have been sent is a sign of a customer satisfaction (except for the techy guys that wants to know what the whole buzz is about). Some websites can’t be used unless you have your friends in, and that’s the only reason why you invite your friends. That’s not the case in Pinterest, users only invite their friends after they are totally satisfied with their personal experience. That’s a strong sign of user satisfaction.
        3- While facebook and twitter is about people and news, Pinterest is about products and things. If they succeeded to have people to spend that much time looking into products, then they totally nailed it.
        4- Are you really worried about competition!! Google suck in social networks, and I think they are smart enough to admit it. And Facebook is about people, try adding products and you’ll have all of the male hanging on WhatsApp instead.

        At the end, I know that we all hate Pinterest because everyone is to talk about it right now. But, let’s be honest with our-selves, Pinterest created something here. Pinterest is our personalized catalog that updates it-self every second. Yes, catalogs exist for females and Pinterest as well.

        Abdullah Alshalabi,

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  3. Wow, this may or may not be accurate or correct, but it bears the distinction of being the first sane analysis of Pinterest that I’ve yet encountered. good job!

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    1. Gk
      Thank you. That is why this is a statistical model stated with level of uncertainty and not stated as absolute truth.
      -Rags

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  4. Bhavin Parikh Friday, March 30, 2012

    Love the sensitivity analysis, and the use of “realistic” numbers, specifically around estimating number of active users. And we know valuation is only partly based on revenue, moreso based on % ownership depending on the size of the round of financing :)

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  5. 200M independent of the ownership % is an overrated value for a company whose business is flawed and builds ont he principle of just copy whatever you want without any respect for ownership rights. Does Pinterest understand what the © at the bottom of each web page means? Yes they do but couldn’t careless and entice it’s users to pin things in an unlawful manner but pinterest can wash theirs hands. Well since this piece is about revenue and valuation I ask myself how come investors are willing to support this model. Does this mean or should one read the investors could careless about what’s right or wrong as long as it create buzz and potentially brings in new revenue? I’m puzzled. Good piece though Rags.

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  6. Your very interesting estimate of Pinterest’ current revenue seems compatible with a $200 million valuation if you factor in expected growth rates because company valuation is based on expected future earnings. Pinterest seems to have quite a big room for growth (for example internationally) and to have high leverage, i.e. not to require huge additional investment to materialize that growth. Biggest unknown seems to me to be Pinerest’s ability to sustain its momentum in the face of intense competition competition (Facebook, tumblr , shopping gyration a la fab.com.). Your take? Thanks anyway for sharing your revenue estimates.

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    1. Therese
      As you point out it is the uncertainties in the future growth and impact of competition. A more rigorous model of future revenue will have to include all these uncertainties. But that is not how the current valuation is based on.
      -Rags

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  7. Sorry I meant shopping curation in previous comment… not shopping gyration . Curation is a word android autocompletion has not yet learned !

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    1. Nicely done on the analysis Rags. Puts some actual perspective on the subject.

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  8. Nice article, Rags. It’s refreshing to see analysis like this. To add to what you’ve said, Pinterest have been enjoying some very rapid growth, so valuations are likely to assume that growth will continue to some extent into the future.

    It may be worth mentioning, too, that Pinterest have stopped using Skimlinks and are no longer monetizing through the affiliate model.

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  9. Pretty interesting detective work. Thanks :-).

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  10. Ashutosh Saxena Saturday, March 31, 2012

    Interesting analysis that proves it is just hype behind the popularity of Pinterest. I am really skeptical about the sustainability of their (current) business model.

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  11. Loved the modeling approach to come-up with the estimated revenue. However, I disagree that Pinterest is totally overvalued. I believe when VCs enters a new round of financing they will be revealed with future plans of monetization (other than affiliate links), some in depth numbers and some information that we don’t know about. For example, imagine that you can shop directly from Pinterest with one button from each photo. Pinterest is already building good relationships with retailers and this idea doesn’t seem that crazy anymore.

    I agree that Pinterest didn’t nail it yet with the revenue model, however I believe they are way better positioned to monetize their platform than Facebook and Twitter. The user in Pinterest is already on the shopping mode starting from the first visit. On the other hand, FB and Twitter are desperately PUSHING to engage users with brands and products. However, users are not buying it!!

    Yes, Pinterest is an expensive bet. But, it should be, because Pinterest have a good chance to be the first e-commerce social network.

    Share
  12. “Data collected by Complete says online stores receive a total of 662 million visits a week, or 1,434 million visits a month. This means that in order to justify Madrigal’s estimates, Pinterest must account for 16.1 percent of all online retail traffic.”

    662 visits/week * ~4.3 weeks/month = ~2800 visits/month

    Not sure where 1434 came from…maybe I’m mistaken.

    Accounting for 8% of all retail traffic is still pretty high, but not 16% high. Interesting analysis, though.

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    1. Branden
      If you noticed the 662 million is near the Holidays shopping peak period where we expect lot more traffic than during other months. So I averaged it out over 12 month period accounting for leaner months (weighted average). If you do want to use the same number then you are correct the 8% traffic share is still high.

      Thanks for the note.

      -Rags

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  13. I appreciate the article. It makes some excellent points. What it doesn’t mention is “growth”. Investors pay for not just “what is” but “what is” + growth. What pinterest does have is a loyal following and, being a new technology, the opportunity to add many, many users. It will be interesting to see where it goes.

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  14. Gary Johnston Saturday, March 31, 2012

    HI,Its Simple> NO MONEY NO HONEY http://amazinghomes4u.yolasite.com

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  15. Chandu Chichora Sunday, April 1, 2012

    Pinterest is good one.. i’m making good money from them using amazon tools…

    Download Pinterest Bot : http://crackergenius.blogspot.com/2012/04/pinterest-follower-bot.html

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  16. Serge Versille Sunday, April 1, 2012

    There’s a calculation mistake at the very start, 662 million visits a week means it’s 2837 million visit a month (30*662/7). Which means Pinterest would need to drive twice as much traffic as the compete numbers suggest. But these have been wrong, and should traffic quality be better (think active women with disposable income and inspiration to get items from browsing pins…), and the original figure doesn’t seem that far-fetched anymore

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    1. Serge
      See my reply to previous comment above. The 662 is the data from peak period and I took a weighted average for lean periods. If you want to use the max 662 for all weeks then you would get the 8.2% (twice as you say).
      This part of the calculation is aimed only at showing the bigger problem with doing math based on averages and broad assumptions that are not qualified. Hence the next part that states the 90% confidence interval and runs the statistical model that.

      Regards
      -rags

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    2. On the point of “original figure doesn’t seem far-fetched”, that is why I built the model to see how likely is such a scenario. Instead of 10 million users transacting $10 every month (for a total of $1.2 Billion sales) the model calculates outcomes of different scenarios based on the 90% estimates. This way we know the uncertainty and can quantify it.
      The final result is stated only in terms of probabilities and not as absolutes.
      Hope this clarifies.
      -Rags

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  17. Michael Murdoch Sunday, April 1, 2012

    It’s backed by Andreesen Horowitz. Need I say more….

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  18. Josh Blanthorn Monday, April 2, 2012

    At the end of the day value is more than affiliate. There is an inherent value to the user that they are attracting. There is an advertising value that far exceeds any affiliate links which often will never monetize a site to any value past the cost of development and maintenance.

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  19. Andrew Chen Monday, April 2, 2012

    Have you considered a model where Pinterest has a lot more users? Google AdPlanner pegs them at 100M uniques worldwide:
    http://cl.ly/1F1F2r1r2E121P1L3Y2f

    What do you think?

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  20. Rags, I’d love to hear more about how you came up with your numbers  especially the $2 and $18 figures. I don’t even know what one can buy for $2 (that would be bought online), but $18 seems like a very low “high.”

    (Pinterest claims to have stopped using Skimlinks last month, but this is still an interesting academic exercise.)

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  21. OK, but all of you guys are valuing the company like a 409A valuations!!! While that work for established companies, it doesn’t really apply for Startups. You guys are saying we are using the data we have to remove all of the uncertainties!! I’ll say you built the whole model on uncertainties, you can’t value the Pinterest in it’s affiliate revenue model. That’s clearly not how the company will make money in the future.

    Abdullah Alshalabi,

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  22. Maybe I’m wrong but that conversion seems way too high. Each user buys one product? I would say more like 1% of users buy an average of two products. Here is a short write up of a more conservative example guessing that they would be making more like $240,000 per month: http://www.howitmakesmoney.com/how-pinterest-did-does-or-will-make-money/

    Just seems a bit aggressive to conservatively assume everyone buys something.

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