Deconstructing Domain Name Industry Math

by Edwin on February 25, 2012

Deconstructing domain name industry math, or why the domain name you’re after is likely worth more than you think it is.

At Memorable Domains, we consistently receive emails that seek to “educate” us about our core business. You may have come across the kind of thing I mean already: “I’ll give you £25 for your domain name. That’s 3x what you paid for it so you’ll make a nice profit.” or “I’ll offer £50 – that’s already more than it’s worth.” or even “You should sell us the domain name for £100 because that’s all we can afford.”

The mental model their authors have of how the industry works is so far from reality that it’s worth taking a moment to deconstruct it and highlight just how misguided such offers really are.

A) Sell-through rate: It’s a fact of life in the domain industry that few domain names sell in any given year. We figure on selling between 1%-2% of our inventory each year (although we’re always looking for ways to improve on that) and anecdotally that’s in line with other industry players. What that means in practice is that for every domain that sells, there are between 50 and 99 domains that will need renewing, which translates into carrying costs of many hundreds of pounds per sold domain name.

B) Acquisition costs: Domain names don’t grow on trees. Most portfolios have been painstakingly built up over time via a range of routes (free-to-register domains, catching expiring domains, opportunistic buys from other domainers or from end-users selling at prices perceived as offering additional latent value, etc.) And nearly every one of those routes incurs higher costs than just registering a domain name would.

C) Research and sales costs: Researching commercially valuable domains takes time. Lots of time. And time is money. That time has to be paid for somehow, so it factors into the ultimate selling price.

Similarly, domains don’t magically sell themselves. Deals have to be negotiated, invoices issued, payments chased, buyers educated, domains transferred, transfers verified, and inventory and accounts updated. All that takes time, which translates into more money.

D) Inherent market value: The old saw is that a domain name is only “worth what somebody is willing to pay for it” but that doesn’t mean that the price should be dictated by somebody trying to get it for a song because they have no clue what makes a domain valuable!

If a domain name is generic, and describes a commercial product or service exactly, one which is sold by multiple companies all competing for that sale, then it automatically has a baseline value which can easily be thousands of pounds or more.

Factors such as the size of the market, the value of an incremental sale, the number of companies selling the product or service, the amounts being spent on marketing/advertising to that market, the size of the niche, whether the domain name in question is the “top” term for that niche, and many other considerations all have a positive impact on its value.

E) Likelihood of availability: If it had a shred of commercial potential, the domain name wouldn’t have been available available anyway, even if we weren’t the ones to register it. That means that any attempt to compare an offer to the standard domain registration fee is inherently misleading.

F) Opportunity cost of sales: Because domain names are unique, there is a real opportunity cost to every sale. Simply put, once it’s gone it’s gone. If I sell domain X on Monday, I can’t sell it again on Tuesday! Consequently the price of that domain name needs to reflect, in some way, both the loss of the name, and its potential replacement cost within the portfolio.

G) Cause and effect reversal: You wouldn’t go into a car dealership and expect to emerge with a new vehicle for a fraction of its market value because you were a poor student and that was “all you could afford”. Nor would you expect a jeweller to magically hand over his diamonds for pennies because you were a charity or non-profit. Yet for some people the usual rules of capitalism seem to fly out the window when it comes to domain names.

We receive more than our fair share of enquiries from people who make the fundamental mistake of believing that because they can’t pay much for a given domain name (due to being poor / students / a charity / a non-profit / a startup / cash-strapped – DELETE AS APPROPRIATE) therefore we should sell it to them at a knock-down price.

While it’s true some businesses do offer preferrential rates to certain groups such as students or older people, these discounts are inevitably minor and designed to provoke repeat business. Domain sales on the other hand are one-off transactions, just like most other large-ticket sales.

Bottom line, the price of a domain name is not predicated on the ability of a particular buyer to pay for it. Cause and effect are preserved.


All that said, the act of domain name registration itself does not automatically imbue that domain name with value, no matter how much the registrant may fervently wish it to do so.

Instead, it’s the commercial potential of the domain name and of the market it addresses – what we, you or others will be able to do with it – that creates the value. The registration itself only creates the opportunity. In other words, if you register a random jumble of meaningless words the domain name is still going to be worth exactly nothing after you’ve finished registering it!

{ 6 comments }

Samit February 25, 2012 at 5:21 pm

Good article, well explained.

I wrote something similar a little while back, see the link in the postbit.

Cheers!

Edwin February 26, 2012 at 8:32 pm

That was a good analysis. The bullets sum the situation up very well.

Anonymous February 26, 2012 at 6:58 pm

When domainers are perceived as serving a purpose I’m sure we will receive higher offers. The reality is domainers serve no purpose what so ever so why would anyone want to pay a high price? There is no value being added, it is exactly the same product as it was when it was first sold.

Edwin February 26, 2012 at 7:17 pm

The suggestion that there is “no purpose” to what we do is something of a red herring that distracts from the real issue buried in your comment, that of availability.

Since the domain name is registered, then by definition it’s no longer available to anyone else. And therefore any comparison with “what it might have cost to register” (which I assume is what you mean by “value” here) is immediately misleading. That horse has bolted.

So the only questions to be answered are “Does this domain name represent value to a potential end-user at the price it is being offered?” or “What’s this domain name WORTH?”

Neither answer will have anything to do with the original registration fee, just like the current resale value of a piece of land in Manhattan or Knightsbridge has no relation whatsoever to its price when it was first placed into private hands hundreds of years ago. (Related aside: can you imagine knocking on the door of Harrods and saying “I’ll give you £100 for the land your building is sitting on because that’s a massive profit on the £11 6s the owner originally paid for it.”?)

Edwin February 26, 2012 at 8:37 pm

By the way, an excellent point was made in a related discussion on a UK domain forum, and the poster kindly gave me permission to paraphrase it here:

The seller of a domain name is the one in the driving seat. Any given buyer may or may not be willing to pay the asking price for a domain name, but only the seller has the power to decide if a sale will take place or not (and that in turn depends on the value the seller places on the domain name, and their keenness to sell)

In other words, the buyer can’t force a sale to occur, they can only negotiate until it becomes in the seller’s interest to close the deal.

Chinese Bookshop.com June 27, 2012 at 2:08 am

Of course a domain is worth what someone is going to pay for it. Equally, some people are putting prices on domains that are not reasonable and are hoping that there’s someone who can afford that domain. Having bought several domains, the vast majority have been bought for less than half the original asking price. It completely depends on how long you are prepared to wait for that domain. With both buying and selling domains it’s about the right timing. I’ve found that with buying domains it’s important to be clear about how much I am prepared to pay for the domain.

Comments on this entry are closed.

Previous post:

Next post: