Part 1 - How to Price Your Domains for any Market

Part 1 - How to Price Your Domains for any Market

As I’ve stated in a previous article, pricing domains can be a difficult task. Many domain owners firmly believe that the price completely depends upon the buyer. The problem with this position is that it runs contrary to the fact that priced domains are more likely to sell. In this article, I’m going to attempt to put some mathematics behind pricing domains in ANY market vertical.

Escrow.com

I made my first attempt at pricing domains in an article last year. At the end of the article I suggest that a lot more thinking needed to go into the model…..so here goes!

I’m a firm believer in economic theory and the rules of supply and demand. High prices are the result of a combination of high demand and low supply while low prices are a function of both large amount of supply and low demand. You can see the rules of supply and demand all over the business world; from oil and iron ore right through to dog food.

Supply and demand lead me to attempt to build a demand curve for a set of keywords in a market vertical. I entered mortgage, loans and finance into Google’s keyword tool and out popped 703 keywords with both the estimated volume of traffic, recommended price point and demand (ie. competition) for that keyword.

After a little bit of Excel magic I was able to produce the below demand chart for the financial category. I will be the first to indicate that you can actually get a more accurate curve with greater numbers of data points but the essence of the demand curve will remain intact. The interesting thing is you can also build the same sort of curve for any group of keywords.

Demand Curve

So what are we looking at? This is a pretty good picture of a marketers view of the keyword landscape for their particular market. Remember, this does not provide a picture of what they are spending but how much they value a particular keyword.

The only reason marketers will consistently pay more for certain keywords is because the traffic from that keyword provides a return on their investment. This is the why each keyword has a different price point. This means the demand curve is a mirror of the conversion rate for each keyword.

We do know that the average keyword domain sells for around $AU2000 ($US1,500). It could be then said that keywords around the “weighted mean” (ie. the point at which the areas to the left and right of the chart are equal) of $21 will attract the $2K price tag. Domains down the curve will sell for less than $2K and those above this point will sell for more than $2K.

For example, “second mortgage rates” has a bid price of $12.60 which slides it about 25% down the curve from the weighted mean which would suggest this domain is worth around $1,500. On the other hand “second mortgage loans” (a more targeted keyword) is selling for $21.33 and places it right about the mean and a price tag of $2,000. “Second mortgage” is a shorter keyword and has a price tag of $22.86 which pushes up the demand curve by 5% which suggests the domain is worth around $2200.

These prices are guesstimate and I will attempt to do a more accurate pricing later in the article. What’s interesting is keywords such as “refinance second mortgage” is 45% higher on the demand curve than the mean and are deemed more valuable than the shorter keyword versions. So why is this the case?

Remember the demand curve will only keep in place if the underpinning metrics of a sale are met. It’s not just about traffic volume or “brandability”. Ultimately, it’s all about sales! This suggests that people that click on the keyword “refinance second mortgage” are more likely to purchase a second mortgage compared to individuals that click on “second mortgage”.  In fact, we can calculate the number as being nearly 40% more often.

This flies-in-the-face of the assumption that a short domain is a good domain. Sometimes shorter keyword domains provide more traffic but they bring a lot of tire kickers who don’t purchase products or services. The simple act of typing in more letters can be one of the more interesting qualifiers of whether a consumer will purchase or not.

For instance, everyone would assume that “best loans” is a great domain….and yet, the marketers don’t like that keyword and push it down the demand curve. What they love is “home refinance” and are prepared to pay top dollar for traffic from that keyword.

Here’s the problem with this analysis. The amount of $2,000 for the weighted mean is an assumption for this market vertical. I believe that every market vertical will have an average value that domains are sold for…..the majority of this type of information is held by the incumbent marketplaces.

What I’m saying is that for the finance sector rather than $2,000 it could actually be $10,000 or even less for the weighted mean. In my next article I’ll continue to dig and pull out more on the mid-point number.

Battleframe

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The Quality of Your Domains

The Quality of Your Domains

This is one of the most difficult topics to cover and it’s easy for a domain investor to throw their hands up in the air and say, “It depends on the buyer.” Although this is a true statement, it is sometimes used as an excuse for lazy thinking. Let’s begin to unpack this most difficult of topics.

Escrow.com

For a start, everyone will have different opinions on pricing and much of it will be tainted by their own experience. Selling a domain for a lot of money doesn’t make you a genius, it just means you’ve sold a domain. What makes you smart is if you’ve had a deliberate strategy for the sales of your domains and that strategy is unfolding in a successful outcome.

A fundamental error that many domain investors do is look at their portfolio of a thousand domains and multiply it by an average sales price of $1500 per domain. They then congratulate themselves on owning a $1.5 million-dollar asset. If this was true, then what would stop you from buying 9,000 more domains so your portfolio is now worth $15m?

The reality is that unless you have a very unusual portfolio, 90% of the domains aren’t getting any offers. If you look at your offer stream over the past 10 years (assuming you’ve been around that long) then you’ll probably discover that number is pretty close. This of course, depends on the quality of your domains…..more on this later.

So are the 90% worthless? Ask yourself this question. If I have a shack that’s falling apart on the edge of a crumbling cliff in the middle of the desert. How much is it worth? At some stage, I’ll pay someone to take it off my hands so you don’t have do to any maintenance!

The second question you need to ask is, “Do you feel lucky?” If you answer “yes” then keep the shack and pray that someone comes along and puts an offer in to buy it. If this miracle happens, then grab it with both hands. Don’t negotiate…..just sell the shack!

Many domains are like this. They are ramshackle shacks in the middle of nowhere that no one wants to buy.....I hat to say it but just drop these domains. The market has spoken and no one is making offers.

Here's the trap many investors fall into. Logically, a domain renewal fee of $10 per year is small compared to the potential windfall of selling it for $1500. You can convince yourself that even if you waited 150 years you would still be profitable. What’s the problem with this perception?

The problem is that having one domain dramatically reduces the likelihood of a sale. It’s like buying a single ticket to the lottery and you have a very small chance of winning. You can double your chances simply by buying another ticket…..but you also double your ticket expenses.

If we were to apply this to domains, then having two domains means you’ve just dropped your “time for a sale” to remain profitable from 150 to 75 years. At 3 domains, your number drops to 50 years and at 100 domains the figure is now 1.5 years. If you have 1,000 domains, you need to sell a domain every 55 days just to remain profitable.

So far I’ve been talking about average figures but let’s take this a step further with applying the thinking to the quality of a stock domain portfolio (ie. All domains selling at $1500). The below bell curve shows that for a portfolio of 1,000 domains those with higher quality will experience a sales events on average less than 55 days and those of lower quality will have much longer sales cycles.

Bell Curve

The more or less domains you have will simply alter the position and value of the average point. What’s interesting about this curve that it potentially shows you the quality of your own portfolio. I should also mention the underlying assumption is that a portfolio is high quality if it is profitable.

If you are sitting with 1,000 domains and you have a sale a few times per year then my advice is to start dropping domains immediately. You’re effectively subsidizing your business every year as you reach into your pocket to pay the renewal fees. You're on the wrong side of the curve....

There’s another curve that needs examination and has a lot to do with supply and demand. More on that in another article.

Battleframe

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How to Sell a Domain to Your Target Market?

How to Sell a Domain to Your Target Market?

There’s a great discussion taking place over at the domain forum, NamePros, where one camp is asking why businesses don’t buy domains for thousands of dollars well another group is suggesting that is way too much money. The fundamental question that needs to be asked by a domain seller is, “Who am I selling to?”

Escrow.com

The vast majority of businesses in the world are small not large. These are often the family owned firms that may be running the local pizza shop or printing company. They may or may not have a website and given their clientele are within a few miles of their business they often have little need nor desire to expand to the rest of the world.

A successful small business is often one that allows the owner to pay themselves a salary. Remember that 80% of small businesses fail in the first couple of years largely due to lack of capital.

To ask a small business owner to put their hand in their own pocket and buy a domain name worth $10,000 plus dollars is a huge step. They are likely to decline the opportunity because they would rather buy a car or take their family on a holiday instead. One of the reasons why most domains sell for $1500 is because this large market has individuals within it that are prepared to risk smaller amounts of money.

Typically speaking this market segment is looking for an idea that will either make their life easier or allow them to get the jump on local competitors. They are fast moving and more often than not would buy a domain on an impulse. This market segment also provides the baseline of inbound enquiries to the marketplaces like Sedo and Afternic.

This brings us to the medium sized enterprises that represent about 9% of businesses. They are still often controlled by an individual who makes any significant monetary decisions and they will require a rudimentary business case for a $XX,XXX or more domain purchase. They do have a greater capacity to purchase a domain if they believe they really need it. The challenge here is to prove the domain's worth....more on this later.

The large corporate customer is about 1% of the market and have the capacity to pay significant amounts of money for domains they believe are a critical part of their strategy. I find many domain owners make the mistake of assuming big companies have lots of money just waiting to buy domains.

Inbound enquiries may or may not reveal whom they work for….ideally you need this information to better help build the business case for the domain. The first part of any discussion needs to be around this point.

Contrary to popular opinion, a marketing manager doesn’t have a large amount of cash they can just throw around….it’s already been allocated in budgets and it’s very unlikely to have a line item for domains. An individual rarely makes the decision for a large domain purchase but they may become your internal champion if correctly managed. Just don’t expect decisions to happen quickly in the corporate market!

I should say that your goal should NOT be to sell one of your domains but rather educate the individual on how they can sell the domain internally. There’s a big difference between getting this person’s sign-off and getting the other 32 sign-offs needed in the corporate structure for the sale to go through. This means you should be thinking about how you can make your internal champion look and sound like a domain name expert.

The first thing you should do when speaking with your prospective contact is to really listen. God gave you two ears and one mouth…..use them in that proportion! What you’re trying to understand is the reason why they want the domain….think about the strategic vision they are trying build. Given non-disclosures etc. you’re going to have to be very careful and tease some of this information out across multiple discussions.

In conjunction with your champion you then need to build a compelling deck that they can take internally on why the corporation needs your domain. Some of the slides in the deck are likely to cover:

1.  Quick overview of the importance of a domain

  • Simple one page general slide covering importance of domains to marketing strategy. This will help get individuals that aren’t completely over domains up to speed.

2. Current market analysis for existing corporation/business/product unit.

  • What is the size of the online market?
  • What is the potential for growth?
  • What are the barriers for growth?
  • Traffic, Alexa rankings etc.
  • Estimated online spend
  • Look for natural type-in, search and advertising generated traffic

3.  Top three online competitor’s analysis

  • Traffic analysis, Alexa rankings etc.
  • Estimated competitor advertising spends.
  • Look for natural type-in, search and advertising generated traffic

4.  Potentially do a domain analysis comparison

  • Corporation versus competitors
  • Length, type-in traffic (ie. Brandability)

5.  Why purchase the domain name?

  • Add to strengths?
  • Help shore up a weakness?
  • Will open up a new market for a product/service?
  • Seize the opportunity before a competitor does? This is a potential threat for the business and decisions will largely be about blocking a competitor from entering a market.

6.  About the Domain Target

  • Existing traffic?
  • Where does it fit within the market after the analysis?
  • Is there any market research on brand recognition that would help support the case for the domain?
  • Have you conducted any market research with your domain? Do some market research and spend a day making calls targeting potential customers of the company’s products…..asking them a variety of questions that may/may not support the case for your domain.
  • Put a survey on the domain and see the results.

7.  What is the deal?

  • Think in terms of NOT what the domain is worth but what the domain will bring to the business that may buy it. It’s all about understanding the strategy. I remember I had a company make an offer for one of my businesses and they wanted to do so on a EBITA basis. I said, “Not a chance, the IP in my business will increase your business by X%!”
  • If you know the size of the market opportunity, then it becomes much easier to price a domain accordingly. Don’t every pick a figure out of the air as assume that it will be challenged and you must be able to justify it.

8.  Who are you?

  • A brief about yourself featuring your expertise as a domain expert….it’s a bit of a don’t mess with me slide. You’ve sold such and such a domain at $Xm etc. This gives confidence to the buyer that you know what you’re talking about. Take guidance from your champion about this slide…..you may leave it out.

I could go on and on for what should be in the deck. Basically, the goal is to puts some empirical evidence behind why your domain is absolutely the asset the corporation should purchase. There should also be appendices with data backing up the slides.

It would be worthwhile “coaching” your champion (don’t be condescending….they got where they are because they’re smart) through the data so they know it intimately.

It may also be worthwhile jumping on a plane to be at hand in the event there are any questions once the project reaches the higher levels in the organisation. I’m amazed at the number of people that want to sell a domain for a huge amount of money but aren’t prepared to spend a few hundred dollars on a plane ticket.

There's a lot more that can be said about doing high end sales but I hope helps your thinking and gets the ball rolling.

Battleframe Book

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Why Are Companies Reluctant to Spend Money on a Good Domain?

Why Are Companies Reluctant to Spend Money on a Good Domain?

The last article on “Underpinning Domain Sales” sparked an interesting discussion on the domain forum, NamePros. One of the respondents asked the question, “Why are companies reluctant to spend money on a good domain?” In this article, I hope to answer that question.

Escrow.com

In my opinion, the dominant reason businesses don’t spend money on domain names is because of ignorance. On the whole the domain industry has not been able to mobilise itself and communicate cooperatively to businesses about the importance of domain names. I’d like to unpack this a little further.

The biggest problem has always been the question of whom should put up the PR/Marketing money to generate interest and understanding in domains. Some people point to the registries, others the registrars while others say the current domain owners should all chip in. These discussiona often degenerate into name-calling and a lot of inaction.

What domain investors need to appreciate is that once they have purchased a domain name the registries and the registrars have effectively done their job. There is NO incentive for them to try and market on behalf of existing owners to increase the demand for already registered domains so the price goes up. That’s an almost impossible job.

The job of registries and registrars are to convince existing owners to renew and to get new registrations from wherever they can. On the whole, new gTLD registries have been excellent at selling their product to the domain investor constituency based on scarcity. “If you don’t buy this domain you’ll miss out like you did in the .com rush.”

Once a domain investor has purchased a domain then there is a great reluctance to drop it as the domain may represent a significant windfall someday in the future. Essentially the registries and registrars are selling hope. By the way, I actually don’t have any problem with this as long as investors go in with their eyes wide open.

Once invested, many domain owners then turn to the registries for help in offloading their assets at significantly higher prices. You quite often hear at conferences statements like, “If I was running that new gTLD then I would……” Well, you don’t run the registry so stop wishing you did and work on the problems that you can actually work on. This is a bit of tough love but stop complaining and don't expect someone else to bail you out.

All of us would agree that .CLUB is a reasonably successful registry with an awesome team. Let’s imagine for a second they spent $20m or near enough to 100% of their revenue on marketing. CLUB (back of envelop calculations here) to help existing domain owners. Despite .CLUB being regarded as fantastic marketers they will be the first to admit that $20m is about 2% of what they really need to do a proper ongoing global marketing campaign.

What I'm saying is the best the industry has doesn't have the fire power to move the needle in educating the entire world about the value of domains. What they can do and actually do is target their efforts to maximise registrations and renewals.....this doesn't involve educating corporations.

So here’s the bottom line with registries and registrars. They love you registering and renewing your domains. They aren’t going to spend a huge amount so cash (even if they did have it) trying increase the price of your domains. In the case of .com if you drop a domain it’s likely to be picked up in a second. ccTLDs aren’t typically profit motivated and have other objectives while the new gTLDs don’t have the cash.

This leaves you to market and promote your own domains. It also means you need to focus your efforts and really think about how you’re going to educate your target market rather than sell. You’re fighting largely against ignorance…..so once you get over that hurdle what’s the next one?

We live in a market that has a MASSIVE supply issue. The new gTLDs are inevitably eroding the power associated with incumbent TLDs and in the process, have devalued the entire market (top end .com excepted). If I’m a new business, why would I pay thousands of dollars for a domain when I don’t know whether I’ll exist in 6 months’ time? I’ll just grab a new gTLD, it’s not like there is a shortage of them.

If I’m an existing business, then why would I spend a bucket of cash on a domain name when I can just use something I paid $10 for. I could save the money on the domain and put it towards marketing the product or service I’m trying to sell.

Yes, we know the importance of a good domain name because we are in the industry. Your task is to imperically prove it. You can’t just tell someone to spend $100K because they should….you have to give them hard cold evidence.

Here’s your next problem. The whole point of a domain name is that it’s unique….one of a kind and the reason the buyer needs it. The first thing most people do is bring out comparables…..which undermine the whole value proposition of uniqueness. I’ve always believed this strategy is flawed.....so I'd try to think through this a little more.

So why don’t companies spend money on domains? It’s sad to say but it’s largely ignorance combined the domain owner’s lack of skill to make a compelling case. If there is no business case, then there won’t be a sale.

There are some exceptions to this rule where a wealthy individual just “want a particular domain” and will pay anything for it. These are lucky events and should be grabbed with both hands.

The essential point is unless you are prepared to spend the time putting together the business case then don’t expect companies to want to buy your domains. I will go one step further…..you also have to pick up the phone at some point and present the case to the prospective buyer….ideally this is done face to face.

I should also mention the last reason why companies don’t spend money on domains. Because they’re doing other stuff and domains are complicated. Just think about it, should the marketing, IT, or legal department manage the asset once purchased? An internal champion in a large organisation would inevitably throw their hands up in the air and move onto buying another TV spot.

This is definitely a question your business case needs to answer and it had better be the market department or you’ll end up getting a sale worth pennies.

I know that I’ve rambled a little in this article but I hope that it answers the central question posed in the title. Feel free to poke and prod some of my suppositions with any comments.

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Do the Domain Sales Numbers Stack Up?

Do the Domain Sales Numbers Stack Up?

I thought that I’d take a break from the series on “Building a Business” and examine what underpins the domain sales market. There are a huge number of domain investors that have bought into the market purely to sell their assets onwards…..so is this a sensible thing to do?

Escrow.com

In my investigation into the domain sales space I thought I’d first of all outline the two fundamental domain sales business models.

Domains as Stock Items

Stock item domains are those that sell for sub $2,500 and represent around 87% of domain sales by volume. The goal here is to move greater numbers of domains and NOT necessarily increase the sales price. The business focus is therefore to increase the stock-turn from 0.3% to say 0.6% of your domains per year….it’s all about speed and automation of transactions.

Think of these domains as the fast food end of the industry….so many people make the mistake of trying to sell their burgers at high end French restaurant prices. Not surprisingly they don't make any sales.

This business model is the bread and butter for companies like Afternic and Sedo who have done whatever they can to get wholesale domains exposed to potential buyers. You really need to have your domains listed in both these major marketplaces if you are to maximise your ROI for this business model. There are other markets but they are substantially smaller.

High Value Domain Sales

High value domains are typically single word .com or prominent ccTLDs (eg. .de, co.uk). There have been a few new gTLD sales for high value and this will increase as adoption of the new gTLDs become more widely accepted.

It should be noted that only about 1% of domain sales are over $50,000 in size. So the next time you try and push a buyer up over this amount you’re really in the stratosphere as far as typical domain sales are concerned.

 

So who wins in the domain sales market? The registries, registrars and governing bodies all get their fees when domains are renewed or first registered. The marketplaces take a commission on each sale and the buyer secures their long-lost domain. The seller…..well in some cases they win but not always.

Back in 2013 Sedo produced a wonderful infographic that outlined Sedo domain name sales and the fact that they conducted $70.5m for 37,241 domains. This provided an average $1893 per sale and a median of $577.

So why am I reviewing this bit of history? Let’s imagine Sedo did around $100m in 2016 and I think I’m pretty safe guessing they are about 33% of the market. Afternic is the other 33% with everyone else (private sales included) are the remaining third. This means the total domain sales aftermarket industry is around $300m per year. This is not big by global standards.

What’s interesting is that it also means that around 100,000 domains are sold each year in the aftermarket. Given there are approximately 340 million domains registered in the world these sales represent about 0.03% of the total domain market.

If all of the averages play out and you have a portfolio of 1,000 domains, then you should hope to sell 0.31 domains per year at an average price of $1893. This means your average revenue line will be $584 per year. Assuming an expense line of $10,000 for your renewals you are a long way short of the mark.

To have a profitable business you need to believe that your domains are 17.12 times higher quality than the average in the world. I calculated this by taking the direct costs of $10,000 and dividing it by the expected average revenue line of $584 for the year. This of course assumes domains are re-registered each year due to economically rational reasons…..which is not always the case.

The Belief Gap

If you sold $5,000 last year then your domains are only half as good as the average in terms of quality. On the other hand, if you sold $20,000 then your domains are on average twice as high quality than the average. There are a lot of questions in here such as, did you sell one domain at $20,000 and received no offers on any others……but let’s stick with the averages for now.

I should also state up front that I’m ignoring the cost of your time. Sadly, most people ignore this cost and continue to run their businesses more like a hobby.

So why do domain investors hold onto their stock? I’ve concluded that many people approach domains as something on the side which they hope will blossom into a lottery sized windfall one day.

It’s so easy to read about huge domain sales and hope that if you just hold on a little longer than it will happen to you. Hope is a very dangerous thing if  you've just mortgaged your house to take “advantage” of the domain opportunity.

So why am I laying out these numbers? Have I decided to become a cosmic killjoy and rain on everyone’s parade? No….but I hope to bring a dose of reality. Domain sales is a really tough game and if you are new to this industry then don’t expect to make an instant killing.

If you’ve been sitting with a portfolio of domains and wondering why you can’t make ends meet, then just do the maths. I hate to say it but the market has valued your domains and most of them should be dropped. Why renew something for the last ten years if you’ve never received an offer?

What the larger portfolio owners believe is their expertise combined with scale will allow them to become profitable. Along the way, they also get other income streams from their domains (eg. revenue from traffic) that help cover some of the renewal fees. Even still, many of the more skilled industry players have been reducing the size of their portfolio to remain profitable.

Ultimately, the question that every portfolio owner needs to answer is whether they are 17.12 times smarter than the average domain purchaser. By the way…..as I’ve outlined above, this is one of those cases where you can actually measure how good you are.

If you come up short, then think about getting a mentor who has a lot more experience in the industry than you do. It could be the best investment you’ve ever made and either save or make you a lot of money.

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