The Development Scam

The Development Scam

I’ve seen so many online scams in the world and none bigger then convincing domain investors that they should build out a website for each of their assets. I put the “build-out” strategy out there as a scam because so many investors have fallen for the trap.

What normally happens is that an investor looks at their portfolio and says, “WOW! Look at all these awesome domain! If I could build out 1,000 websites then I will make a killing!”

What’s actually happened is that the investor has drunk the kool-aid that all you need is a good domain and you’ll have a great business. Heck, that’s why all the domains in their portfolio are worth at least $200K each. If you build a business with a great domain then it’s an unstoppable combination and people will flock to the website.

Escrow.com

I hate to rain on many investors parade but that’s just not going to happen. For a start, you can’t build 1,000 domains out and expect to seriously run them as businesses. From a management time perspective there are 40 hours in the week divided by 1,000 domains mean that you can only spend just over 2 mins per week on each domain. In other words, you can probably look at the website, think about making a change and not have the time to do it.

Just because you have a great domain doesn’t mean the target market will jump onboard. People tend to be pretty sceptical and giving out their email address in a sign-up process is a major event for them. Unless you are actually running a real business then trying to get them to actually part with some cash then the odds of doing so are next to zero.

This means that you need to develop a brand. Why do you need a brand? People trust brands that consistently provide them with value. Branding is not just about a logo. It’s the whole essence and ethos of the company that is behind the brand. Coke isn’t just about a beverage, it’s about fun and a lifestyle. Apple is about technology that is artistic, sophisticated and easy to use.

The challenge with developing a new brand is that it takes effort, time and money. No matter what you do on the advertising front developing a quality brand demands that you produce a consistent message on a regular basis. Sure, there are some exceptions but let’s leave them as outliers.

If you only have just over 2 minutes for each domain how the heck are you going to develop a brand? You just can’t do it.

Right now I’m developing my own brand as a science fiction author and to be quite honest with you it’s REALLY hard work. It takes so much time and the rewards are next to nothing but what I do know is that if I’m consistent then over time I’ll get there.

Last year I spoke with a guy who had developed over 5,000 travel websites. He’d literally spent millions of dollars building systems and putting it all together. He didn’t make a cracker, let alone get a sensible ROI and has now dropped just about every domain. This should be a big warning to everyone that has similar thoughts.

The problem is that it’s all about the traffic. The purpose of a brand is to attract the right traffic to your website and encourage them to spend/transact/read or whatever. The goal of developing a brand is to lower your acquisition cost and get the revenue up as people are confident in what you are offering is what they want.

When I say it’s all about the traffic I really mean it. You can build the most awesome series of websites for your domains that mankind has ever seen and if you don’t have the traffic then it won’t be long until they are mothballed. Coining Rick Schwartz, traffic is business!

It’s the rare domain that has enough traffic that allows it to naturally grow over time into a sustainable business. By sustainable I mean a business that will allow a person to work in it at least part-time.

The solution to this problem is to build-out a single market vertical (eg. Travel) and direct all of your travel domains to this website. The problem here is that the majority of domainers would still not have enough traffic for the market vertical website to flourish.

So what should a domain investor do? For a start, build ONE and ONLY ONE domain out that you’re passionate about into a real business. I love what Morgan Linton and his wife are doing with fashionmetric.com. He’s focused and busily working his butt of to make it a success.

BTW – I should mention that even if you focus on a single website it’s unlikely to succeed. Around 80% of businesses fail in the first year of operation so don’t expect a roaring success out of your very first domain build-out. Think of it as the most incredible training course that you’ve ever been on and that your second attempt has a much greater chance of success.

This means that you should be prepared to kill a project that just isn’t working. Too many people get so heavily invested that like a poker player that ends up going all in with a garbage hand. I’m all for going “all in” but I feel a lot more comfortable when I’m holding 2 aces.

Let me say that web developers love it when someone comes to them with all these domains to build out. This will keep them busy for ages so there’s a big win for them. The hosting companies love the fees as well. At some stage the accountants and lawyers normally get involved, so they just love all this activity as well.

Be really careful when you find that you are about to put your hand in your pocket to fork out a heap of cash. Each of the above groups of people provide incredibly valuable services if they are accessed appropriately but don't let the build out europhoria go to your head. Remember that it's not their fault that they are doing what you asked them to do!

I've seen a number of investors that don't have the cash to build-out all of their domains try and do fancy equity/loan deals to access the skills they require. It's the rare equity deal that actually ends up working. The biggest problem is the decision making becomes a lot more difficult and exits typically become impossible as each party has a different objective. Even though there are great intentions going into the deal their are typically tears going out. Inevitably, both parties feel ripped off and no longer have a friendship. Please, please be very careful about this sort of thing.or better yet, just don't do it!

There’s an old saying…..How do you make a small fortune in the aviation industry? Easy, start with a big one. It’s the very same with many domain investors. They’re losing their shirts because the underlying metrics and sustainability of their developments are really suspect. Before you do any development make sure that you have the end in sight and know how you will get your ROI.

I’m sure that there are some exceptions to my observations but after so many years in the domain industry I’ve seen this "scam" played out again and again…..so whatever you do, please be careful.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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Comments

Guest - Nicco Schaal on 07 July 2015

Very interesting and really quiet eye opening.

Very interesting and really quiet eye opening.
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Saturday, 21 October 2017