In a previous article I discussed the topic of what a domain is actually worth and suggested that the great majority are actually worthless. So the questions that needs to be asked is why and how can we price domains effectively to maximise their sale potential.
So let’s open up the stock item sales model of domains. This is where you have a lot of keyword related domains and are wanting to sell 1% of them each year for some average amount. This business model was first pioneered by Fabulous (remember them?) and Buy domains (now owned by Godaddy).
We’re going to use a really simple case study to help us understand how to price domains using this model. Let’s imagine I have a 1,000 domains that cost me $10/year to register. My cost is going to be $10,000 per year (ignoring my time for now).
If I want to make 100% return on my investment, then I will need to do $20,000 in revenue for the year. If I think I can sell 1% of the domains each year (ie. 10 domains) then what is my domain sale price? Pretty simple, it’s $20,000 divided by 10 domains which is $2,000 per domain.
Since stock item domains typically sell for $1,000 each then it looks like my price of $2,000 is a little aggressive. It just so happens that in order to satisfy the price point of $1,000 I will then need to do a 2% stock turn or sell 20 domains per year.
My guess is that the great majority of people don’t sell anything like 2% of their domains each year so this is going to be a challenge. Two other costs needed to be added into the equation. The first is stock replenishment and the second is the value of your time. If you decided to spend an average of 1 hour per night working on your domain business (ie. your part-time) and charge out your time at $100 per hour then you will need to add in a cost of $36,500.
The reality is I don’t know any part-time domain investor that actually incorporates their charge-out rate into their business. This means they are really running a hobby more than a business…..which is fine as long as they realise this.
In terms of replenishing stock….let’s imagine that there are enough domains to hand register so they only cost you $10 each. Fingers crossed on this one J
If you take into account all of these costs, then selling 2% of your portfolio per year will mean that you need to sell 20 domains at an average price of $4,670 per domain. To get the price per domain around the $1,000 mark you need to sell 10% of your portfolio per year and around 8-9 domains per month. Good luck with that!
Here’s the mistake that many domain investors do. They sell one domain for $1,000, attribute a cost of $10 to the domain and then cheer because they made 10,000% on their money. For that domain they did but across their portfolio their more than likely losing a bundle.
So what is it that we all believe will happen to get across the economic irrationality of our situation. The first is that our time is free and the second is that we will sell a domain for not $1,000 but for $1,000,000. The domains become like buying lottery tickets and if only just one of them comes off we can be financially free!
So when an offer of $1,000 is received some investors convince themselves that maybe, just maybe this is the potential buyer that is going to save our bacon. So they respond to the offer with something ludicrous. Remember these are stock-item domains not premium domains. The goal here is to increase the speed of sales, NOT to sell for a crazy price. Nine times out of ten the sale is lost due to the outrageous response.
So far everything sounds a little depressing…..but don’t worry, there is light at the end of the tunnel. This article and the preceding one laid out the situation for the majority of domain investors. The next article in this series is going to throw out just about everything I’ve said in the last two as it unpacks what is happening at a domain economic level. It will cover additional thoughts on pricing, supply and more importantly demand.