In the previous articles in the series I discussed how much a domain is really worth and some of the potential traps that some domain investors fall into in selling stock-item domains (ie. multiple keyword domains). In this article I plan on tackling both the pricing and portfolio models from the perspective of supply and demand.

What we do know about the supply/demand curve is that once a domain is acquired the cost of supply is constant for .com domains. Each year there is the same renewal fees (assuming no increase) and the renewal fees are identical to each domain whether it’s google.com or fredspizzashop.com. This line is represented in the blue colour in the below chart.

The shape of the demand curve is much more difficult to plot but for now let’s assume that it’s linear and represented by the red line. The industry essentially works under the assumption that optimum price for stock-item domains is around $1,000. What this suggests is that the total volume of dollars sold, Area 1 (yellow), is at a maximum at this price point. In other words, the quantity of domains sold multiplied by $1,000 is the best amount the industry can possibly do for these types of domains. I don't believe this is correct.

What happens if the demand graph looks like the one below? As the price rapidly decreases more domains are sold while the profit is reduced as we slide down the demand curve to the point of zero profit where the supply and demand curves cross.

Conversely, what if the demand curve is a step function and the minute we try and charge more than $1,000 for a domain then no domains are sold. This shaped graph means the $1,000 price tag better be really accurate or we are either maximising our returns or never getting a sale.

What these examples illustrate is the shape and scale of the demand curve can have a huge impact on our potential sale opportunities and also return on investment.

At a micro-level one of the problems with domains is that each of them is unique so predicting the demand curve for a specific domain becomes problematic as the quantity is always one. Basic economic theory says that we are selling large quantities of identical items. Nevertheless, although we can’t predict the demand curve for an individual domain we should be able to do so for a market vertical which has many thousands of domains which may be appropriate to it.

 For example, let’s imagine I have decided to corner the market on 3D printer domains by purchasing as many 3D-printer related domains as possible. I’ve finally accumulated several thousand of the domains…..so how should I price them and what should I do with them?

The first thing we need to look at is the size of the 3D printer market. Right now it’s sitting at around $12 billion dollars and is expected to rapidly grown to $27 billion dollars by 2019. Although this looks like a massive number, it’s actually a really small market compared to other market verticals. I could also add the total number of 3D-printing companies into this mix.

I should see the predicted market size growth reflected in the traffic for my 3D printing domains. So after plotting the various graphs (eg. market size, number of companies and my domain traffic) over time I find there is a correlation of 0.9. This confirms that the market is rapidly expanding so all is good!

Obviously the more data points that I can put into the mix the better the result. For example, what is the demand for Google adwords for 3D printer related keywords? If I put the domain names into the keyword search tool, then out pops a cost to buy that keyword. Since this is a dynamically changing auction it provides a real snapshot of the demand curve for customers. Once I match this up with the other data I’ve collected I should know which domains are actually my diamonds and which are my straw.

So what’s my strategy? For illustration purposes let’s imagine I now work out that my demand line is linear and looks like the one below. My goal is to maximise the revenue under the entire curve. If I set the price of all of my domains with a buy-it-now of $1,000 then I ONLY have the potential to get the revenue represented by the yellow area.

My goal should be to pick up ALL of the white area under the demand curve that is ABOVE the blue supply line.

Since it is a rapidly expanding market, I’m going to build out my highest demand domain into a fully functional website. An advertisement on the site will be about buying 3D printing domains and some of the articles may even be about the importance of a domain name for start-up businesses in a rapidly growing market etc.

My super-premium domains that are in demand I’ll put a “call for price” on them. The vast majority of the domains I then price accordingly down my demand curve. The goal is to have price points that maximises the total area under the demand curve. This means that some of the domains I may sell for far less than $1,000. The patchwork quilt in the below image illustrates what I’m talking about.

Since we work in a changing marketplace then over time we need to re-evaluate our pricing strategy based upon any new data that we’ve collected. If you want to maximise your returns from selling domains then you can not afford to approach it with a fire and forget mentaility….it takes work!

Here’s the challenge, this strategy seems logical if you have a lot of domains in an individual market vertical but what happens if you only hold a handful? More on this in a future article.

If you've found this article useful and it has provoked your thinking to approach selling domains differently then please leave a comment. As a long-time blogger I sometimes wonder whether I'm actually helping people out or now. It's through our engagement and sharing of ideas that we can improve our businesses. Besides, leaving comments spurs me on to write more :-)

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.

Over the last few years there has been a rush of capital into the domain industry from two major sources, Chinese investors and speculators. I have written quite a lot on the Chinese investors but have largely ignored the speculators.

Speculators have hoped to win the lottery by having a domain that a cashed up major company wants to desperately buy. They hear about the successes of “old-time” domainers and dream about find the pot-of-gold at the end of one of their domain rainbows. I don’t mean to rain on your parade but this is unlikely to happen and here’s why.

I’ve taken a great deal of interest in the Chinese economy of late and I’ve written a number of articles that outline how everything is not so good in the dragon nation. Debt continues to skyrocket, GDP is levelling off and there appears to be stockpiles of commodities that are unused. So how is this all going to impact domain investors?

CNBC published an article, “Moody’s raises worries over China loans as Communist party paper calls debt load ‘original sin’”. Within the article, influential investors Kyle Bass and George Soros warn of a credit crisis in China, with Bass noting the presence of “ticking time bombs” in China’s banking system.

What really struck me about the article was the second video where an independent economist, Andy Xie, suggests that China’s real bad loan situation is closer to 20% and not the 1.5% being reported. He then went on to say that over half the loans relate to property and that all across the country buildings empty and that they are being traded like gambling chips. Everyone is hoping that someone else will pay more for the assets.

The Economist recently wrote an article titled, “The coming debt bust”, which outlined the fact that China’s overall debt is 280% of GDP. One scary statistic is that 16% of China’s top 1,000 firms owed more in interest than they earned before tax. Debt levels are expanding twice as fast as the economy. Market Watch recently indicated that it takes four units of credit for each unit of growth.

So will the Chinese authorities be able to manage the economy to a hard or soft landing? They have plenty of ammunition in their reserves (around $3 trillion) but more and more commentators believe that the current regime is playing catch-up to rapidly changing economic circumstances. What everyone appears to be saying is the debt piper is calling….

If there is a hard landing how will this impact domain investors? Since China is the world’s second largest economy we can draw a comparison between it and the US sub-prime fuelled crash of 2008.

For traffic portfolios, Google immediately took greater margin in a great cash grab to help support their earnings. The difference we are seeing now is that Google’s TAC (Traffic Acquisition Costs) has been pushed down to the point where they really can’t increase margins without losing market share to tier two advertising networks. This means that we are unlikely to see a collapse in earnings per click rates induced by Google.

The other factor impacting the advertising auction system is obviously the companies bidding for the traffic. In the event of a crash many companies will immediately hold onto their cash and reduce discretionary spending (which online advertising is often seen as). This will place downward pressure on EPC rates and depending upon competition for the market vertical keyword how far down the rates will fall.

Domain sales will almost certainly experience a sharp correction (especially in the ChiP domains) as debt laden Chinese buyers suddenly become sellers at any price. In many cases, off-market margin loans have underpinned domain valuations and these loans will be called as stocks collapse in value. Chinese investors will be forced to sell domain assets to meet their lenders capital requirements.

Assuming that the world doesn’t go into a global depression, what’s the good news? If you’re cashed up, then there’s going to be a heap of bargains. A good rule is most people make money on the buy not just the sell. In other words, in this type of market there will be domains available that can be snatched up for a song and later sold at an enormous profit.

Whatever happens, make sure you have some cash to ride out the crisis. Some commentators are suggesting that the GFC of 2008 was a tremor before the real financial earthquake.

I know that my wife and I are reviewing our personal financial circumstances to help ensure that we are in a position to weather a global storm. We periodically do this but right now I’m getting a sense of urgency about it. If I’m completely off the mark, then the worse that we’ve done is be financially prudent.

Remember, many people make a fortune in the bad times by being wise in the good times.

I had the absolute pleasure of presenting a session on Domain Monetisation at Domaining Europe yesterday. A lot of people asked if I could upload the presention to my blog....so here it is!

Click to Download the Domain Monetisation Presentation

Domaining Europe has been outstanding so far and I'm really looking forward to heading back down to meet new people, do some business an make new friends!