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 was asked in a forum what I mean by stock-turn domains. These domains are typically multi-keyword names that have a price tag of around $1,000. Like a supermarket selling low-margin goods, the aim the domain investor is to increase the number of domains they sell each year. So what are some things you can do to increase the number of sales of stock-turn domains?

There are some really basic things you can do. For a start, make sure that you have correct whois information with your contact details. Lots of buyers use this information to contact sellers and you can end up having a lot of very frustrated buyers out there if your details are incorrect or out of date (ignoring the fact that ICANN requires correct information).

There are two main markets where you can sell your domains. The first is the wholesale market where you are selling to other domain investors. You’re not going to get the best prices in the world here as they need to make a margin when they onsell the domain to an end user. The advantage of the wholesale market is you typically don’t have to educate it on the value and importance of a domain name.

The retail or end-user market is a little different and I would suggest that you have a selection of stock-item domains in a number of discreet market verticals. This will then allow you to target prospective buyers and potentially upsell them into higher value domains.

Many people sit around and wait for inbound calls to magically come in from red-hot buyers. Since I’m a little impatient I’m not going to do this…..so it’s time to throw some mud at the wall and see what sticks. The first thing I do is map out a typical call that I’m about to make that will help me to glean information or even possibly sell my domain.

This may be a little scary to some people but I pick up the phone and call perspective buyers in a market vertical. Let’s face it, the worst they can do to you is hang up…..so relax and enjoy meeting a few new people. You’ll be amazed at the responses and in the process you’ll either learn a lot about the true value of your domains or amazingly even make a sale.

I’ve found that if you carefully map out your call then you will dramatically increase the chances of selling the domain. If you just pick up the phone and call then don’t be surprised at the negative reaction.

If you have domains in a market vertical, then it may be worthwhile reaching out to the blogging community in that vertical and educate them on the value proposition of a good domain. You may even consider throwing a few sponsorship dollars at some of the more popular blogs. Remember that you’re selling a $1,000 item so don’t get too carried away.

Generally speaking, think of all of the places where your target market will be and think of creative ways to be there as well. For example, if it’s forums, then participate (don’t just spam). Get involved in your target market’s community and with any luck you’ll make a few sales and contacts along the way.

Waiting for inbound enquiries is one thing but flipping the business model and really thinking about generating interest in your products is quite another. Just like a grocer, you are selling products. I’m amazed at the number of domain investors that do no outbound marketing effort and not surprisingly they don’t sell a thing.

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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.

With the incursion of the Chinese domain buyer ChiP (Chinese Premium) domains have become all the rage and are typically hot items. ChiP domains are domains typically 4 letter domains without vowels or the letter v. The definition of ChiP domains has broadened to include 4 number domains without a 0 or 4. The one thing that both the letter and number variations have in common is they are all .coms.

In my recent trip around the world attending the Dubai Domainers Meeting etc. I began to dig into what was fuelling the interest in ChiPs. I spoke with one prominent domain owner and he indicated that a lot of the money being invested in ChiPs actual come from margin loans underpinned by stocks on the Shanghai stock market.

What Chinese investors are doing is taking RMB (Renminbi – Chinese currency) and buying ChiPs on websites like 4.cn. They are then either flipping the domains to other Chinese investors or planning on selling them for $US at a later date. In many cases, as ChiP domains are quite liquid they have become an effective medium for converting RMB to $US.

It just so happens that there are some well cashed up Chinese investors (ie. not margin loan backed) that are buying the domains in $US because they can resell them for more in the Chinese market or believe that their value will increase over time.

It's also an effective method for hedging themselves against a likely RMB devaluation as the Chinese economy slows down. It’s a long-term play in a very volatile market that if you have the cash you can ride out the ups and the downs. In the event of a Chinese economic collapse these investors have a very transportable assets (ie. domains) they can quicly sell for $US. It's an interesting play and just shows the incredible flexibility of viewing domains as an investment asset class.

For your interest, my company ParkLogic has now established a number of relationships with ChiP domain buyers that are paying reasonable rates for the domains. We’ve been moving a LOT of domains for western investors wishing to quickly cash-out now so they can diversify into other assets. Let me know if you have any ChiP domains you are wanting to sell and I can put you in contact with our team leader.

Where this is all heading is anyone’s guess but there’s one thing for sure that if you ignore the Chinese market you’ll miss out on a huge opportunity. As a person that never regrets having cash in their bank account I would suggest that the door on the ChiP opportunity is quickly closing. Possibly due the Chinese stock market taking a beating there is a declining demand for the domains and this is impacting prices.

I have written in a previous article that I’ve sold all of my own ChiP domains and would recommend other investors carefully consider doing the same.

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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.