Demand Based Domain Pricing Strategy - Part 3

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 :-)