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The Big Issues in the Domain Industry - Part 2
In this series of articles, I’m endeavouring to identify some of the big issues the domain industry needs to tackle through innovation. For the last number of years, the industry has largely been stagnant in many of the business models being employed by investors and I believe it’s time for this to change.
In the previous article I looked at a couple of innovations for selling “stock item domains” and in this article, I’ll trying and provide some thoughts around selling “high value domains”.
The new gTLD domain extensions have created a scenario where we have a massive supply of domains. Regardless of your feelings about new gTLDs, having the same overall demand and a massive supply will tend to depress prices by providing additional options.
Just think about this for a minute. If you are a marketing director of a big company and someone offers you a .com domain for $500K or a new gTLD for $10, which would you take? They could essentially spend an additional $500K in marketing efforts and be in a net neutral position. Many marketing directors would believe their marketing efforts (ie. their smarts) are making the domain popular and not the other way around.
This will upset many .com portfolio owners but when you consider the number of high value domains that are sold it’s tiny compared to the overall market size. Clearly, many non-domain investment people have the view of the marketing director. That being said, there are a number of things that can be done to improve the odds of a sale.
I’m constantly approached by domain sellers to buy domains and there is one thing I’ve found in common with every pitch. There is absolutely no justification for the price and no attempt at providing reasons why I need to own the domain.
I’ve said this before but telling a person they should spend $500K on a domain with little to no justification in the price is tantamount to stupidity. The first innovation that needs to happen is an automated way to mobilise the bulk of the data that empowers a broker to make a pitch based upon solid metrics.
Yes, we can provide anecdotal scenarios such as, “Do you want a billboard on freeway or in a back alley with tumble weeds rolling down the road?” These may be clever one liners that you have in your sales bag but to move more of the high value domains there needs to be greater justification.
In terms of innovations, if a broker wishes to sell more domains there are two things necessary. A proper analysis for the domain, including a SWOT analysis, market positioning, competitive reaction etc. for the potential target buyer. The second thing is for the broker to take on less domains…..which leads to the second innovation.
In my opinion, in a high supply environment the current brokerage model is actually broken. Generally, brokers are taking on WAY too much inventory and then responding to inbound enquires. What this really means is the brokers have shelved brokering and turned their job into order taking.
Why is this? It’s simple maths. If you have more inventory you’re more likely to get more inbound queries that you can respond to, this will lead to more sales and more commissions. The problem for the domain owner is once they hand over their portfolio/domain to a broker they don’t hear from them again because the odds of them selling their domains is now massively diluted across the brokers entire portfolio. This is not a good situation for the seller.
In addition, we have a situation in a massively oversupplied market where brokers are being asked to take 100% of the risk. They have to try and sell domains for the sellers’ price or they get nothing. This just doesn’t make sense.
A new brokerage model needs to evolve from this mess. This is where the broker is paid a monthly fee for their professional services plus some sort of sliding commission. The fee will be influenced by what the seller believes the domain is worth versus what the broker believes it’s worth.
For example, if a seller believes their domain is worth $500K and the broker believes it’s worth $100K then the odds of the broker selling the domain is greatly diminished. The seller that is holding out for a crazy price should pay for the privilege with a higher monthly fee and a possibly a reduced commission.
The closer the seller comes to the broker’s price the higher the commission paid and the less the monthly fee. This will then keep the broker incentivised to get the maximum price while keeping the seller realistic with their reserve price.
What this model does is create a tension between the broker and the seller to be as realistic about all pricing. This model only works if the broker can PROVE they are working on a low number of domains to really take to the market. The minute the broker tries to game the system and take lots of domains to get their monthly fee up they are “done” in the marketplace because it won’t take long for the sellers to spread the word in the various domain forums.
As an aside, if the monthly fee is reasonable it also provides the broker with the means to jump on plane to attend a meeting to really sell the domain. If a broker is expecting $50K earnings from a commission plus fees, then this behaviour should be expected by the seller.
If you’re a seller and think to yourself, there are heaps of brokers out there I’ll just go with the one that provides $0 monthly fee…..think again. You’re back into the order taker model and you’ll be unlikely to sell your domains.
I know this article will rattle the cage of many sellers but before you send me a flame email/comment just pause and think about the current market. It's changed dramatically across the last few years and maybe it's time for you to shift your thinking.
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