Making Domains Your Business
By Peter T Davis
Even though there's not a NASDAQ or S&P 500 for domain investors, industry insiders all know how steeply the domain market rose in 2007.
More people have asked me about domains -- or told me that they've started their own portfolio of domains in 2007 -- than in all the years since I registered my first domain in 2000. I wouldn't suggest that domaining has gone mainstream yet, but the industry of domaining does seem to have sparked interest in a far wider demographic over the last twelve months than it had previously. Services such as Domain Capital have arisen due to the explosive growth of domains. Domain Capital (http://www.domaincapital.com/Domain Capital) is a financial service to help fund the purchase of domain names in much the same way as a mortgage funds the purchase of a new home.
What is Domaining?
The classic definition of domaining is to buy domains for the sake of buying domains. A domainer is someone who purchases domains as an investment without planning to develop them. I know people who register domains, develop them, and end up with a portfolio of sites, but I wouldn't really consider this to be domaining in the true sense of the word. Of course, many domainers also register domains in order to develop them, so there is significant crossover here, but in this article we'll look specifically at domaining without developing. To make domaining work for you, you need to start out with a strategy that details how you're going to make a profit on a domain without developing that domain.
There are two primary strategies for domainers:
1- Buy a domain because you think you can sell it for a higher price than you'll pay for it.
2- Buy a domain for the traffic it attracts, which, you hope, will produce a steady stream of revenues.
Most domainers that I know use both strategies, but buying domains on a speculative basis, with the intention of reselling them for profit, is certainly the most common approach.
How to Value a Domain
As with real estate, there's often a lot of hype around domain purchases. When you're planning a purchase, it's very important to remain calm and rational, and not allow yourself to become too invested in the idea of acquiring a specific name.
You'll hear comments from domainers along the lines of, "this is a 'category killer' domain," but I personally don't buy into this hype. Even though having a premium domain is a great start for a new web site, I don't believe there's such a thing as a 'category killer 'domain. If there were, Software.com would have knocked out Microsoft.com long ago. Amazon would be a rainforest in South America and we'd buy our books at Books.com. Auctions.com would have surpassed Ebay.com years ago, and nobody would use Del.icio.us when Bookmarks.com is easier to remember and type. And did I mention Google? It should be easy enough to knock them off, right? After all, their domain is just a typo of a word that nobody knew anyway.
Having said that, it's important to understand that there is a basis for the hype. According to Rick Schwartz, one of the pioneers of the domain industry, big business is missing a huge opportunity because of its lack of understanding about the quantitative and qualitative values of web traffic that high profile domains naturally receive. He speculates that "businesses will be wiped out because of this mistake." Type-in traffic has meant millions in revenue to him, and would most likely be worth exponentially more to large corporations who are better positioned to take advantage of that traffic. "Could you imagine 1-800-flowers not owning flowers.com?" he asks. That's just one example of a business that "got it" and got into the market ahead of the curve. Companies that don't take web domains seriously now are going to be behind the curve -- and they're going to pay for that mistake.
Of course, understanding the value in a domain can be a matter of perspective. One person might view recent sales prices of domains and be astonished by the high prices, while another wishes he had more cash on hand to take advantage of the bargain pricing. To illustrate the point, Schwartz wants us to "imagine if Westin or Marriott had the vision to get [hotels.com]" years ago, or even now, when there are still undervalued domains. "Millions of people type hotels.com directly into their browser each month" he explains. This could equal millions of new customers for the Westin or Marriott, for a fixed, one-time expenditure. Not only that, but Schwartz contends that type in traffic that reaches premium domains such as hotels.com "converts to sales at a rate 3 to 10 times that of normal traffic."
For those of us who aren't the Westin or the Marriott, thankfully prices for great domains can be more down to earth. Pricing domains based upon revenue is fairly simple. You'll find that many sources will quote a valuation of "10 x annual revenue" as a good starting point for traffic domains (that is, domain names that attract type-in traffic which produces measurable income -- typically using a domain parking service). Don't even bother trying to argue with a domainer that the multiple should be more inline with the market for web sites (generally 1 to 3 times the annual revenue). The key difference is that parking a domain takes absolutely zero effort. You don't even need to make a trip to the bank to cash the check, as most domain parking services pay by direct deposit these days. This is the reason why it can be difficult to convince a domainer to sell a revenue-generating traffic domain in the first place.
Other types of domains can be more difficult to value. The best advice is to see if you can categorize the type of domain you're after and search out comparable sales (using the list of marketplaces at the end of this article). You'll notice, after observing the market for a while, that domains of a given type often sell for similar prices. For example, currently there's a trend towards four-letter domains. Naturally, four-letter domains that form common words buck the trend, but otherwise you'll notice four-character domains selling at around the same price regardless of the marketplace at which they're posted for sale.
You can use this kind of knowledge to your own advantage in pricing. You'll always find domainers who will hold out for prices much above what the market justifies, but armed with knowledge of the market you'll be able to avoid those domains and go for the ones that are priced below market.