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The Domain Name Fair Value Game

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.
How Do You Identify a Great Domain?

Before you begin surveying the market for available domains, you need to identify in your own mind the reason why you’re buying a domain.

There are many legitimate reasons for buying a domain — more than I could list here. Some of the more common reasons are:

* because the name fits the business
* because you know it’s already receiving significant traffic

When you buy a domain because the name fits a business, your goal is usually to establish it as a brand. Traffic domains are self-explanatory for the most part — you want them because you immediately get the boost of attracting relevant traffic to your web site without having done anything other than build the site and buy the domain.

Buying Brandable Domains
Since buying brandable domains is a more opaque business, we’ll start there. It’s easy to lose sight of the fact that it’s the buyer who holds the upper hand when you’re buying brandable domains. When you truly understand what a brandable domain is, and why you should buy it, you’ll realize why.

A brandable domain is a domain that’s unlikely to receive much type-in traffic, usually because it doesn’t consist of a dictionary word — for example, sitepoint.com. It could also be a keyword domain, but one that doesn’t receive a significant amount of type-in traffic (one that gets significant type-in traffic is a traffic domain). Remember the sitepoint.com brand? A keyword domain that would work in the same field is WebmasterForum.com. Take away the established branding and user loyalty to these domains, and I doubt there’d be much (if any) natural type-in traffic that pre-existed the web sites.

The task of finding a great brandable domain is intertwined with creating the company name. It can involve a much more intense creative process than finding keyword domains, which is more a matter of crunching data. If you’re looking at brandable domains, you’ll want to find something that sticks in the memory and is easy to pronounce — usually, the shorter it is, the better. I usually look for a single word that contains fewer than twelve characters. However, a two-word domain might also be perfectly suitable. Some companies make up new words, like Wufoo. Two-word domains that are descriptive often work very well — for example, WordTracker and RapidShare work well to evoke a sense of purpose.

Buying Traffic Domains
Traffic domains are another animal altogether. It’s much easier to place a value on a traffic domain, and they’re usually more expensive than brandable domains. As I mentioned earlier, the industry standard for a traffic domain sale is ten times the yearly revenue. The most common problem with traffic domains is convincing the seller to part with them. It’s also important to make sure that the traffic isn’t fake (fake traffic is usually created by bots, or may be the result of a click farm. You also want to make sure you’re not buying a domain that infringes on an existing trademark, but for the purposes of this discussion, I’m speaking about generic domains. For domains that are product-oriented, or can be utilized in lucrative service industries such as mortgages, real estate, health, and so on, you may consider paying a higher multiple of revenues.

Negotiating to Buy or Sell a Domain
When I was building my hobby community, I wanted to build it on a brandable domain. I made a list of several domains that I thought were great choices. If you limit yourself to one choice, or if you fall in love with a specific name, you lose your advantage over the sellers. If you have several options to choose from, it’s much easier to walk away from the negotiations if you don’t like the price.

When I was getting started, I began with a sizeable list of domains, made some initial inquiries, and eventually whittled down my list to two choices: eHobby.com and Zealot.com. After a series of negotiations, I discovered that the owner of eHobby.com thought his domain was worth $45,000, and wouldn’t take a penny less. This was more than I wanted to pay, but luckily the seller of my other choice, Zealot.com, was prepared to negotiate a price of about one quarter of what eHobby.com would have cost me. Besides, ‘e’ domains went out with the 1990s, so the only one who lost out was that domain’s seller, who had unreasonable expectations of his domain’s value.

You should never accept the first price that’s offered to you, whether you’re buying or selling. Dave Evanson of NetVantagePoint didn’t take the first offer when he was contacted about his domain InstantApprovals.com. Later, the owners of LowerMyBills.com ended up paying him $60,000 for the domain. They key is to own a generic domain that a buyer absolutely cannot live without. Dave registered the name in 1999 for the cost of the registration fee alone, and at the time it was purely generic name that did not infringe upon any trademarks. Several years later, when LowerMyBills.com decided it could not live without the name, Dave held all the cards and could demand a high price for the name.

As a buyer, you may find yourself in a similar situation. If you become overly focused on a specific domain, you may find out exactly how high a domainer will make you go for a quality name.

Domain brokerage services are another way to approach a transaction. On a number of occasions, I’ve acted as an agent for domain buyers and sellers who either lacked the time to conduct the negotiations or wished to remain anonymous. Depending upon who you are, or who you represent, the price of a domain that you want to purchase may easily slide up the scale behind the scenes, so it often makes sense to be represented by an independent party. Alternatively, you could create a portfolio web site where you list domains for sale — there’s probably even a market for online real estate agents which list domains for sale on behalf of others, like BigTicketDomains.com. I don’t see that happening as much, which is probably the result of the fact that so many great marketplaces, like the SitePoint Marketplace, already exist.

How to Avoid Being a Cybersquatter
Cybersquatting is one of the most controversial topics among domainers — you can’t have a conversation with a domainer for very long without cybersquatting being mentioned.

However, there is in fact much disagreement about exactly what cybersquatting entails. Most people would agree that if you register a domain with the word “Microsoft” in it, that would make you a cybersquatter. On the other hand, if you wanted to build a web site about a rainforest in South America, and included “Amazon” as part of the domain name, few people would suggest that you were cybersquatting.

The grey area lies around cases where someone registers a domain with “Amazon” in it, but doesn’t develop it — instead, they attempt to play off Amazon.com’s brand. Is it cybersquatting if you were to register AmazonBooks.com and then try to sell books about the rainforest?
Beyond Dot Com

Based on the examples I’ve used so far in this article, you’ve probably noticed my heavy predilection toward buying .com domains. Do I also recommend buying domains with a different TLD? Certainly! In fact, I include a good number of .net and .org domains in my own portfolio. There are a number of reasons why you’d go with the .net or .org domain. If your goal is to build a site that will rank for a specific keyword, and you anticipate only attracting search engine traffic to that site, a .net or .org should work fine if the .com is not available or would come at too high a price.

Traditionally,.net domains are evocative of networks, and the .org domains of non-profit organizations. If your goal is to give the impression that your site is associated with a network or a non-profit organization, choose a .net or .org respectively. I don’t usually recommend the .info domains, as spammers have abused them so heavily due to the low registration costs. However, a very nice keyword domain might work out fine for you and can usually be had at a small fraction of its .com equivalent.

Another category of TLD that’s worth your consideration is country code domains. There are some compelling arguments for using a domain with a .ca, .de, .pl, and so on. Obviously, if your target market is a specific country, the country code TLD is a natural choice. It signals not only to your target market, but to the search engines, that this content is meant for the people living in that specific country.

You may have seen some alternative uses for these country-specific domains — names such as del.icio.us and caboo.se are cute uses of the country code domains that spell a word. I typically wouldn’t recommend them, because they can cause a lot of confusion, and in a case like caboo.se, I wonder how much traffic their success drives to caboose.com. On the other hand, it’s difficult to measure how much of these sites’ success could be attributed to the ‘cute factor’ of their domain. If you could somehow control the .com version of the domain, it could be a win-win situation. Otherwise, step into country code domains with extreme caution.

The interesting thing about the domain market today is that it’s both a buyer’s market and a seller’s market. For the huge majority of domains being registered by would-be players in domaining, it’s definitely a buyer’s market. One of the reasons that “dropped domain” lists are so long is that so many of these domains were registered on a whim, but should never really have been registered to begin with (a sin of which I, among many others, are also guilty).

It’s the rare domain that truly commands a high price — almost all of these rare domains have already been registered, but you’ll find that many of the domain marketplaces on the Web are littered with tens of thousands of almost-great names. It takes a lot of digging, but the gems are out there.

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