Buying Domain Names

Jump the Domain Market

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In the investment world, once a story hits the press, the price of the affected company’s stock is impacted almost immediately. In the domain industry, news travels less quickly, and because of that, you could possibly get a jump on news before price increases are made. Timing is everything.

One way to get a jump on the news is to review the list of domain names that are scheduled to be auctioned in an upcoming live auction. Do your best to determine the value for each live auction domain name based on the venue, comps, current market value…etc, and compare your calculations to the reserve prices. Should your valuation be significantly higher than the reserve price, there may be a strong chance the domain name will sell at auction.

When a domain name sells at auction for a significant price, the demand for similar names may increase as a result. In the week or so before the auction, if you are confident that a particular name is going to make a big splash in the auction, attempt to acquire similar domain names using Whois searches or via domain marketplace. If you don’t have the opportunity to do this quickly enough, you can do the same thing immediately after the auction. I recommend this strategy if you have a strong feel for the domain market and are willing to take a financial risk.

Of course, the caveat is that not all domain names are similar, even if they look the same. You need to know the market well enough to feel comfortable going out on these types of limbs. Also, the demand for similar names may be short lived, so this is a short term strategy.

Disconnect Between Buyers & Sellers

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“This domain name can be developed into a great website!” This popular phrase amongst sellers is laughable to many buyers and developers who would argue that ANY domain name can be used for a great website. What some sellers don’t realize is the actual time and cost of building a profitable website. This can cause a disconnect between domain sellers and buyers.

For many buyers who plan to develop their domain purchases, the right domain name is essential, but contingent upon the price. When buying a domain name for a specific project, the buyer knows his overall budget (based on expected returns). In the budget, he allocates funds based on the approximate cost of the project, the cost of marketing, the cost of technical management, hosting, and other incremental costs. He also knows what he can afford to spend on the domain name. Most of the time, a buyer is willing to spend a bit more than he really wants on the right domain name, but there is a limit to the overage.

Developers typically think differently than domain investors. Developers believe that if they build a great website, visitors will find it no matter what the domain name is. Domain investors believe visitors will find the website more easily (and more quickly), and they will be able to recall the website much quicker if it has a memorable generic domain name. Both lines of thought are accurate, which can make bridging the gap more difficult.

In my opinion, the time to spend the money on a generic domain name is if you have a “category killer” product or service, and owning the domain name of that category will instantly make you the industry leader. If you are building a city directory for example, you want to spend the extra money and buy the city .com name rather than a “brandable” domain name. It gives you instant credibility when speaking with potential advertisers, and Google loves targeted domain names!

Generic Domains: Informational vs. Transactional Websites

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In many instances, having a generic domain name as a standalone brand, or forwarding a generic domain name to an existing brand’s website can play a large role in the growth of that online business. This is especially true for informational websites, and may be less important for transactional websites.

When the sole purpose of a website is to give information, and there are a number of sites that provide the same information, the consumer may be more likely to simply navigate to the generic domain name. Why bother to remember a complicated domain name when you can find the exact same information on the generic domain name?

However, when a website is transactional, whereby a visitor makes (or considers) a purchase, a generic domain name is important, but less so than for an informational website. With a transactional site, there is much more to the customer experience than simply finding information. The visitor pays close attention to brands, pricing, fulfillment and customer service. Because of this, consumers are more likely to remember the site that gives the best all around service.

The bottom line, in my opinion, is that if you are developing a business around the domain name and plan to generate revenue by selling products or services, the domain name may be less important than the other attributes in building a positive customer experience. If your website is informational in nature, and you plant to generate revenue  from advertising/ppc links, having the generic domain name may be critical.

Why You Shouldn’t Use Revenue Multiples

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I think Michael Gilmour has one of the sharpest minds in the domain business, but I am going to play devil’s advocate to his post today about buying based on revenue multiples. In today’s post, Michael provides some guidelines about what someone might expect to pay based on the type of name they are buying:

“I’m really going to stick my neck out here and state some revenue multiple ranges for different types of domains. For the purposes of this example let’s imagine that roysfood.com has a trademark and is a small business in Utah.

Type of domain Example No. Months
Direct TM infringing from heavy TM defending company microsoftword.com 0-3
Direct TM infringing from non-defending company roysfood.com 6-12
TM typo of heavy defending company micorsaft.com 3-9
TM typo of non-defending company rosyfod.com 12-18
Typo of a generic multi-word domainperking.com 36-48
Typo of a generic single-word domain.com 48-60
Generic multi-word domainparking.com 60-72
Generic single-word domain.com 72+”

In my time in the domain business, I have never purchased a name nor have I sold a name based on any type of revenue multiple. Incidentally, I had a long conversation with a successful domain investor today about this, and I believe that buying or selling based on a revenue is very risky and shouldn’t be done by anyone but a domain expert and/or domain actuary.

Reasons why I think you shouldn’t buy (or sell) based on a revenue multiple:

  1. It’s very difficult to determine how much a name can earn based on different parking companies, different revenue shares, different landing pages…etc. Whose revenue do you use for the multiple? Do you count on someone else’s revenue share which might be considerably higher than yours? It would be in the buyer’s best interest to have revenue be as low as possible during a traffic test. Likewise, it’s in the seller’s best interest to earn as much money as possible while the domain name is being tested. If the buyer can’t replicate the exact conditions the seller had when he was selling, the buyer may never see anything close to the quoted revenues.
  2. If the name is dependent upon search engine placement, what happens if Google/Yahoo update their algorithm, causing traffic (and consequently revenue) to plunge? The buyer could be screwed in this situation. This is especially difficult if the new owner changes DNS or does something that could catch the attention of search engines. Even a change in the Whois or registrar could possibly impact it. The reality of the situation is that the search engines are powerful and mysterious. We don’t know exactly how they work, but we hope things we do can help boost rankings.
  3. How does a buyer know if the traffic is “real” or if the seller is asking his buddies to do a little clicking on the PPC ads. What happens if/when the traffic dies? Hypothetically, a domain name that earns an extra $1.00 per day is worth around $3,000 more on a ten year revenue multiple.

Maybe I am wrong, but I don’t think there are many people out there willing to sell their revenue producing generic domain names simply based on a 72 month revenue multiple as suggested by Michael, or even a 120 month multiple. If there are, I would be suspicious, just because it sounds like it could be too good to be true.

As I said in my post about the Art of Pricing a Domain Name, the most important factors for me in determining a price to sell and to buy are the following:

1) Traffic the name receives
2) Revenue the name receives
3) Google listings for the “bracketed term”
4) Advertisers on Google
5) Comps of recent sales
6) Gut feel

Revenue is certainly important, but no way would I buy only based on a revenue multiple. It’s good to know what kind of revenue potential the domain name has based on what people are looking for when they navigate to the site, but it’s not close to being the main factor.

To me, buying or selling a domain name simply based on a revenue multiple is a losing proposition for both parties.

Domain Speculation Pointers

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Throughout the past several months, I’ve had many conversations with a fellow domain investor about different speculation strategies focusing on newly registered domain names. He and I frequently share stories of new registrations along with the motivation behind speculating on certain new names.  I want to share a few brief pointers for registering relevant domain names on a speculative basis.  

Travel and geographic-related domain names may be worth speculating on, as their value has climbed and always seem to be in high demand.  Sometimes you can create a relevant domain name by combining a travel destination with a travel-related keyword to form a new name with some value. The key is that the new domain name must make sense, and the keyword should have some click value (be it a large ticket item or an expensive service).

Example:

When I am planning a vacation, there are several things I search for prior to departure:

  1. Hotel
  2. Transportation
  3. Sites
  4. Restaurants
  5. Etc…

To make the most of #3, I frequently search for a tour guide online, in order to visit attractions that will be most interesting to me and my fiance. With that in mind, I believe the terms “tour guide” and/or “tour guides” could add value to a travel destination.  Turns out, CroatiaTourguides.com is available to register.  Whether it has much value, I don’t know, but I like the name for under $10 because there are plenty of  tour guides in Croatia,  and there are many people looking to find them online.

Other types of speculative domain registrations I  occasionally  take a chance on are  relevant health related domain names.  With most health or wellness related issues, there are cures or forms of proactive products.  Oftentimes this is in the form of creams, pills, shots, patches….etc.  Sometimes newly discovered and/or trendy plants and herbs are publicized, causing great demand for their related products.  

Example:  

One way to speculate on this type of domain name is to stay on top of these marketplace trends and buy relevant domain names.  Using the herbs or the health issue, you could add keywords to the end of the domain for potential products that may be developed and marketed.  Recently, I’ve heard quite a bit about fish oil.  I know the pills have become popular, but maybe there will be another application.  Perhaps a cream could be in the works? As of today, FishOilCream.com is available to register.  Maybe this name (and product) stinks, but if it does become popular, it will cost under $10 to secure this name.

The final type of name I would like to discuss are state/local professions and activities. These are my favorite types of speculative purchases because they are less about speculation and more about hunting for unregistered gems.  You can search through the yellow pages or various online directories to see if a particular profession exists in a specific area, and if it does, there is probably at least a small amount of demand, and certainly the ability to add content.  This topic is something that  Frank Schilling  discussed a while ago, and it’s something I like.  Personally, I own WashingtonDoctors.com, NewJerseyDoctor.com, and VirginiaMortgages.com among others I bought in the aftermarket, and I am a big fan of this type of name.

Example:

One way to become inspired is to search through your local phone directory to see what professions exist where domain names don’t.  Let’s say you live down in Palm Beach, Florida.  When I was down there last, I noticed nearly every home had a swimming pool.  These seem to be high value commodities, so presumably there are people who would pay quite a bit for a lead.  PalmBeachSwimmingPools.com is available to register.”Relevant” is the most frequently used descriptive term in this post.  In order to make a wise speculative purchase, the domain name must be relevant.  You probably wouldn’t find much value in registering FloridaMountainClimbing.com for example.  If you stick with relevant domain names, you may come across something of value.  

You should stay away from registering names that contain the trademark of another company. I would advise that you do a search of the  USPTO database  before registering a potential trademark infringing domain name.  

Again, please keep in mind this is purely SPECULATION!  Just like investing in the stock market, I would only advise a small amount of domain names in your portfolio be of the speculative nature – although some might argue that most domain names are speculative if they aren’t developed.  Owning too many speculative names may be cost prohibitive and wouldn’t be something I would advocate.  

Multitasking: News Watching & Domain Investing

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I was watching the news last night and there was a story about New York City offering nicotine patches to people trying to quit their smoking habit. Instead of calling them “nicotine patches,” the news anchor referred to them as “tobacco patches.” I hadn’t heard that reference before, but I thought that if a person with a teleprompter in front of him made this error, there are probably others out there who might do the same thing.

I quickly did a Whois search for TobaccoPatch.com and saw that the name was registered in 1998, although the domain name doesn’t resolve. I searched for TobaccoPatches.com, and voila, it was unregistered! I snatched it up and will park it to see if anyone is making the same mistake as the television anchor. Just a few clicks a year, and the name will pay for itself. I know a name like this is certainly a gamble, but I would rather take my chances on this than on creating a random word that doesn’t exist.

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