People often ask me what I look for when buying a domain name. While there are many factors that I consider, I think the single most important thing about a domain name is its potential commercial usage. When evaluating domain names to acquire, I ask myself, “how can this domain name be used, and would it make sense to build a website around this domain name?” If you are able to know exactly what will be on the website before even navigating to it because it’s a category killer name, you probably have a good name.
I hardly ever buy a domain name based on traffic or revenue numbers. There are too many non-controllable factors when buying based on these statistics, so my buying decision is not determined by these stats. Yes, I do ask about a domain name’s traffic, but that is to make sure the name “has a pulse” to get a feel for whether it is worth sinking money into a development project. The single most important thing to me is commercial usage.
Whether I am planning to build a website on the domain name or whether I plan to sell the domain name to someone who will build a website, I want to know whether the domain name makes sense to have a website. Sure, there are plenty of great “brandable” domain names out there, but why do I want to spend my time trying to convince someone about how great it sounds or why that particular domain name would be great for a particular site? I would rather be able to contact someone in the industry or someone in the domain industry and say, I have the category killer name for this particular niche, and the domain name is actually the name of a particular category or niche.
A person should never have to say, “this domain name would make a great xyz website.” A great, commercially viable, generic domain name shouldn’t need any explanation. For example, my newest acquisition is EstatePlanners.com. I believe this domain name needs no explanation, and that’s why I like it.
Tracking Domain Names for a Competitive Advantage
There are many companies that track domain names to get a competitive advantage over their competitors or to monitor another company’s strategic initiatives. Previously I discussed the use of IP address monitoring to track new domain purchases, but some companies simply track new domain registrations to essentially do the same thing.
I read a blog post in Boston Magazine where they speculated about where a Boston-based news outlet wanted to expand (prior to their demise). Because of domain privacy, they aren’t able to know for certain that the company bought those other names, but based on the date of registration and the registrar, they could get a pretty good idea about who registered the domain names.
There are many types of information a company can use to track a competitor. They are able to monitor trademark and patent filings, follow business license applications, watch city/state filings…etc. A company’s domain registrations are another tool to allow outsiders to look ahead and make predictions or assumptions about another company’s strategy.
Re-Contacting Domain Owners
Now might be a great time to re-contact domain owners if they were previously reluctant to sell a domain name. With the credit crunch, rising unemployment rate, depressed real estate values, and the dropping Dow (aside from the past few days), people may wish to cash in their virtual domain assets. This might make it easier for you to convince someone to sell a domain name they have been holding out on selling.
While most domain investors archive their mail messages, allowing them to contact buyers who made offers in the past, many passive domain owners may not. Recontacting these people may be the only way to get back in touch. As long as a respectful email is sent, I don’t think you will have any problems in terms of annoying someone or having them think you are spamming them. In fact, some might welcome the fact that you are checking in with them. I have found that being persistent (but not in an annoying way) works wonders. I prefer saying something to the effect of:
“We haven’t spoken in a while, and I am still interested in buying xxxxxxxxx.com. Would you consider selling it at this point? If not now, please let me know if you change your mind in the future. I am willing to buy it for $x,xxx.”
While I don’t like to capitalize on someone else’s loss, your offer may come at a good time for them, and they may have decided to sell their domain name.
Buy a Domain Name and Start a Business
One of the coolest things about owning a domain name is that you can get into just about any type of business your heart desires. Domain ownership breaks down some of the barriers of entry in an industry, and it allows you to jump right in feet first. You don’t necessarily need to sell product or services to be in a particular business, and you can make your own niche in the industry.
Let’s say you always wanted to be a travel agent or restaurant reviewer. You can buy yourself a domain name, easily set up blog software (or have someone do it for you), and start writing. You might not become recognized as the next Frank Bruni or Robert Parker, but you can carve your own niche because you can offer a unique perspective that they can’t. There are thousands of people who are similar to you, so why not reach out to them and share your interests? With a bit of web design and marketing help, you can create a unique site that tells people who you are and why you are pursuing this business. Maybe it won’t grow from anything more than a hobby, but the more you write, the better chance that someone will read it and be interested.
All it takes to do this is a domain name and an interest in a particular business. A friend of mine owns a highly targeted domain name (with an affiliate website), in the same industry my father’s been in for 30+ years. I told my friend that he should attend one of the semi-annual industry trade shows. With the domain name he owns, he will instantly receive respect from the wholesalers and exhibitors, even though they probably haven’t heard of his website. Having a well-targeted domain name tends to do that. People assume that you have a well-funded and respected website when you own a great domain name.
I am not a tax expert and this is far from “real” tax advice, but if you started a French restaurant review blog and generate revenue using Adsense or direct advertising sales, I would imagine you could deduct some of your dinners, as that would probably be considered a business expense. Why not get into a business that you are passionate about? It’s as easy as buying a related domain name and simply uploading blogging software or having a designer create a website that reflects your personality.
Of course you could do much more with a domain name than start a blog. You could build a directory site or e-commerce site with a little more work. By purchasing a domain name, you are buying a piece of land in the business district of your choice, and you can build whatever you would like. Is jewelry your thing? Why not set up shop on Jeweler’s Row on Sansom Street in Philadelphia? Want to work in the stock market? Why not buy a property on Wall Street? With domain ownership, you can virtually open a business anywhere you want!
Domain Name Valuation Based on Revenue Multiples
Industry professionals occasionally debate about whether buying based on a pay per click revenue multiple is smart, and on what revenue multiple is appropriate to make a purchase. Naysayers (like myself) will argue that there is much more to a domain name than PPC, so simply using a revenue multiple is short sighted. Many who use revenue multiples argue that it’s one of the easiest and best ways to value a domain name, and it is especially important when buying a group of names or a portfolio.
While I don’t believe names should be bought or sold simply on a PPC revenue multiple, I do believe domain names should be bought based on some sort of revenue multiple. In any major business, marketing spend is typically allocated based on the return that is expected from the investment. Most of the time, the company will use a model to project a return based on expected response, lifetime value, depreciation, attrition…etc, etc. They will input the variables they know from past experience and make an educated guess on variables they don’t know. This gives an annual rate of return and can help place a value on an investment.
Using similar calculations based on my past experience, I come up with a value for a domain name before buying or selling it. I like to use 3-5 years as the amount of time to earn back the initial domain investment, but it varies depending on the domain name and my plans for it. With geographic domain names, I can determine approximately how much revenue I will be able to generate based on advertising sales, and I can justify a purchase price based on that. Had I used PPC multiples, I probably wouldn’t have been able to justify my purchase price.
When doing a calculation such as this, keep in mind the cost to develop and maintain the website, the cost of data and data entry, and the time it will take you to make the sales or the cost of paying someone to make the sales. Just because a domain name can make $100,000 per year as a website doesn’t mean the name is worth $300-500k based on my thinking. Since the cost of building and maintaining a website can be high, and the time considerations can be great, it is important to keep these figures in mind. While this isn’t perfect, it can help determine the value of a domain name to make an offer or a sale.
Safe Domain Name Transactions
After reading an excruciatingly long thread on DNForum that deals with allegations of scamming, stolen domain names, missing funds…etc, I wanted to share some general advice when buying and selling domain names. The advice I give is only based on how I personally do business, and I recommend using an attorney if that makes you more comfortable.
Before I purchase a domain name, I always check the Whois history to make sure the name looks like it is free and clear of problems. Frequent changes in ownership, different/inconsistent email addresses or phone numbers, and incorrect-sounding information always ring bells in my head and requires further checking. I also like to search using Google and the domain forums to see if the name has ever been in a dispute or had “issues.” Because I mostly