Domaining 101 – A Complete Guide to Domaining
By Michael Gilmore
Part 1 – What’s Your Business Model?
I was approached to write a series on starting a domaining business and revealing some of the opportunities and pitfalls for the unwary.
Whenever I view any business the first thing that I look at is the underlying business model. If there is no business model then there’s no business, just a gamble. In many instances you’d get better odds playing in any one of the casinos at Vegas.
When you look at the domain industry there are three models that are distinctly different from one another although they are not mutually exclusive. One of the great things about domains is that a single domain may exhibit qualities that reflect all three business models.
- Monetize domain – get revenue now, sell for revenue multiple later.
- Capital growth – treat domain as a stock item and sell domain to natural owner in the future.
- Development – design business for domain, monetize and sell in future.
When viewing a domain it’s a good idea to think about what type of business model does this domain supports.
For example, if I have a domain with considerable traffic that I can monetize now then this will reduce the payback time on my investment. If on the other hand I purchased “asdcffddsc.com” then I would have to be prepared to continuously reinvest the cost of re-registration until the domain sold to a natural owner or speculator.
Always, always, always think in terms of the underlying business model. I’ve seen so many newcomers to the domain industry spend a lot of money on what they thought were terrific domains only to get a near zero return on their investment.
For example, “SeattleMedicalBenefitsSchemeForOlderPeople.com” is likely to take a long time to sell to a “natural” owner of the domain and is unlikely to have any traffic. Developing such a domain into a website is going to become a branding nightmare.
I know that you may think it’s a great domain but remember that ultimately you need to subject your personal opinion to that of the business model. Just to reinforce what I’m saying picture yourself sitting before a table loaded with $10 bills. Now picture yourself tearing them up, one at a time, hundreds and then thousands of dollars being sent to the trash can. That’s what domaining is like without focusing on the business fundamentals.
If you insist on tearing up the money then send some of it my way and sponsor whizzbangsblog.com ?
In Part 2 I’m going to unpack what are the basic building blocks you need to start domaining and who are some likely partners that you may want to approach for underpinning your business
Part 2 – Buying domains
As mentioned in part 1 domaining can be divided up into 3 categories:
- Capital Growth
When purchasing a domain the first thing that needs to be considered is, “What business model are you purchasing the domain for?” This will help determine your purchase price.
For instance, if you are purchasing a domain for development into a business then the purchase price for the domain should be a part of the overall plan and cashflow for the business. It should then be reasonably easy to determine your maximum price for the domain.
As an example, I’m sure that the recent purchase of seniors.com for $1.8m would not be tied back to revenue generated from a parked page. There will be an overall plan which shows how the new owner is going to get a reasonable return on their overall investment, not just the domain.
I find purchasing capital growth domain quite difficult and more of an art rather than a science. I’ve made quite a number of purchases in this area and all of them seem to pay off quite well but I find it difficult treating a domain as a stock item that will one day be sold off for a thousand percent return on my investment.
The best thing that has happened to this space has been Dark Blue Sea and BuyDomains developing a channel to market for all of these low to zero traffic “brandable” domains. One of the biggest problems for domainers with large portfolios of capital growth domains has been how to find a buyer that’s willing to pay for them. These two companies have solved this problem and are working towards increasing the volume of sales through their own various networks.
Here’s the other problem for capital value domains. What price should you sell a domain for? The classic rebuttal to this question is to say, “Sell for precisely what the buyer wants to offer.” I think that it’s another way of saying, “I have absolutely no idea but I’ll hang out until it’s big enough!”
For example, let’s imagine that I owned “computer.com”. How much is it worth? My friend who owns a computer shop says that he’ll offer $2,000 because he thinks that it will increase sales in his business. I then get a call from the marketing director of IBM who says that they really want the domain for an international advertising campaign and would I be willing to accept $5m?
So which is right? I think that the price point is only partially in the hands of the buyer. There is a trade-off between what offers you are willing to accept and the price to maintain the domain. Remember this is not just the re-registration cost but the cost of actually maintaining a portfolio of domains. This means that you must include what you value your time at.
In the Part 3 of Domaining 101 I’ll open up how I purchase traffic domain names.
Part 3 – Buying Traffic Domains
In the previous parts of this article I discussed the importance of determining what business model you are applying to a domain prior to an acquisition. Whether it was for the domains traffic, development or to treat the domain as a stock item is a decision that needs to be made if you are to become a profitable domainer. In this article I’ll now explore some of the ways that I’ve purchased traffic domain names.
The first example I’ll look at is purchasing an individual domain from an existing owner.
Since traffic domains generate their return on investment from the traffic going to them then there are a number of questions that should be answered prior to any acquisition or purchase. There are many, many questions that can and need to be asked but I’ll tackle the most important one first.
Is the traffic going to continue?
This is the number one question that you should be asking! If the traffic is not going to continue then it will dramatically impact your return on investment. In fact, you may wish to say “no” to the deal right now.
Why wouldn’t the traffic continue? The domain for sale may have once been an old website that has an established web of links that will degrade across time. Worse still there may be a single primary link that is providing all the traffic for the domain. If that link is severed then the traffic to your potential acquisition will die.
Another reason why the traffic may cease is that the seller is artificially increasing the traffic numbers by purchasing traffic from elsewhere and pumping up the numbers for the domain. This can be done in a number of way such as via PPC advertising, email lists or I have even seen one case where the domainer had relatives (they had a lot) go to the domain and click on the links. These are ALL acts of fraud and can only be construed as being theft. If you do this then please stop reading as it’s all about establishing a good reputation rather than ripping people off.
To overcome fraudulent activities I look at the domainer more than I look at the domain. If the domainer is right then nine times out of ten the domain is right. If there are problems with a domain then I believe a good domainer will often make the transaction good in other ways.
Let me share with you an example of this. A few years ago I purchased a domain from a German friend of mine that over time I’ve grown to respect. After about one week the traffic to the domain declined dramatically. Neither of us could work out the reason why this had happened and without a moments hesitation my German friend offered to either replace the domain or reverse out the transaction. When you deal with quality people like this then acquiring domain names becomes a LOT less risky.
Therefore, if you are looking at purchasing a domain name then not only do you need to look at the reputation of the seller (I’ll talk about this later) you also need to establish a reputation yourself. Good sellers are also nervous about bad buyers.
Establishing a good reputation takes money, time, effort and has an initial payback of zero but a huge long-term payback.
To establish a good reputation I would:
- Join the domain forums and most of all be humble when asking any questions and taking part in the discussions. You can start here if you like whizzbangsblog.com forum.
If you haven’t joined a forum before then the first thing that you should do is introduce yourself. Say where you’re from, how long you’ve been in the industry for, what you are wanting to achieve and a few personal items always help (eg. Married, kids, hobbies etc). Real people with real lives are reading the forums and you would be surprised at how helpful they can be. Most of all, be humble and be who you are.
- Attend the conferences (eg. TRAFFIC, DomainFest etc). Don’t be afraid to talk to people, everyone has to start somewhere. From my experience the great majority of domainers are fantastic people who will often bend over backwards to help a new person to the industry that has a humble attitude.
- Read the blogs and leave comments. This is not a push for you to leave comments for my benefit but you would be surprised at how fast you can develop a great reputation by leaving insightful thoughts.
- There are links to all of these resources plus a lot more in the domain archives area.
It may seem that I’ve diverged from buying domains into establishing a good reputation but let me assure you that it’s really hard to do business if you have earned a bad reputation or if you have no reputation at all.
In the Part 4 of Domaining 101 I’ll tackle a few more of the important questions that I always think about in any domain purchase.
Part 4 – Buying Domains and traffic sources
In the previous part of “Buying Domains” we discussed the importance of developing a good reputation in the domaining community. Domainers conduct business incredibly fast, often doing hundreds of thousands of dollar deals on the basis of an instant message “nod” and the persons reputation. If you get a bad reputation in this industry then you’ll never do business in it again, so be careful.
So what are some of the other questions that I ask myself when purchasing a domain name? After “Is the traffic going to continue?” the next most important would have to be, “Where is the traffic coming from?”
The where could relate to links as previously discussed in article 3 but it also can be what country. The country is very important because it will often indicate whether you can actually monetize the traffic. It can also suggest further “fraud” investigation work if the traffic is largely originating from a third world country or places like Turkey.
I really feel sorry for any legitimate Turkish domainers because like or not they are all tagged with the same brush of artificially inflating traffic numbers and increasing revenues via click fraud. If you’re from Turkey, know some of these fraudsters and you’re a good domainer then you need to report them as it will be the fastest way that I know of for you to be able to increase the value of your portfolio.
Let me provide an example of where I forgot to answer the “Where is the traffic coming from?” question. I’d purchased my first domain and it began to make money. Sure it was only about fifty cents per day but it was fifty cents more than yesterday. I was so cocky and confident that I didn’t do a rigorous check on my second purchase. It turned out to be a Russian mp3 website and the traffic died after about 6 months. I ended up re-registering that name every year for about 3 years just to remind me to always ask the “Where is the traffic coming from?” question.
A few flags should have gone off in my head. The biggest one of which is “beware Russian mp3 traffic!” There’s always another deal but it’s really hard to get your cash back when it’s gone. Thank goodness that it was only a few hundred dollars.
For any domains that I’m looking at buying from a complete stranger (which is not often) that are valued over a couple of thousand dollars I always ask to do a traffic test. I of course offer to pay for the test. A traffic test will often show up information on the domain that is not available by looking at the statistics alone.
For example, when I ask for the domain to be pointed to my own nameservers I can check the actual web logs for the domain to see if any repeat IP addresses are evident. I can easily see what country the traffic is coming from and also if the traffic is largely link based rather than type-in. All of this information is really valuable in making an informed purchasing decision and in assisting you in working out a potential return on your investment given a particular offer you may be contemplating.
In Part 5 I’m going to unpack Earnings Per Click, click through rate and parking companies.
Part 5 – Buying domains with CTR, EPC and Parking
We’ve managed to plough our way through a whole lot of information on buying a domain name but the best is yet to come. This is part five in the “Domaining 101” article and in this part we’ll be discussing the impact on a domain’s valuation caused by earnings per click, click through rate and parking companies.
Click through rate (CTR) is very important when purchasing a domain because it often indicates whether there are live, real people at the other end interacting with a parked web page.
I’ve seen many people on the forums trying to sell domains with thousands of unique visitors per day. Unique visitors do NOT necessarily mean an actual person, so beware!
For example, the domain may have previously been a virus launch site so that it is getting repeatedly hit by “Trojans” on different IP addresses around the world but none of the traffic is real.
Other methodologies of increasing traffic artificially include reporting not unique users but a total traffic number. This is often done by sellers who only report web stats and not screen captures of parking statistics. Web statistics often also include currently unmonetizable traffic such as graphics and applications. This makes the numbers look great (particularly for ex-photo websites).
In my view, other than if the seller is trying to exit a business (sell a website) the seller should always have parking company statistics. It is the rare sale that needs to be done so quickly that there was not time to get even a few days of stats.
When I see a “claimed” click through rate for a domain the first thing I do is check out what the keyword (if any) is being applied to the domain. I then compare this CTR against the average CTR for all our domains at ParkLogic for that keyword to make sure that it’s a reasonable claim. If it is out by a lot then I either stop the negotiation or ask some more questions.
I also ask for statistics over the last couple of months as this will often show up any potentially fraudulent clicks. It’s easy to add clicks for a week or so but much hard to consistently sustain clicks over a couple of months.
Likewise I also like to see earnings per click stats (EPC) and relate them back to a keyword. We’ve been tracking keywords for years and checking the existing keyword payout rate for a domain against our database has been invaluable in determining a potentially likely fraudulent claim.
A wild fluctuation in the EPC across a couple of months often indicates a category that does not have very much advertising. This strikes at the heart of the consistent return on your investment and should ultimately impact your offer to the domain owner.
For example, I’ve seen a domain that has earned 3 cents one day and $178 the next. So what’s it worth? No idea. You can’t average those two numbers as there isn’t enough data to determine if the payment rate per day is then going to shift to becoming 3 cents or $178. Due to this uncertainty the domain purchase price needs to go down.
What I also look for is whether a keyword has been appropriately applied to a domain name. If a domain which is music related is using a “games” keyword then you can bet that you’ll increase the daily rate that the domain earns with a new keyword.
I always check where a domain is parked. I then ask if the seller has any special relationship with the parking company that is artificially inflating the figures. If I have a special deal which is better than the sellers then it will help me adjust my return on investment calculation accordingly.
On the other hand if the seller has a better deal then me then it may cause me to talk with the parking company and seek under what terms I can also get that deal. Always remember, if you don’t ask then you don’t get.
So the CTR, EPC and parking companies all play a pivotal role in helping us determine the price we would pay for a domain name. The challenge is to create an algorithm that encompasses all of these variables that results in a meaningful result. I’ll see if I can have a go at that in the next part.
Part 6 – What should I pay?
In the previous parts I’ve discussed a number of domain characteristics that I look at prior to a purchase. I’m now going to attempt to provide some guidelines for what you may expect to pay for traffic domains. Before I begin I would like to stress that they are guidelines only and that every domain deal needs to be treated on a case by case basis.
Since domains are valued in multiples of revenue what you should always look for is a consistent revenue line. Without a consistent line you are unlikely to make a return on your investment. This may seem obvious but many people get caught up in the deal and forget why they are making it.
The more inconsistent the revenue line the great the discount for the buyer so that they can hedge some of the risk. If you are selling your domains then you are essentially selling a trailing revenue stream so the more work that you can do on your domains to ensure that it’s consistent the higher the price.
The second risk facing a purchaser is legal. For example, if the domain name is trademark infringing then the potential new owner not only has to factor in the risk that the domain may be taken off them by the trademark owner but they also may get a damages case. All of this reduces the price.
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|
Now for all of the disclaimers. These revenue multiple estimations are that, estimations and will vary on a domain by domain basis. The domains are ONLY valued by their traffic and not from the brand ability of the domain. So please don’t tell me that boat.com is worth a lot more than I’m suggesting.
Remember that if you have a TM domain name that you are taking on considerable risk that is sometimes not just financial but can be classified as a business risk. Be very careful in heading in this direction and DO NOT read the above table as an endorsement of that type of activity.
For .net’s discount the above by 30% and for .org extensions by 50%. ccTLD’s are really in a category to themselves and their value depends upon the country. For instance co.uk domains are worth a lot more than .za.
I know that I’m sticking my neck out there but I hope that it gives some of you a bit of a guide. I’m sure that I will get a lot of feedback on this article…..which is great! The more of us that contribute the more accurate the figures will become.