Making Domains Your Business

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 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.

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.