How to Valuate Internet Domain Names & The Domains Valuation Secret
Domaining as a Business Industry has witnessed great growth rates during the past two decades. This growth was been reflected on both sales activity and the average price of domains sold. As internet has literately entered every aspect of our life, domain names have become valuable assets like bonds, shares, real estate etc. Some domains have even been sold for millions of US dollars making their owners rich. As the potential for domain flipping is great nowadays, the crucial question for every domainer before buying or selling a domain name is “What is the real value of this Domain?” This is the main issue analyzed in this article.
How to Define the Basic Framework for Appraise Domain Names
In order to define real value in a market we must first identify the factors forming the aggregate demand and supply. Demand for premium and highly premium domain names comes mainly from businesses that want to go online or from domain investors that buy domain names cheap to sell them in businesses at a higher price. Many factors define if a domain name is the right for naming a business, here are some really important factors:
1) Ability to focus on a Business Niche
2) Brandability (Short Length, Easy Spelling and High Memorable)
3) Premium Domain extension (.com for international brands and a geographical domain name for local brands)
4) High Organic SEO Value (in other words, the ability to attract free visitors coming from Search Engines)
But there is also another crucial factor for defining the value of a domain, and that factor is scarcity. Scarcity limits the power of supply and that means that if demand suddenly increases, the domain name price can lift up in the sky.
5) Scarcity of supply
How to Instantly Valuate a Domain Name using Past Sales and Other Indicators
Here is my manual method that can prove reliable when valuating instantly domains.
Note: If you are a beginner, you may pass directly to step (2)
(1) First you break the domain in 2 pieces, one piece defines the market and the other piece defines the brand.
For example TradingCheap.com, Trading defines the market (trading online) and cheap defines the brand (cost leader).
(2) Using past sales and especially recent sales you may create a basic valuation for a domain name. For example if there is a very similar domain name that has been sold recently for $1,000 (without a site) you have instantly a basic valuation model for your domain.
To make it even more sophisticated we may appraise separately each domain piece from (1) and create a more precise two-piece valuation model.
As mentioned, this method is based on past sales data. You can find past domain sales using several web sites, I use NameBio.com.
(3) The third step is to identify the domain’s extension availability and then define scarcity. First of all you must check all available extensions. If a domain is registered in 7 different TLDs then the .com gains value and it should be valuated in a premium than if there weren’t any registered domains in other TLDs. If it is a .net you must calculate about 1/5 to 1/7 of the value of the .com domain.
.com = 100% of the value from (2)
.net= 15-20% value of the value from (2)
.org= 10-15% value (when community sites then .org value = 100%)
After we have gained knowledge on TLD scarcity we must identify the potential for possible abbreviations or the existence of reversed name. In the previous example of TradingCheap.com we can also use the domain CheapTrading.com. That means that our domain valuation has just lost 50%.
(4) Measuring Exact Searches and Identify CPC
This step can be used as a method itself. As a general rule we multiply the value of CPC to the number of exact annual searches to get a basic valuation. Here is The Rosener Equation:
Domain Name Valuation = A x B (i)
where:
A = Exact-Match Yearly Search Volume
B = Average CPC
In order to make the appraisal more accurate we may multiply (i) to the Click-through ratio of the domain name
The Little Secret for Successful Domaining
There is a little secret for all Domain Investors, here is the secret..
“Never register or buy a domain name that is appraised below $450.”
This little secret derives by using simple financial mathematics:
CALCULATING REVENUE FROM SALES
1) Based on past experience, the average domain portfolio sells 1 domain per 50 domains it holds. That means a 200-domains portfolio, statistically sells 4 domains per year. This assumption is based on an average portfolio that prices domains in fair values.
For every 50 domains a portfolio holds, one is sold in a yearly basis. So let’s calculate the minimum value of the average domain sold in order this portfolio to be profitable in the long-run (i)
Note-1: Most domain holders price their domains far above their real value.
Note-2: The 1/50 domain sales assumption is based on simple free domain promotional methods such is domain parking and listing in popular domain markets like SEDO.
To make calculations easier, we assume that we hold a domain portfolio of 50 domains.
CALCULATING YEARLY PARKING REVENUE
2) If we assume that we park all our 50 domains, we will earn about $0.08 per domain per month, in a yearly basis:
0.08 x 12 x 50 = $48 (ii).
CALCULATING YEARLY REGISTRATION EXPENSE
3) Each domain will costs about $9 per year in registration fees. That means that for a whole year we need to pay about $9 X 50 = $450 (iii)
CALCULATING BREAK-EVEN BETWEEN PARKING REVENUE AND REGISTRATION FEES
The break even can be easily calculated by by deducting $48 (ii) from $450 (iii)
$450 - $48= $402 (iv).
This is the statistical break even ($402) but something is missing, and that is the return of our investment.
OPTIMIZING VALUATION PROCESS –ADDING IRR
Holding domain names as holding any other asset class must pay you back a minimum rate of return. In investment valuation that is called as the IRR –internal rate of return.
Adjusting Domain Value by Calculating the Internal Rate of Return (IRR)
A general internal rate of return is about 8-12%. It depends of course on general investment, macroeconomic and other variables such is the current GDP growth, inflation rate and the level of interest rates etc.
As domain industry is extremely dynamic we shall use the maximum value of this short IRR range (8-12%), meaning IRR at 12%.
Calculating Domain Name IRR
If we pay about $450 each year for registration fees, then our minimum profit should be 12% x $450 = $54 (v)
If we add the dollar value of our IRR $54 to our previous breakeven price of $402, we get $456 (i).
That should be the minimum value of each domain that we accept to register free or buy.
■ If the average value a domains portfolio is below $456 then this domains portfolio will probably loose money in the long-run.
■ If the average value a domains portfolio is above $456 then this domains portfolio will probably earn money in the long-run.
Let’s see some more examples by altering the value IRR.
Level of IRR (%) |
IRR Yearly Dollar Value |
Yearly Registration Fees |
Yearly Revenue from Domain Parking |
Minimum Value of Domain Name |
8% |
$36 |
$450 |
$48 |
$438 |
12% |
$54 |
$450 |
$48 |
$456 |
20% |
$90 |
$450 |
$48 |
$492 |
30% |
$135 |
$450 |
$48 |
$537 |
New Trends-The New Upcoming TLD’s are Reforming the Domaining Industry
The latest developments in the domain names industry incur the prospect of hundreds of new TLDs (for example .shop, .club etc). These new TLDs are imposing a great threat to the future value of any domain name. But it seems that premium .com domains will always include great value in favor of their owners. Since today tens of billions of USD have been invested in premium .com domains by large businesses, and they will certainly don’t like seeing their investment become useless. So, .com will always make the difference either there are 10 TLDs available worldwide or 1,010 TLDs available worldwide. Other interesting domain extensions include .org which is expected to maintain value as the ideal extension for community web-sites or non-profit organizations. Also there seems to be a bright future for geographical extensions (for example .de or .co.uk) which they will always constitute ideal domain extensions for localized web services.
The Correlation between Nasdaq and the Value of Domain Names
There is a great Correlation between the historical course of Nasdaq and the historical value of Domain Names. There is an index by SEDO that presents this correlation perfectly, it is called IDNX, information here » SEDO IDNX Index
Appraise your Domain using Free Online Tools
Automated systems can not valuate domains better than human pros can, but there are still some great free online tools for valuating domain names and web-sites, here is a list:
APPRAISE DOMAIN NAMES
1) EstiBot.com - Bulk Domain Appraisal
2) Domainindex.com –Appraise Domains
3) Valuate.com - Free Appraisals
APPRAISE WEB-SITES
1) Calculate worth of your site - Stat My Web.url
■ Appraise Domain Names
by Giorgos Protonotarios, Investment Analyst and Domainer