Whether you are simply curious about the domain industry or you are a domain veteran who bought his first domain in the 1990s, chances are you are often asking yourself a question. This is the holy grail of the questions, the alchemic secret, the knowledge of which, can grant you the power to transform virtual strings of letters and numbers into gold (or cryptos, or your favorite fiat currency – for what is worth these days). The question is:
How much is a domain worth?
Unlike other assets, domain names are not easy to price. It is easy to price houses based on location, size and finishings quality. It is easy to price a barrel of oil. It is easy to understand why a Perth Mint gold bar is more expensive than other gold bars. It might even be easy to understand why a painting from Picasso is worth millions, while the painting on display at the hipster coffee shop is only worth a few lattes – and proudly not from Starbucks:
But no one – no one in the world – not even if this person dissected our Numeric Domain Guide 2.0, can explain why 3709.com sold for $12,500 and, only 5 days later, 3196.com sold for $27,706 on the same platform. 0 in the middle is not a good number in China, and also 7 is not great. Still, it is difficult to explain the whopping 100%+ price difference. If similar combinations of 4 numbers sell with such a large difference, how can the uninitiated hope to understand how to price a 4 letter .com?
This article is my best attempt at explaining. Open the door and read on.
The first stage of initiation to the arcane domain wisdom, is understanding that domain names, as explained by Yoni Belousov, have two separate demand curves: End User – also known as “retail” – and Investor – also known as “wholesale” – curve.
This means that a domain name can sell for very different prices based on whether the buyer is an investor or an end user. Let me give you an example. In 2013, IG.com, a 2 letter .com domain, sold for $4.7M. The buyer was IG group, a well funded online trading company, while the seller was ig.com.br, a large search engine operator from Brazil.
During the same year, xz.com, qr.com and zc.com sold respectively for $230k, $138k and $120k. Once again, how do we explain the 2,000% difference in price?
The answer is simple. Xz.com, qr.com and zc.com all sold in auction to investors, while ig.com was bought by an end user. Generally speaking, end users pay more than investors because they expect to have an economic benefit to their business by buying that domain. For example, IG group could have reasoned that owning the 2 letter .com with their letters would make the brand appear more trustworthy. In the financial world, were margins are high and competition is fierce, this is worth quite a bit of money – which IG quantified to be worth at least $4.7M.
Was ig.com worth $4.7M in economic benefit to IG group? Only IG knows. Would the domain ig.com have sold for the same amount if IG group didn’t show up to buy it? Most likely not.
The only insight to remember is that the end user prices are generally higher than investor prices. There are a few exceptions to the rule – for example, during the 2015 bubble, Chinese investors were willing to pay more than end users, but, generally speaking, end users do pay more.
You might now begin to wonder: “If I have a choice, I also want to sell to an end user, because I can make more money. How do I do that?“. Despite what some people may claim, actively selling a domain to an end user is not easy. This is how a veteran domain investor once explained it me during Domaining Europe – my first conference – in beautiful Valencia, Spain:
Imagine you already own a house and you live there. The idea of upgrading hasn’t crossed your mind. One day a broker cold calls you to pitch you about another supposedly better house.
Even if the broker is the best salesperson in the world, he/she would struggle to convince you to pay above fair market price. In most cases, you would reluctantly make a speculative offer. In fact, only a tiny percentages of domains sell to end users. There is a strong survivorship bias: you only hear about the sales which take place, but you never hear about the millions of domains that do not sell. With few exceptions, when someone advertises a large end user sale, he/she either received an inbound inquiry or, in case of a brokered transaction, the broker was representing the end user buyer – not the seller.
If active sales are not so easy – what can you do then to sell to end users?
Elite investors know that in order to sell a domain for the highest possible price, you have to do something that millennials find practically impossible. You have to wait. This is because, when you receive a direct inquiry from an end user, the company already made a decision that they want that domain, and that puts you in the best possible negotiating position. The price then will be decided by the buyer’s budget and by how much you are willing to let your domain go for.
How do you sell domains for record-breaking prices? As Frank Schilling, the legendary domain investor who recently sold Uniregistry to GoDaddy, joked about the $30M sale of voice.com: “How do you sell a domain for $30M? You turn down a $29M offer“. Not many investors are capable to do say no to 8 digits. Would you? This is why, if you dig behind the largest domain sales reported by Ron Jackson on DnJournal.com you’ll often find a motivated End User buyer and – surprise, surprise – an unmotivated End User seller.
If you are quick to think, you might ask yourself: “But what happens if I just sit and wait and buyers do not come?” That’s a great question. As Michael Cyger, the founder of DnAcademy, wrote, the average sell-through rate of a domain portfolio is about 3% per year. This means that if you own 33 decent domains, you should expect to sell roughly one a year. If buyers consistently do not show up, maybe it is time to question your portfolio’s quality.
Hold on a second. But emergencies do happen. Renewal prices increase. Your daughter gets married. A Pandemic hits. What do you do if end users do not show up and you need to sell your domains?
Well, my friend, you are about to enter stage 2 of the domain wisdom. This is the place in which you begin to understand the incredible intricacies of the domain investor market. Open the door and read on, if you dare.
Domain investors buy domain names because they want to make money. An investor buys a domain at a price X, with the plan to resell it at a price Y, where Y has to be > X. What a surprise, Sherlock. I know. However, if you stop and consider this simple truth, you understand it has important consequences.
First of all, an investor makes an offer on your domain because he expects he is going to sell your domain for more money than the amount offered. Unless you are in a rush, you wouldn’t sell a house for a price lower than its potential, would you? So the question for you is – does the buyer know something that I don’t about the value of my domain?
Possibly. An investor buyer might know better than you how much your domain is worth to other investors. A buyer might also have a different perception about the domain’s end user potential or future value. On the flip side, you know exactly the type in traffic of your domain, the monetization revenue and the number of inquiries you received. This is what in economics is known as information asymmetry.
The information asymmetry causes conflicting views within the buyer and the seller about the present and future value of the domain. If you buy example.com today for $50k, you are basically betting that you will be able to sell the domain for more than $50k, while the seller believes that $50k right now is the preferable option. This disagreement is actually desirable – if all investors agreed on valuations, there would be no transactions and no domain aftermarket.
The problem comes when the perceptions of the value are so different that your domain – and the market in general – is not liquid enough. This happens because there are many cognitive bias that hinder an investor’s ability to price a domain accurately, like the Ikea effect (for hand-registrations) or the sunk cost fallacy.
But the major cause of misunderstandings and major obstacle for the liquidity of the domain aftermarket is not being clear about whether you are pricing your domains for end users or for investors. If you are pricing your domains high because you are waiting for end users, and you are comfortable selling roughly 3% of your portfolio per year, there is nothing wrong with it – as long as you are aware that this is your strategy.
But if you are pricing your domains for end users and you actually wouldn’t mind selling to investors, then it is time to pause and reflect on your pricing strategy. If there is no consensus about whether example.com is worth $10k, $100k or $1M, it’s understandable why you would want to err on the caution side and price it at the top of the range. After all, you don’t want to miss out on the upside of the end user sale. There is a not-so-obvious downside though. Pricing your domain too high may result in you not only not selling it, but also causes you to miss out on a decent margin investor sale. And if you have a lot of unsold domains priced at end-user level, then sitting on them year after year while they chip away at your bank account in renewals, might not be the optimal strategy.
What you could do, for example, is to target the 2 separate demand curves with different tools. For example, you could list your domains on end user marketplaces as a “make offer” listing, and then list your domain on an investor-only domain trading platform like LMX.com with an investor targeted price. In this way, you would get the best of the 2 worlds.
But, leaving aside the advanced price optimzations, let’s examine the simple scenario in which you decide to sell in the investor market. How much should you price your domain and where do you list it? Typically, there are 3 solutions available:
- You list your domain on one or more marketplaces and wait for a buyer. This is a great first step. The most obvious challenge though of listing only on marketplaces, is that marketplaces are black boxes that contain thousands, sometimes millions of domains. How are investors going to find you? Also, how do you make sure you are pricing your domain correctly?
- You list your domain on a broker’s newsletter or newsletter-like site. This is slightly better. Newsletters provide a quality filter and capture buyers’ attention. Your domain reaches the inbox of active buyers. There are challenges though with this process as well. First of all newsletters aren’t published on the buyer’s schedule, so your domain might not reach the buyer willing to pay the highest price at the right time. Lastly, newsletters feature a fixed or “make offer” price system which is largely inefficient because of the cognitive biases mentioned above. You might price your domain too high or too low, and your domain might therefore sell for too little or not sell at all. Even when an “expert” prices the domain for you, he/she is still prone to make pricing mistakes.
- The last popular method available for liquidations are auctions. Auctions are nice because they use a demand based process to determine the highest possible price. But there are challenges with auctions as well. Firstly, auctions don’t run on the buyer’s schedule. If you hit a week when the top buyers are on holiday, you will pocket a lot less money due to the decreased bidding activity. Secondly, once an auction starts, it is like a train you can’t stop. What happens if on the auction week an end user buyer suddenly shows up?
Lastly, the normal auction process is – by design – unable to get you the highest possible price. To explain this concept I need your attention for a second [spoiler alert – quiz at the end].
Imagine a simplified auction with only 3 purely fictional buyers: Mr Blue, Mr Pink and Mr White (Reservoir Dogs, anyone?) battling for your 3L domain xyz.com. These 3 buyers have different strategies and ideas about the value of your domain. Mr White is a cautious domain investor from Philadelphia who believes in buying as close as possible to floor price. The maximum amount Mr White is willing to pay on xyz.com is $14k. Mr Pink instead is a Hong Kong based investor who, thanks to his connections and knowledge of the Chinese market, is confident that he can sell xyz.com for at least $23k. He doesn’t “dirty his hands” for less than a $2k profit, and decides that the maximum he is willing to offer on xyz.com is $21k. Mr Blue is a little different. He is a retired British investor living in the south of Spain. He just buys exceptional quality domains that he think he can sell to end users for at least 6 digits. Mr Blue’s maximum budget for xyz.com is $28k. To recap, the budgets are:
- Mr White: $14k
- Mr Pink: $21k
- Mr Blue: $28k
Quiz for you. At what price do you think xyz.com will sell in auction given these 3 buyers?
Some folks might be surprised here, but the answer is b). The final price of an auction is the second buyer highest bid + $1.
So you might ask: “How can I maximize the sale price of my domains when I want to sell to investors?“. Glad you asked. I spent years trying to come up with an answer. Seek and you shall find. The answer came to me in an unusual location, the BMW museum in Munich, Germany:
The organizers of the German chapter of Domain Pulse, one of my favorite domain conferences catering to the German speaking market, decided to host the yearly conference in this unusual venue. During one of the breaks I started chatting with an investor specializing in ccTLDs domains with a large portfolio of tens of thousands of domains. While he was explaining me how he built his portfolio, at one point, he said something I will never forget: “I hate the .se drop auction system. Rather than working in the normal auction format, it works in reverse, meaning that the price drops until a buyer pulls the trigger. Because I am afraid someone will buy the domain, I always end up overpaying for .se domains”. “That’s it!” – I said to myself – “This is how you maximize the price of your domains“.
But a reverse auction is nothing new and might still not be an effective method. For example, if you reverse auction random domains, often you will have 0 buyers. The devil is in the details.
Enter LMX.com with Domain Dynamic Pricing (pat. pending). It took a long gestation process and many tweaks to develop this price optimization process. The specific features that we built in LMX.com made it possible. First of all LMX only accepts liquid domains. By definition, liquid domains have a floor price, therefore when the price approaches floor, there are multiple buyers battling for your domains. But the most powerful feature of LMX is the ability of the users to set up personalized opportunity alerts for themselves, called opportunity alerts.
Here is how opportunity alerts work: when you sign up on LMX, you pick your favorite liquid domain classes (for example 3Ls and 4L .com) and set your custom maximum budget for each category. When a seller lists a domain that matches your category and budget, the buyers receive an email notification so they have an opportunity to bid. When a seller reduces the price by 5% or more, the buyers get notified again about the price change. With Dynamic Pricing, you can set your 1) initial price, 2) the number of days between each 5% price reduction and finally 3) your reserve price, which is the price at which the descent stops. You can also stop or pause the dynamic price at any time. In this way, the prices slowly descends on your own schedule until it finds the buyer willing to pay the most.
So let’s go back to Mr Blue, Pink and White. You list xyz.com on LMX with Domain Dynamic Pricing. To stay on the safe side, you list it at a starting price of $40k. Because you want to allow ample time for the buyers to find and bid on your domain, you pick an interval of 7 days between each price reduction. You set the reserve price at $20k, which is $5k above floor price.
At the end of week 1, the price reduces to $38k. Week 2, $36.1k and so on. At the beginning of week 7, xyz.com goes to $27.6k and Mr Blue pulls the trigger.
Congratulations! You now pocketed $6,600 more than what you would have gotten in a normal auction. Also, with the LMX industry low fee of 7.5% ($1k min), you might save up to $3,500 more compared to 20% auction sites. $6,600 + $3,500 = $10k+ in savings for a 3L .com sale. Not bad, huh?
Now, before you go ahead and list your domains on LMX, you might ask: “How do I pick a good starting price?“. To help you answer this question, we invented another amazing technology – the Domain Price Optimizer (pat. pending). Remember when I said that the users on LMX set their own preferred domain categories and customized budgets for each one?
Effectively, that builds the closest possible approximation of a demand curve for a specific asset class, similar to a bid/ask model of the stock market. Wouldn’t it be nice if you had a magic wand that would reveal to you the demand curve for the category of the domain you want to sell, so you can optimize the price based on the buyers’ budget?
Close your eyes and make a wish. Starting today, you have that power:
Go ahead and pick the initial price that makes the most sense based on your new clairvoyance superpower. You can now maximize your liquid domain sales thanks to the Domain Dynamic Pricing & Domain Price Optimizer.
Go ahead and create an account on LMX.com – the platform is open to all the owners of liquid domains. You are welcome.
One response to “How The Domain Economic Machine Works – Solving the Pricing Question”
What a great article. Well done!