Domain valuation explained by these 6 factors
*This is a long post however if you think you have a valuable domain well worth the read)
Domain Valuation Fundamentals Explained.
I think you will agree with me when I say: It can be VERY difficult to determine the correct domain valuation range for most domain names. The last thing you want to do is leave money on the table when selling your domain. Or is it? Well if you understand these key elements of domain valuation you can increase your return on investment by multiples. In today’s post, I am going to review several factors that impact the value of your domain.
In the domain community, we use examples to draw similarities to real estate, coins, art, advertising (etc…) to help buyers and sellers understand the value and market for domain names. For example, a premium domain is like owning the marque property on Broadway in New York City because of how it connects to consumers and search intent. A bad domain is like putting a 1,000,000-square foot shopping mall in Jay Oklahoma. But, you can buy property in Jay Oklahoma for next to nothing.
Why not save the difference and use it for your marketing? No offense against Jay Oklahoma, however, no amount of advertising would support this investment. I will let you figure out why 😊. Another example to explain the domain valuation would be to look at coins. A 1944 steel penny is worth $110,334 where as a 2016 penny is worth, well a penny. A 1943 steel penny is worth only $10 (I actually have one). So why is there a difference in values between these pennies, they are after all only a penny right? It is good to draw similarities to other markets because it helps buyers and sellers make quick connections. Domain names, however, have a uniqueness that sets them apart from these categories. Understanding the value of a domain name can have a profound impact on your return on investment, both for selling and acquiring a domain.
Although the internet has been around for over 20 years, there is still a lot of misunderstanding of how domains are valued.
More importantly, there are only a small percentage of people who understand how a great domain supercharges the value of a brand’s positioning and marketing. These would be people like Elon Musk (Tesla.com), Paul Graham (Y Combinator), etc… After reading the rest of this article, my hope is you gain a deeper understanding to establish the value of a domain you want to acquire or sell.
Here are 6 factors to consider that determine the value of your domain
- The general market for domains
- How different types of businesses will invest differently
- Size of the market based on the domains connection and meaning
- How the domain will be utilized
- Where and how you sell your domain
- Using Google CPC as an indicator
The general market for domain names
One way to understand the market for domain names is to look at the number of new businesses that are started each year. According to this article in Forbes there are over 500,000 new businesses started each month in the United States alone. If you look at Europe there are about 2.4 million new enterprises created yearly (based on 2014 statistics). When you include the entire global market for new businesses, this number is well into the millions of new business. This blog on the Wall Street Journal estimated there are between 22 million to 27 million active businesses in the USA.
Why are we looking at these statistics?
We are looking at the statistics because our world is now increasingly online and domain names are inseparable from branding and businesses. A very large percentage of these companies will purchase a domain name to support their business. Each of them will have different needs however they will want to own their brand name online.
Many brands also own multiple sites to support their brand and marketing efforts. This global demand for domain names continues to increase while the supply of quality domains is fixed. How many companies can own Delta.com. How many businesses have Delta in their business name (hint: lots of companies)
*This classic supply and demand matrix shows why premium domain names will continue to increase in value. Domain valuation is impacted by the number of new businesses needing to position themselves in the marketplace.
The size of the business acquiring the domain will determine the domain value
In a previous article, I outlined the different companies and their domain needs. The valuation of your domain will be different to each of these startups. Domains that allow for a broader appeal and target market will have a higher valuation. Here is a recap of the 6 startup types.
- Lifestyle Startups
- Small business startups
- Scalable startups
- Buyable Startups
- Social startups
- Large company startups
Each of these business models will use resources and assets in a different manner with a different rate of return. A domain name is no different. What business type does your domain target? This will determine the domains valuation. The goal of a lifestyle startup is not to be the number one share nationally for a particular vertical.
They are just looking to make money to support their lifestyle. For example, the local surf rental company in Honolulu Hawaii will never be able to leverage a domain like Surf.com. Interestingly Surf.com is owned by Unilever which shows how domains cross categories beyond the obvious (more on this later).
Scalable startups will value a domain that allows their brand to go big. They are looking to create an amazing brand experience, and an exact match domain to their brand is a necessity. They will achieve a higher return on investment owning their brand online, especially in the (.com). Scalable startups will acquire a premium domain name because it communicates to Venture Capital investors that they understand marketing and branding. Venture Capital companies want to pick out winners, and a short, descriptive or category defining domain quickly instills confidence for their investment. It shows them the founders understand branding and marketing.
Large established companies will value and be able to pay more for a premium domain simply because they have more resources to achieve a return on investment and understand the power of branding. The competition for premium domain names between scalable startups, buyable startups, and larger corporations is what has driven up the value for domain names. This is kind of like the New York real estate market. The more buyers there are the higher a seller can get for the property. The more buyers for your domain the higher the valuation.
The only difference is that most premium domains never get sold again because they become working assets. Many companies also do not sell premium category defining keyword domains because they don’t want their competition to utilize it against them.
*Determine what business class and size your domain name attracts. Down below we show a general rule of what each business class will spend on a domain for branding. Domain valuation will differ drastically for each of these groups.
The size of the market will typically determine the domain value
Does the meaning of your domain name connect with one market or multiple markets? The size of the market that your domain connects with is also a great indicator to use for the domain valuation range. The larger the market size and growth typically the heavier the competition. For example, the online encryption and security business is projected to be a $9B industry by 2021.
Here are several of the top companies in this industry. These are in no particular order however just a sample of the brands that are competing in this space. Look thru this list of brands and without any additional information which top three brands would you pick as a possibility. Now consider a domain like Encrypt.com. Would this make it to your top three list? This is the power of a premium domain. It cuts thru the noise and effortlessly connects to consumer intent.
The online encryption and security vertical is one of my top five industries for 2017. I believe we will see more companies entering this space and stronger growth as consumers become more educated. New startups will need to differentiate themselves from the long list of brands in this space. A strong brandable domain that transfers over will become a valuable asset to their marketing and branding strategy. Another example is the FLU industry which is projected at $4 billion dollars globally.
A domain that helps to build a brand or a marketing campaign will have a higher value, because the size of the prize or share is larger. Many domains will cross over to multiple categories. The example of Surf detergent using Surf.com is an excellent example of branding. A premium domain can have a broader appeal beyond the obvious industry or definition. The size of the market typically plays a significant role in the valuation of the domain.
The reason for this is the return on investment can be higher and quicker. Determine how many verticals your domain targets to understand the quality and quantity of potential buyers.
*Domain valuation is higher for domains that connect with a growing and larger industries. Determine the size of the industry that connects with your domain. How deep is the competitive landscape. Does your domain connect in a way that would help a new company or product differentiate from the competition?
How will it be utilized?
How a business will utilize the domain name will determine the value. The higher the return on investment the higher the value that is placed on the domain. Typically, in the hierarchy of utilization, the branded domain will have the highest usage and rate of return.
This is because of how the domain connects to the brand and everything that touches the brand. Marketing is supercharged the closer the brand and the domain overlap. This is why Hive acquired the domain Hive.com and retired the HiveTeams.com. They experienced a 40% increase in traffic by owning their brand online and making the journey effortless for their clients. Domain names are used in two principal ways.
- Marketing campaign or lead generation
Depending upon the industry and the strategy a business may own several brandable domains.
Here is an example of the several brands that Salesforce owns.
Getty images also own multiple brands in the stock photo vertical.
Brands also utilize domains for marketing campaigns. These can help the brand stay focused on a message or target market. There are multiple reasons and uses for marketing campaign domains. For example, when a company launches a book they may want a separate website to use a lead capture page. There is typically more flexibility in a marketing campaign domain which is one reason they will have a lower valuation than a brandable domain.
Here is how StoryBrand.com utilizes marketing campaign domains.
- StoryBrand.com – main site
- BuildAStoryBrand.com – podcast, and blog
Determine whether your domain will be used for a brand or marketing campaign.
- Domain valuation will differ drastically depending upon the use for the domain. The value for a brandable domain will be higher than a domain that will only be used to support a business’s marketing efforts.
So far, we have looked at the size of the business that the domain attracts, the size of the market the domain attracts and now how a company will utilize the domain all impact the value of the domain.
Types of domains
The value of a domain can also be determined by the type of the domain. The more categories a domain can reach the higher the valuation. Keyword domains are now regularly used outside the obvious description or descriptive definition. Many branding agencies break down branding and domains types into three main categories.
- Descriptive – The brand or domain describes what the company does
- Suggestive – suggests what a brand is about however evokes creativity
- Inventive – creating a new word or using words or phrases that have nothing to do with a company’s industry or product offering
Here is an example of this in use in the phone conferencing vertical.
- Descriptive – FreeConferenceCall.com
- Suggestive – Webex.com
- Inventive – BlueJeans.com, LifeSize.com, Calliflower.com
About every other week, a Founder or CMO will tell me that they are the only one that has an interest in a certain keyword domain. This is a huge risk because of how domains are used. Just using the above example who would have thought Surf.com would be used for a detergent or BlueJeans.com for a conference call software or Kabbage.com for a small business loan company. Startups are now forced to use creative keyword domains for branding because of trademarks and domain availability. This impact raises the domain value for domains that fall into the suggestive or inventive category.
*What type of domain do you own and how will it be used. Be realistic and honest if it is a good fit. Your domain could cross over into other verticals that have no direct correlation. Domain valuation is also impacted when a company uses your domain with the inventive approach to branding.
Keyword domains, length of the domain & gTLD ending
Domain valuations are also impacted by the length , the number of words, if the domain is a keyword, and order of the words. The goal of a domain is to make it effortless for consumers to interact with the brand. When you add words in front or behind the brand this takes more effort to communicate and thus valuable marketing dollars are wasted. There is a massive difference in the value of a domain that adds words. This is why startups typically go this route because they have limited resources to invest.
- MyExample.com (little value because it will be confused with Example.com)
- ExampleMy.com (worthless)
- GoExample.com (little value because it will be confused with Example.com)
- GoesExample.com (worthless)
The length of a domain has a significant impact on the valuation of the domain. Short one word or two-word domains that are category defining regularly sell in the six figures USD. The reason why shorter domains are valuable is that they are easier to share, type and email without errors. This supercharges every dollar that is spent on marketing. A great source to view domain names sales that have been made public is NameBio.com.
Here is a look at the top 5 domain sales for 2016.
- HG.com sold for $3,7000,000 USD
- Rate.com sold for $725,000
- 01.com sold for $1,800,000 USD
- Refi.com sold for $500,000 USD
- Asset.com sold for $406,000 USD
About 75% of sales are under a “non-disclosure agreement” so will never be made public (this is my estimate). You can go to my book .COM Strategies to see a recap of the top name sales by category. Domains and brands are inseparable so the closer a domain is to the brand the higher the valuation assuming that it also scores high on what we mentioned about the size of the market, size of the business, usage intent.
*Domain valuation can differ drastically by the length, words, spelling and order of words. Will your domain be used as a brand name or a marketing campaign. If it is for a marketing campaign, is it phonetically correct?
What platform are you using to sell your domain?
There is a great expression that transfers to your domain name – “Fish where the fish are gathering.” Where you sell your domain will also be a determining factor to how it is valued. Domains are sold in three principal platforms or ways. While they can all overlap, they do attract different clients that will value your domain differently.
- Auctions (NameJet.com, Flippa.com, etc…)
- Outbound marketing to end users (typically thru a broker)
- Inbound leads (you can use a company like Uniregistry.com or Efty.com)
Auctions will generally attract the wholesale market which is looking to buy the domain and hold it to later sell to an end-user company. Without proper marketing, end-user companies are typically not even aware that an auction is taking place. If they do become aware, most companies need time for approvals and strategy discussions. Auctions do provide liquidity however rarely will fetch the higher value that an end-user company will value the domain. Inbound leads from vetted business will typically pay the most for a premium domain. This can take years (maybe decades) if they find your domain and consider it as an option.
If you can hold out and don’t mind waiting years this may work. Outbound brokerage is the best way to get your domain in front of qualified end-user companies. It can take months of hard work, however, having your domains as an option when strategies align is priceless. Your domain will achieve the highest return on investment when it is utilized to drive revenue. There is a way to communicate and market your domain to end user companies properly. This can also be done incorrectly. If you have a valuable domain please be cautious in your outreach.
- Domain valuation is impacted by where and how you sell your domain. Where do you plan on selling your domain name? Be aware that each method will achieve different results with different timing. Outbound brokerage will get your domain in front of end user companies, where it has the best possibility to be an option when the timing is right.
Google CPC and search volume can be a good indicator of domain value
Google search volume and CPC are a good indicator of value because they put metrics behind what we discussed above. The power of a premium domain is how it matches consumer intent, supports your brand or defines a category. Google search volume shows the interest level for a set of keywords. Higher search volume obviously shows more interest.
A higher Google CPC also demonstrates the demand for a keyword. For example, a keyword domain with a CPC of $40 will typically have a higher value than one with a CPC of $2. If a site has organic type-in traffic, you can estimate the value by multiplying a factor of the traffic by the CPC. This should be factored into the price of the domain. This should be used as a guide only.
*Domain valuation is impacted by how often a matching keyword is searched. Higher CPC and traffic is a great indicator and gauge to use to determine demand and quality of your domain name.
Very rough categories for domain evaluation
I can guarantee you that this next section is going to ruffle a few feathers. These rough categories are my observations having contacted over 12,000 companies of varying sizes and verticals. I do plan on updating this every year and might even do a spinoff of just this section. Misspelled domains – worthless Phonetically incorrect – very little value Branded domain based on the size of the startup.
- Lifestyle Startups – $10 to $500
- Small business startups $100 to $10,000
- Scalable startups $25,000 to $250,000
- Buyable Startups $100,000 to $350,000
- Large company startups $100,000 to $1,000,000
Premium marketing domains will typically be in the $5,000 to $100,000 range depending upon the investment or dollars a company is going to put behind the campaign.
*Domain valuation is higher when they can be utilized to produce higher returns. Companies that have strong growth plans or established successes typically want higher quality domain names to support their brand positioning.
The domain name market is a lot like real estate. They are assets that appreciate in value and provide a competitive advantage for brands. Finding the proper value of a domain is not an easy task.
It takes serious research and an understanding of the market. There is no magic formula. Hopefully, by reviewing these six factors, you will have a better idea what drives the value of a domain. We do provide professional domain appraisal services. Let me know how I can help.