The Tripod – Three Foundations for a Solid Domain Business

The downturn in domain parking has hit a lot of domainers hard.   When the economy is doing poorly, end-user sales often dry up.

Domaining is not immune to risks from the larger economy, but a diversified domain business can cushion some of the blow.

A diversified domain business can rely on income from three main business models.  These are domain parking, flipping domains or volume sales of low priced domains, and higher dollar negotiated end-user sales.

Domain parking is nice to have for its steady cash flow. If your parking revenues cover your basic living expenses, then you don’t have to worry about where your next sale is coming from in order to pay the bills, and it can save you from having to liquidate some of your better names at fire-sale prices to come up with needed cash.

The downside to domain parking, as we’ve seen, is if parking revenues drop. The portfolio that was purchased for 5 times revenues, can turn into a portfolio that will take 10 years or longer to recoup the original investment.  That purchase went from being a reasonable investment to digging a huge hole in the domainer’s cash reserves that will take a long time to be refilled.

Flipping domains is another good source of revenue.  It requires hustle, and a lot of effort, to find domains in private hands that can be obtained for less than reseller pricing. But these domains are out there, and the return on investment is usually great, as even if you flip for a small profit the holding period is very short, and by reinvesting your profits in new domains and then flipping them, you can see your pile of cash grow quickly.  Domain flippers can start with, let’s say, $10,000 at the beginning of the year and end the year with $50,000 or $100,000 in profits, if not more. The other great thing about domain flipping is that it isn’t capital-intensive. You don’t have to tie up a lot of cash for a long period of time in domain name inventory. Some domain flippers, if they have good relationships and can trust buyers who are longer-term domain investors, can even pre-sell the domains so there is no risk because they can purchase the name knowing ahead of time that they’ll be able to resell it immediately for a profit.

The downside to domain flipping is that it is time-consuming, and that it can require a lot of effort for not a lot of profit from each individual domain sale.  Hours of sending out domain inquiries, many more hours of negotiating, can result in acquiring one domain that can then be flipped for a $500 or $1000 profit perhaps.   Domain flipping is more like a job, where you are paid by the hour, even though you may get lucky and find some highly profitable domains to resell.   One of the challenges with domain flipping is that often you use your profits to cover your living expenses, so you don’t end the year any richer than when you started.  In addition you also have to pay income tax, at least in many countries, on the profits that you make from flipping the domains. So it is a little bit like running on a treadmill, where you’re going two steps forward, but then one step back after the effect of taxes is taken into account.

As you build a war chest and start buying and flipping higher value names, then the potential for profit is much higher as well, as one domain sale could bring in a $5000 or $10,000 profit when resold.   But the risks are much higher as well. One mistake in overpaying for high-value name where you misjudged the resale value, and you may have to take a quick $10,000 or $20,000 hit that could wipe out much of your profits from the previous few months.

Volume sales of low-priced domains to end-users is a little bit like domain flipping. Instead of selling to domain investors, you sell to end-users, but price the domains cheaply enough that you can sell a good volume of domains.   unlike with domain flipping, you don’t expect to resell all your domains, but your profit margin is also somewhat higher to offset the investment in the domains that don’t sell. This is the business model that BuyDomains has had for many years, and is now opening up to more domain investors as the secondary market distribution channels of Sedo, AfterNIC DLS, GoDaddy, and others expose domain inventory to more end-users.

Holding premium domains as long-term investments for high-end negotiated end user sales is a third business model. It requires a large enough portfolio so that the portfolio will generate several end-user sales per year, which brings in the cash that is required to make this business model work.   The benefits of this business model is that it is largely passive, although you can work with brokers to actively reach out to possible end-users, but the domain investor can focus on other activities, in particular trying to acquire more domains for the portfolio.    This business model takes advantage of the appreciation in the value of domains over the years as the Internet has become an increasingly important sector of the economy. If the value of domains stops appreciating, then this model becomes much less attractive. But it works well when the domain is bought for a low price, then appreciates considerably in value, and then is sold for full value to a motivated end-user, usually for many times the original acquisition cost.  It is also tax efficient, because there isn’t a lot of churn,  and the domain can appreciate in value over the years without being taxed on the increased value along the way.

Usually a domain will need to be sold to end-user for many times the acquisition cost in order to make this model work. This model is very capital intensive, as it requires tying up  large amounts of cash for long periods of time in domains that otherwise don’t generate much revenue.   If it works well,  in this model the appreciation of the domains does the domain owner’s work for him, as the portfolio increases in value simply by being patient. But the risk is that you spend a lot of money buying high-priced domains, using up all your cash, and then wait in vain for an end user buyer to appear. Or if buyers appear but with modest budgets, you may make some sales but not enough to offset the investment and all the other domains that haven’t sold.

The long-term hold model is the opposite of the domain flipping model.  One is passive, the other active.   One is very capital intensive, with the other you can get started with next to no capital.  One has a relatively low ROI on the value of the portfolio as a whole, the other, on an annualized basis, can have a very high ROI of 1000% or more.   The revenue from a long-term hold model is like the return on an investment. The profit from the domain flipping model is more like earning a salary or a commission.

Because I am lazy and got in early enough,  I focus on holding domains long-term.  Because these domains are so illiquid, it is possible to buy them at reseller prices that can be a small fraction of what these domains can sell for to end-users.   As long as enough sales come in to cover living expenses and the replacement cost of the domains that sold, this business model can be sustainable long-term.

I’m most impressed with the domain flippers, many of them young guys who entered the domain industry in the last few years, and through hard work, hustle, and a keen sense for the market value of a wide range of domain names, were able to start with a very modest investment and before long would start outbidding the established players on the highest value domain names.

Over-reliance on one business model can create serious problems for a domainer if that business runs in the trouble. If you can diversify into two or three of the domain related business models described above then it can help you weather a downturn in any one of the businesses, and keep your business intact through the tough times.