Avoid These Four Common Mistakes When Pricing Domains

Follow this advice when pricing a domain name and you will be well on your way to successful investing. These tips will seem like common sense to industry veterans, but I’ve found myself repeating them on the forums a lot recently so I thought it was time for a refresher course.

Mistake 1: Not Understanding the Types of Comps

We track two types of sales: wholesale and retail. Wholesale sales are to domain investors like yourself, and retail sales are to end user buyers. I estimate that wholesale represents about 75% of our records in terms of quantity and about 30% in terms of dollar volume.

When searching for comparable sales to price a domain name it is extremely important to distinguish between the two.

Why it Matters

The price points are very different. Retail sales are generally 10x higher than wholesale give or take. If you research comps for a purchase and most of them are retail, but you don’t recognize them as retail and divide by 10 to determine your price range, then you’ll be drastically overpaying and you won’t be able to liquidate if the need arises.

Retail sales are much less predictable than wholesale ones and can be all over the map. They often depend more on who the buyer and seller was and their respective financial positions than the domain name itself.  They have little predictive value unless there are a lot of them in a pretty tight range.

It is dangerous to determine what you should pay on the wholesale market based on retail comps. Don’t see a single $80k retail comp and get excited, divide by ten, and be ready to spend $8k on a similar domain. That retail comp was most likely an outlier that you won’t be able to replicate. Use wholesale comps to determine the wholesale price when possible.

How to Tell Them Apart

Looking at the venue can give you a good clue as to the type of comp. A sale at NameJet, DropCatch, 4.cn, Park.io, and SnapNames is almost always wholesale. A comp from GoDaddy or Flippa is most likely wholesale, but they do have a few retail sales mixed in. A transaction at Sedo is most likely retail, but they do have some wholesale mixed in from their auction platform. One at Uniregistry will almost always be retail.

If you’re unsure about a particular venue you can search just that venue with no other fields to try to get a sense of the types of sales they produce.

And obviously look at the prices of all the comps as a whole. If you see several dozen close comps in the mid $xxx range, and two in the mid $x,xxx range, it should be pretty obvious that those two were outlier retail sales and the rest were probably wholesale.

Repeat your searches sorting by price ascending to see the likely wholesale numbers. Then sort by price descending to make the retail ones jump out.

Mistake 2: Ignoring Sales Velocity

I alluded to this a bit in the previous section with the example of the single $80k comp; the number of records we have for a given search is very important.

Sample Size and Liquidity

The more comps there are the more comfortable you can feel in the valuation; if there are dozens of comps in the mid $x,xxx range you can be pretty certain the domain is worth mid $x,xxx. And the converse is also true, if there are only a couple of close comps the predictive value goes down.

Sample size isn’t just about statistics though, it also speaks to liquidity which is a big component of value. A dozen wholesale comps at the mid $xxx range probably does give you a strong idea of value. However, it should be a red flag because the domain isn’t very liquid and might require a long hold.

This lack of liquidity is probably already priced into the comps. But you still have to consider whether or not you want to lock up funds on a domain that isn’t in demand even if you’re buying it at a fair price.

How Fast is Fast

It depends on what you’re searching for. Let’s say you are considering the purchase of a [Geo][Keyword].com domain. You can search on our site and see that there are 13.5k sales of this category. Now let’s search for [Geo]News.com domains; we see that there are 169 which is pretty high considering how many keywords are relevant to Geo domains. A search for [Geo]Hotels.com has 82 results; also pretty solid.

But the domain you’re considering is [Geo]Flowers.com which only has 20 results, that should be a warning that this is probably not a good investment unless the Geo aspect is extremely strong. Searching for [Geo]Flowers.com domains in a vacuum and seeing 20 results doesn’t tell you much, but you know that is low because of the other searches you performed.

You have to also consider the category of domain to determine what the velocity is telling you, if anything. There are very few sales of LL.com and NNN.com domains for example, but they are still very liquid and valuable. You have to use common sense on this.

Mistake 3: Respecting Your Elders

I’m talking about giving too much weight to the age of a domain name. This is a controversial topic that probably warrants its own article, but I’ll try to cover it here because it is such a common mistake.

Most Good Domains are Aged

It’s true that age is a great proxy for quality and is a useful way to sort drop lists. That said, it is not something that makes a domain name valuable. There are two reasons this mistake has become so common.

The most obvious is that because most gTLDs were available on a first-come-first-served basis and not premium priced, the best ones were registered first. I could tell you without looking and with near 100% certainty that CarInsurance.com is older than CarInsuranceQuotes.com based on value.

What I really said is that it is older because it is more valuable. I didn’t say it is more valuable because it is older.

That sounds like semantics but it is an important distinction. I can go to ExpiredDomains.net, sort the drop list by oldest first, and find a hundred garbage domains that are more than 15 years old. They’re still garbage even though they are old. Most good domains were taken decades ago, but a lot of bad ones were too.

The SEO Argument

The other reason people have attributed value to age is for SEO value. It used to be a common belief that search engines would give preference to websites built on aged domains. Matt Cutts refuted that more than seven years ago and clearly stated that what matters is how long the site has been up and how long it has been receiving back links, not the WHOIS creation date.

You might argue that aged domains are more likely to have inbound links, which can be true. But why use a proxy for inbound links when you can get the exact number yourself? There are plenty of fairly recent registrations with a lot of back links, and plenty of aged domains with zero. If your goal is to benefit from back links just find out exactly how many it has.

Mistake 4: Selling Yourself as the Buyer

We all like to find steals and dream of huge flips, but you can’t let your emotions cloud your judgement. As soon as you start trying to sell yourself on a domain that you’re considering purchasing, you’ve already lost. It’s easy to find high comps and ignore the low ones, or see an aged domain, and get carried away.

Flip the script and try hard to convince yourself why the domain is bad and why you shouldn’t buy it. Look for low comps, low velocity, failing the radio test, few end users, not registered in many extensions, etc.

Then after doing your best to walk away, if you still want the name it is probably a solid investment. Or at least your next pet project that you’ll never get around to building 🙂

I hope these tips help you avoid the common mistakes that new domain investors make.

3 thoughts on “Avoid These Four Common Mistakes When Pricing Domains

  • By Uknowledge - Reply

    Thanks Michael,
    This is the way to look at it and avoid all the errors. Domainers get carried away still without reading and taking advise.

  • By Logan Flatt - Reply

    Excellent post, Michael. Lots of valuable nuggets for new and experienced domain investors alike.

  • By Vijayakumar Kannan - Reply

    Great insights and valuable , Thanks for sharing Michael 🙂

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