The Art of Domain Appraisal & Web site Valuation:
It is certainly a very interesting subject. It is also one of the
most challenging subjects for those having interest in buying or
selling of domain names. For those of us who have a serious, long-term business
interest in Domain Name industry, this is certainly an extremely
important, often controversial and hotly debated topic.
An Industry in Constant Flux
Like most Internet business sectors, the Domain Industry is constantly in flux.
Domain aftermarket, in particular, is going through many interesting changes.
Shortage of domain names, Dot Com boom and the bubble burst thereafter,
the general state of the world, national and regional economy, release of new
top level domain extensions, etc., have had a direct and often unpredictable
influence over the Domain name industry.
How is it done these days?
The short answer is, very few people really know how to do a moderately decent job
when it comes to domain name appraisal. Domain appraisal is still a highly
subjective matter, a moving target.
The long answer is as follows:
Domain name appraisal is still more of an art than a science. There are many
self-professed domain appraisal experts out there -with each one
having formulated/honed his/her own special cryptic formula.
The funny thing is, if we were to lock up a bunch of those domain appraisers
in separate rooms, and give them a domain to appraise, they would all
come up with wildly differing estimates. I bet the numbers will be
so widely dispersed, we won't be able to curve-fit those price-points even on a
logarithmic scale chart. Of course, there are a few good domain appraisers out there
that usually come up with reasonable projections most of the time.
However, most of the domain appraisals that one can buy these days are not
worth the piece of paper they are printed on.
No, we are not trying to put any body down here. There is no denying that this
is indeed a difficult task. All we are trying to do is give you a matter-of-fact
background, a view form the inside, on the current state of this brand new industry
that seems to be competing neck-and-neck with Tarrot Card Readers and mystic Fortune
Tellers in terms of accuracy. This is not to put any body down, really. However,
if we were to paint a picture that is any better than the above, it would amount
to gross misrepresentation of the facts.
Here are some of the factors that are most commonly examined:
- Length of the domain name,
- Number of words in the domain name,
- Domain extension (.com, .net, .org, .us, etc.),
- Potential usage,
- Linguistic & Phonological features,
- Typing error sensitivity,
- Legal implications (Trademark issues, etc.),
- Geographic/Regional usability,
- Actual sales history for similar domains,
- Link popularity,
- Keyword density,
- Special characters, Punctuation marks, etc.,
- Typed-in traffic, if any,
- Site content, if any,
- Site traffic, if any,
- Site membership, if any,
- Site track record, if any,
.
.
.
- and Appraiser's own experience, aka secret sauce!
Now this does look like a list of pretty relevant criteria. These factors must,
of course, be examined while trying to gauge value of a domain name. However,
there are still a few missing links that relate to some of the most difficult
aspects of domain name valuation.
Domain Appraisal & Website Valuation -- The Missing Links:
There are a few other dimensions to the "variables" listed above. The missing links
involve issues that are not only complex, they are often very difficult to gauge.
Let us look at two such extremely important factors. They are "Temporal," and
"Market Temperament" indicators that must be included in the equation.
It is these kinds of far-reaching -and often difficult to quantify -factors that
pose the most difficulties to an appraiser.
Value of a domain name is very time sensitive. A domain that is appraised today
for only $100 could have buyers next month that are willing to spend tens of
thousands of dollars, with the reverse also being equally probable. We all remember
that it was not too long ago that any thing that had a Dot Com in it was considered
a gold mine. Times have changed! That is a classic case of Temporal components
at work! Similarly, market conditions greatly affect the value of a domain name.
Just like the stock market, creation/retention of the value that a domain is "
appraised to have" is not just a matter of supply and demand. Consumer confidence
level, overall state of the target market, irrational exuberance or the
absence thereof, as well as external factors such as political stability or
lack thereof, war, etc., influence the true (effective) valuation of a domain
name any given time.
If it's so complicated, what about those Domain Appraisal Vending Machines?
You might have seen some of those Appraisal Vending Machines on the web!
They seem to be so easy to operate! All you need to do is type in the domain name
and put in the coins (your credit card number, actually). Within a second or two,
it emails you a nice looking auto-generated PDF file, often containing an appraisal
that is as real as my beach-front property in Kansas City. Some of those vending
machines now delay the outbound email for few hours in an attempt to make it look
like appraisal of your domain name was a real challenge for that Appraisal Vending
Machine! Often the only thing real about those appraisals is the charge on your
credit card!
Considering the many complex factors that must be considered while estimating a
domain's intrinsic value, it is not feasible to simply enter a bunch of equations
or macros in a spreadsheet, or write a simple script (like the ones that often
auctions for around $4.99 on eBay) that allows the user to type in the domain name
and then receive an accurate or realistic estimate of that domain's true value.
This is not as simple as solving a linear equation with a few variables.
How do we do Domain Name Appraisals & Website Valuations at SlashRoot.Com?
We at SlashRoot.Com take a radically different approach. The value of a domain, as
far as we are concerned, is what the market can bear at a given time, under
given market conditions.
No, we can't take credit for this proven and time tested concept! It is being used
by every business/products/service provider, every single day. For example, multinational
publishers (print, music, etc.) have always "adjusted" the retail
price of their goods depending on the demographics. A publisher that sells a book in
US for $40, often sells it for $5 in developing countries. If you believe the latest
Harry Potter book sells for $30 in Nigeria, I got $42.6million in cash waiting for you! ;)
The same concept applies to domain names. For example, a five letter .Com domain
name that is the name of a city in an underdeveloped country may have far less intrinsic
value than, say, Miami.Com. We call this localization and temporal allowances. Therefore,
after having considered "standard" factors such as the ones listed earlier, we apply
additional "correctional" allowances, and jot down the estimated appraised value
(so adjusted) of a domain name.
Then we estimate the value from a completely different path. We re-estimate a domain's worth
from our buyers' perspective. We look at the target industry, potential usage, as well as
current economic indicators from the end users' perspective, and calculate the break-even
points for different appraised value levels. Finally, we arrive at an ROI that works
from the buyers' perspective. Often the results so obtained are very different than
the valuation obtained using the first method.
We compare the results of these two entirely different valuation paths,
and note where both of those domain valuation curves intersect.
We then look at the results of the above exercise, factor in our own costs (fixed as well as
variable costs), and then map it to our own cash flow projections. The appraised values so
adjusted are the ones we use when we price various domains listed for sale at SlashRoot.Com.
This detailed, formal approach to domain appraisal helps us arrive at a more practical,
realistic estimate of a domain's true intrinsic value that is valid for a specific
time frame, adjusted for the prevailing market conditions.
The down side is, our
domain valuation model is yet to show us a six figure appraisal for our domains!
Wouldn't that be nice? Sure, but having been involved in engineering ventures from a
time that predates both Netscape and Internet Explorer, we prefer real
number crunching over buying into those mushy, fuzzy, made-up, inflated,
imaginary numbers. Kind of old fashioned, but it has always worked for us!
If this sounds a bit complicated, it is. However, we have found that this two-pronged
formal approach to domain name valuation produces far better results -- especially from
the buyers' perspective.
By no means we wish to imply here that we do all this detailed analysis for every domain name
that we have listed for sale at SlashRoot.Com. For many of our domain names, we look for
only a marginal profit. We turn around quite a few of those "marginal profit" type
of domains on a regular basis to cover most of our costs. It is only for those really
precious generic names that we go through all of this rocket-science.
Do you provide Appraisal Services for third party domains and websites?
Yes, we do provide formal domain appraisal services, but only for premium quality domains and websites.
For most domain names and websites, it is not cost effective to go through all that number crunching
and detailed market analysis. Technically speaking, it is a no-brainer to whip up a script and setup
our own fancy little "Domain Appraisal Vending Machine," but we do not feel
comfortable in taking other people's money to provide them a "cookie-cutter" appraisal.
Therefore, we limit our domain appraisal services to high end domains and websites that warrant
detailed professional analysis of its intrinsic value. If you own one of those premium
domains or a well-established website, we would be glad to appraise it for you. Let us know!
We would love to hear from you if you have
any questions or thoughts that you would like to share with us on this very interesting subject.
Email us, if you
would like to link to this article.
