We are often asked why a domain in the after-market is so expensive compared to registering a new domain name. In the interest of credibility, I’d like to explain the economics of the domaining business model.
No two domains are identical, thus every domain purchase price is unique since every domain in is unique in value. Most domainers however set (or at least maintain internally) an absolute “minimum” price they will consider. Our absolute minimum is $5,000 for example. That does not mean we will sell a specific domain for $5,000, it just means we won’t sell any of our domains below $5,000.
So why might an after-market re-seller insist on a $5K minimum when selling an $8 domain? That may seem like extortion, but the same erroneous logic could apply to charging $10 for a pharmaceutical pill that cost $.02 to make, if you only look at the production cost in a vacuum. If you look at the whole picture of the economic model however, you discover that there are significant other costs behind pharmaceuticals – like the R&D efforts of the thousands of compounds that never make it to market. The key to understanding either business is the understanding of the economics of the business model and pricing model.
We are trying to bring some credibility to the industry of “domaining” which historically does not have a particularly good reputation. The poor reputation is largely due to the early unscrupulous practice of squatting on trademarks, which we do not intentionally do. In attempting to bring credibility to the practice of domain reselling, it is imperative that we also educate customers and potential customers as much as possible on the economics of domain pricing. So let’s examine the typical domain re-seller model.
A typical “domainer” will turn over or sell less than 0.5% of their portfolio each year. In our case have a little over 5,000 domain name, which makes us a small domain portfolio, but we are focused in healthcare so we are fairly large within that market. This means we will typically sell less than 25 domains each year, before paying the renewal fees on the 5,000+ (which when you factor in time, hosting, etc.. it is a small business that costs about $125,000 per year to operate (with a good chunk of that going to renewal fees, the rest is a bare bones part-time operation, hosting, etc…).
As such for a domain business to earn a reasonable profit, the “minimum” sale price must be reasonably high, in order to get your average sale price to a profitable level. While the “stories” of the million dollar domain names proliferate, those purchases, while they occur, are few and far between. The bulk of transactions are smaller deals like one we are discussing. The common thinking among domainers is that a minimum sale price of $5K, will allow for a sustainable portfolio (and that seems to be holding true from our experience as well).
In our example the finances go something like this: 25 sales per year at average of $8K each = $200K revenue, less $125K expenses = $75K profit (about a 1/3 profit margin). Like with pharmaceutical drugs, while a single pill (viewed in a vacuum) seems very expensive vis-a-vis the cost to produce it, that single pill need to pay for the thousands of others that never make it to market… in that respect alone, the domaining business is similar to the pharmaceutical business in that a handful of “saleable” products, pays for a much broader inventory/R&D of “potential” products.
I hope a clearer understanding of the economics helps you understand why we charge the prices we do. If your price is higher, than the average, keep in mind 50% of our sales must be higher than the average for the average to be what it is.
Let me know if you’d like to proceed. If so, I hope you find this to be a reasonable transaction, and find us to be a reasonable domain broker, and will consider referring us to other credible buyers.