Since every domain name transaction is unique, it’s very difficult to give advice that will be beneficial to a specific deal. Here are some general pointers that should help novice investors tiptoe around some of the pitfalls of domain investing.
#1 Waiting for Bigger Fish in the Sea
The scenario: a potential buyer emails you what appears to be an almost insultingly low offer for a domain name in your portfolio (e.g. $100.) It may be very tempting to simply delete the offer or to fire back a terse email saying “The minimum offer on this name is $x thousand”. After all, a buyer with deeper pockets is bound to come along eventually…right?
Before rejecting any offer, no matter how insignificant it may seem, think about the answers to the following questions:
- A) How long have you owned the domain?
- B) During that time, how many offers have you received on it?
- C) How much was the highest offer?
- D) How frequently do you get offers on that domain?
- E) Does the domain pay for itself with dividends (see the section on domain monetization)?
You may see the transaction in a different light once you’ve had a chance to consider the big picture. For instance, a domain that you have owned for 3 years and which has received no unsolicited offers before now is hardly a hot sales proposition. Perhaps it’s worth taking the $100 (or trying to squeeze the transaction up to $150 or so) and writing off that particular investment with a narrow profit margin.
#2 Comparing Today’s Offers to Yesterday’s
Domain name offers are discrete events. In other words, an offer made by one party has no influence on the likelihood of receiving offers from other parties.
A common trap that many domain investors fall into is the assumption that a given offer will automatically repeat itself. For instance, a domain may have received an offer of $2,000 18 months ago, but today a potential buyer is offering just $500. The problem is that the market 18 months ago was completely different from the market now and the market in 18 months will be different still. Holding on for an ever-higher offer when the grass is getting less green in the domain name field with every passing day is not particularly advisable.
#3 Thinking a Domain Sells Itself
It’s a typical novice mistake: “I’ll register a few domains, and buyers will be lining up to buy them from me.”
For starters, the buyers won’t likely be lining up. The domain market just isn’t that simple. However, an equally fundamental point is this: how are they going to know the domain name is for sale? Novices often do nothing with their domains, leaving them unresolved (not pointing to anything) or pointing to the homepage of the Registrar they used to buy it.
It takes just a few minutes to put together a simple one-page site saying that a particular domain name is for sale. That way, people typing in the domain to see what is there will know it’s available on the secondary market. Of course, you can also incorporate affiliate links and PPC search engine links on that page to monetize the traffic (see the section on domain monetization).
#4 Hiding from Possible Buyers
When you register a domain name with the intent to resell it later, it’s important to make it as easy as possible for potential buyers to get in touch with you. That’s why the information you enter in the domain’s whois record is so important. If you enter an incorrect telephone number or an email address that you never check, you will never hear from the majority of buyers. Unless you own the next “business.com”, potential buyers are not going to go to extreme efforts to contact a hard-to-find domain name owner.
#5 Getting Excited Over Breaking Even
If you feel a sense of satisfaction, or even relief, when you manage to sell just enough domains in a given year to pay for the renewals on the rest of your portfolio, you may need to rethink your strategy.
If you’re buying and selling domain names as an investment, it’s important to always focus on making a profit from your portfolio, after all, that is the goal of any investment. If you’re only breaking even, you’ve gone through a lot of trouble and effort and, at the end of the day, made no money, which is not exactly an exciting business proposition when looked at in an objective way.
#6 Seeing Double the Money
Be very careful about overpaying for domains. If you see a domain on the market for $500 that you feel confident you can resell for $1000, you should probably just walk away from that domain.
Domains are so incredibly hard to sell that there has to be a clear profit margin of many multiples of your original investment. This is especially relevant in the case of secondary purchases; if you’re registering new domains, you’ve only lost the small registration fee on a bad domain. However, a domain purchased on the secondary market for $200 is a much larger loss if it doesn’t pay off. This is why it’s necessary to hunt for the real hidden gems: the $500 name that should fetch $5,000 or more (or the $200 name that should fetch $1,000 or more, etc.)
The higher the potential profit margin that comes built into the deal, the more you can allow yourself to experiment, diversify, and make mistakes. If the best you can do is double your money on a domain name sale, you would have to sell half of your entire portfolio just to break even.
#7 Not Diversifying
There is no “rule” dictating how investors should set out to make money from domain names. Some people content themselves with scooping up large numbers of new domain registrations and counting on their skills in selecting marketable names to seek out a small average profit per name (e.g. registering many names for $10 or less that will sell for $50). Other investors hold out for larger prizes with the potential of greater payoffs. Both methods can pay off, but diversifying your portfolio to take advantage of many different approaches increases your likelihood of making a profit.
#8 Betting Money on Credit
It’s incredibly important that you don’t get trapped in a cycle of “betting” that the next domain name registration will wipe out your losses. Many people have become trapped in a cycle of registrations, gradually sinking further into debt as they continue to search for the one domain sale that will help them break even.
In short, only invest money that you can afford to lose. For every success story, there are dozens of people who have lost money, often significant amounts, betting on domain names.
Now let’s look at different ways of using your investment to make money in the domain monetization section of this guide.
Some Rules For Choosing The Right Domain Names For Investment (Domain Name Investment)
Domain names are being registered at such an enormous rate that it’s becoming increasingly difficult to come up with good domain names that have not already been snapped up by somebody else. These “Golden Rules” are designed to help shape your creative process in dreaming up new names. However, they are not a recipe for “instant success”. You still have to put thought and effort into coming up with suitable domain names.
Rule #1: Avoid “Clever” or “Joke” Names
A joke that cracks you up when you hear it for the first time after knocking back a few beers with friends may seem funny at the time. However, beyond this threshold the joke rapidly loses its edge with each repetition.
The same can apply to a “clever” domain name. If you’re expecting to use the domain name for years as part of your company’s identity, branding, and promotion, make sure you won’t go red with embarrassment every time you repeat the domain name. One domain name twist that lost its luster almost instantly was beginning a generic word with ‘dot’, as in “dotfactory.com”.
You should also avoid abbreviations and “minimalist” spelling if at all possible. If you buy the domain name “4ever.com” you will be sending free traffic to “forever.com” every time you mention the domain name in conversation or on the radio. You can also expect an endless series of conversations explaining the “clever” spelling. The use of “2″ for “to”, “u” for “you” and other similar shortenings are also best avoided.
Other domainers and webmasters have known this for a long time and they’re not going to buy up your collection of substitution domain names. As a matter of fact, many such names have already been registered and dropped again because of their lack of resale value.
Rule #2: Think Like an Investor…
A good commercial domain name must be able to distinguish itself from the crowd of pretenders. There are several ways to achieve distinction:
Consider the target market
Try to aim your domain name at a specific, but broad, market. Use search tools, such as Google’s Keyword Tool, and other resources to narrow down categories of businesses. Next, try to find domain names that would have clear appeal to such businesses. Focus on a specific sector such as “biotech” or “travel”, for example.
Most of the highest value generic domain names have already been registered, but by using search tools like the Google Keyword Tool, you can narrow categories down and focus more on niches. Lately, there has been a lot of hype talk about the long-tail, which, when it comes to the domain market, would be longer names with keyword phrases, instead of generic one-word names.
Follow trends… or create them
If you’re serious about picking good names and prepared to invest the necessary time, try to follow the latest news and trends on the Internet. Try to see what has staying power and what simply fades away. “Cold fusion” is a great example of the latter from the early 2000’s. For weeks, the media was full of stories about cold fusion, but then they died out. A related incident took place in 2001, when there was a lot of fuss about “Project Ginger”, a predicted life-changing wonder invention. The “Ginger” turned out to be a code-name for the Segway scooter, and most “Ginger” related domains that were registered during the initial media coverage lost their desirability.
Longer term trends include nanotech, plastic chips, genetic engineering and cloning, global communications, etc. None of these is likely to disappear in the next few years, although the popularity of each may fluctuate. And this is just in the technology field, one of thousands of different fields of interest!
Act on a whim
Creativity is not a slave to logic. If you’re hit with a great idea, go for it! Don’t hesitate, have second thoughts, or dither. Considering the sheer number of domains registered every day, it’s not as uncommon as you may think for someone to have the same idea as you and beat you to your choice of domain name. But, don’t put too much money into it. Remember that if it was a good choice, low investments could pay high., but high investments could easily pay nothing.
Rule #3: Buy All The Alternatives to a Domain
When you’ve found a domain name that really clicks, one that you’re going to use for your site or business for years to come, spend a bit of extra money on securing variants of the name. There’s no need to go crazy on alternative extensions (unless you want to), but make sure you at least buy the .com, .net and .org versions of the domain.
Consider registering the singular and plural forms of the domain name, along with the hyphenated version(s) as well. For instance, “EmailAddress.com” and “EmailAddresses.com” but also “Email-Address.com” and “Email-Addresses.com”
As we’ve mentioned in previous articles, you may want to consider registering popular misspellings of your domain name as well. This will help to avoid potential typo-squatting from others in the future.
Basically, when you have a great idea, why let somebody else have a free ride on your tail? For a nominal fee per additional name, you can buy yourself some serious protection.
Rule #4: Don’t Tailgate
On the other side of Rule #3, if you’re a serious domain name buyer, avoid “tailgating” off another domain name unless it has enormous potential. Don’t buy “ABC-DEF.com” if somebody else owns “ABCDEF.com”. While it’s not a misspelling, it’s a variation oftypo-squatting.
As stated several times through this guide, never try to tailgate on a registered trademark or well-known servicemark. For example, Dell filed lawsuits in 2000 against several domain owners who had registered domains with their trademark ‘Dell’ in it, such as DellSolutions.com and DellBackup.com. Be aware that if you register domain names with trademarked terms, you could very easily find yourself with a letter from the trademark owner’s legal department. For more on the legal aspects of domain name ownership, check out our Domain Legal Issues guide.
Rule #5: Don’t Rush – But Don’t Wait
Don’t automatically buy the first domain name you think of. Think some more, sleep on it, and ask your friends for their opinions. Although the supply of domain names is diminishing daily, it’s better to expend more thought at the beginning and save money later. After all, an unmarketable name you’ve decided not to use for yourself is purely a liability.
At the same time, don’t sit on a good idea forever, because “forever” will come soon. Somebody else will stumble upon your idea when you least expect it and, if they react quicker, you’ve lost your chance at that domain name!
Rule #6: Remember the .com Rule
.com is always worth more than any other TLD for the same name. As a matter of fact, most other TLDs don’t even come close to the .com price of a domain name in the aftermarket. However, the smaller price tags on alternative TLDs could make them ideal for someone starting on a low budget.
Don’t be fooled into putting loads of money into second-choice names with an alternative TLD though. A name like computer.com is great. A name like computer.net is good, but not nearly as good as computer.com. But a name like thebestcomputers.org ends up being practically worthless in terms of resale value, unless a fair bit of online marketing is done to earn traffic for the site.
Once you understand all the rules, look at some of the most common mistakes that novices make in the domain industry.
Stock vs. Domain Names (Domain Name Investment)
There are a number of parallels that can be drawn between investing in domain names and investing in the stock market. You can make money from stocks by buying low and selling high and by pocketing the dividend, if any, paid out on the stock during the time you own it.
Similarly, the primary profit in most domain name investments will be unlocked at the time the domain is sold or leased. Even a relatively minor transaction can yield a several thousand percent profit. After all, at $10 a registration, in the case of a new domain, it doesn’t take much to make a profit. At the same time, if the domain name is receiving even a modest stream of targeted traffic, this can be harnessed and turned into an ongoing revenue stream while you wait to complete a transaction for the domain (essentially, this is the “domain dividend” of owning that domain.)
There are also a number of significant differences between stocks and domain names. For instance, there is a well-established market for stocks with firm prices agreed upon by a large number of players – a liquid market in which stocks can generally be bought and sold at any time. The domain name market is far more nebulous, with many players and few rules. It is a highly illiquid market with no guarantees that a particular domain name can sell in any given time frame, or indeed, at all.
The following table compares and contrasts the major features of the stock and domain markets:
|You can make money from stocks by buying low and selling high||You can make money from domains by buying low and selling high|
|You can make money by receiving dividends (if any) on the stocks you own during the time you own them||You can make money from the traffic (if any) arriving at that domain during the time that you own it|
|A single share of stock is generally affordable (though some stocks can cost thousands of dollars)||A single domain is generally affordable (though some domains can cost millions of dollars on the secondary market)|
|All stocks of a given company of a particular class are identical and treated the same by the market||All domain names are UNIQUE|
|There are generally costs associated with the buying and selling of stock||There are generally costs associated with the buying or selling of domains|
|There is generally no cost associated with the ongoing ownership of a particular stock||There is an annual maintenance fee payable on each domain name|
|There is generally a highly liquid secondary market in any given stock (at any time, most stocks can be bought or sold within minutes if the market is open)||The domain name market is highly illiquid – it may take months or years to sell or lease a particular domain… and that’s if it sells at all!|
|Except in the rare case of a company going bankrupt, stock in a particular company always retains some value||Unless a domain can be sold or is producing traffic that can be monetized, it has zero value|
|There is a very well established market for trading stock, with defined players and clear procedures||There is a very chaotic market for domain names, with many players each with conflicting systems and procedures|
|You know the exact value of your stock portfolio at any one time||You have no idea of the value of your domain name portfolio at any one time|
|There is a vast pool of historical data available on transactions in any particular stock||There is no historic data available on transactions for 99.99% of domains (since they have never been resold) and there is very patchy data on any domain name sales|
|All players in the stock market (buyers and sellers active at any particular moment in time) agree very closely on the value of a particular stock||There is no definite value to any domain name – its value is whatever price can be established between buyer and seller at the time of a transaction|
|By diversifying, it’s relatively hard to loseall your money in the stock market if you’re purchasing ordinary stock||Even if you diversify, it’s relatively easy to lose all your money on domain name investments if you purchase the wrong domains|
|It’s very rare to be able to pick stocks that will bring a twenty-fold+ return on investment in a reasonably short time frame||If a domain name sells at all, it is quite common to be able to make back 20-times+ the initial registration cost of that domain|
|You can easily cash out of the stock market at any time (though you may of course have to suffer losses in doing so)||It is very, very difficult to liquidate a large domain portfolio in a hurry – most domains will simply fail to find buyers at any price.|
By now, you should have noticed a pattern emerging. Stocks, while by no means a safe investment, are very low risk when compared to domain name investments.
Domain name investments are ultra-high risk,. They have the potential of a very high return on investment for the right domains, if a buyer can be found, and the prospect of losing the entire value of the investment if one can not. The latter scenario is by farthe more common one as most people buying domain names to resell end up losing much or all of the money they invested.
The next section will provide you with some pointers that will help you stay cash-positive, even as you build up your investment in domain names. But before going into that, take a careful look at some rules for choosing the best domain names for investment.