DOMAIN VALUATION STANDARDS

What is your website or domain name worth and is it priced right?

May 3, 2012

There are many opinions about how to accurately value a domain or it's website. This subject has been the source of much debate ever since the first major domain transaction occurred in the late 90’s with Business.com selling in the aftermarket for $150,000.00. The news was responsible for launching a new industry and the domain hysteria began. Unfortunately, the opportunity was much easier to participate in than it was to research, and still is.

Improving Website and Domain Valuation Standards

This lack of information combined with the vast number of very different people participating has created little consensus, even today. It has also allowed a small group of domain brokers, resellers and registrars to control the majority of transactions and a growing part of the aftermarket. This is a common and unfortunate occurrence in our damaged economic system. Without the time, resources or support to change this massive flaw, we will refrain from digging too deep here in the interest of sanity.

Thankfully though, it is within our means, to attempt some transparency and improve the overall standards by which all domains are judged.

When you try to estimate the value of something, whether it is a domain name, a website, a house, or a company it is important to know that there is never a guarantee of accuracy. Prices can swing wildly from one transaction to the next in any market at any time. A good example of this is the last several years of the housing, stock and foreign exchange markets. So there is no magic to domain appraisals, it is an educated guess based on good information. The better your information, the more accurate the estimated worth of your website will be.

With that said, let’s attempt to evaluate the domain market and the standards by which one should use to put a value on their website domain.

The first and most obvious standard one can use is historical transactions or more commonly known as a relative valuation. The domain market is sufficiently old enough to provide a wealth of guidance. The price that a specific domain or website sold for in the past will affect not only its own worth in the future, but also the worth of similar websites as well. This method is used regularly in housing and other mature markets. It is also the one in which most domainers use to estimate the asking price of their domains.

Despite the large number of transactions available for comparison, buyers and sellers are still having difficulty agreeing on fair market values. One common complaint buyers have is the absence of any earnings data often accompanied by what they feel are unfounded asking prices. Sellers, on the other hand, have no trouble connecting historical domain transactions with their offers regardless of whether they have little or no earnings data to speak of. This difference in perspective is the reason so many good domains sit idle and unsold.

It is an assets ability to generate earnings, profit or interest that investors seek religiously. So they will often use one or more comparative multiples to evaluate an asset and its relative worth based on similar performance metrics. Domains fall into two categories here. Undeveloped, a domain is an asset capable of profit through resale or potential earnings through development of a website, however, quantifying potential earnings is difficult without comparable data from similar developed websites. The majority of stale inventory listed in the aftermarket consists of these types of domains.

Developed, however, a domain is a business with performance data capable of being measured. In this situation, the seller may market the domain as an asset or a business. Regardless of how the seller chooses to market the domain, the buyer will likely focus on the performance data for negotiation purposes and determining the worth of the website. Arguing this is the most reasonable way to predict a websites value, they will base their offer on this valuation analysis. Often, the buyer is only ever interested in valuations which are based on past earnings of a website, and they fail to distinguish between developed websites and undeveloped domains when estimating the value of a specific website or a domain. This failure is why they are consistently under-valuing undeveloped domains.

It is not necessary for us to discuss the proper valuation of an ongoing business, as that has been well established. We are interested in the many high quality, undeveloped and unsold domains currently on the market where the spread between bid and ask is so large you could drive a fleet of trucks through it. There are a number of factors at play which has created this current market imbalance, many of which have nothing to do with website/domain valuation issues.

Most of these factors are related to the many barriers of entry into the much broader World Wide Web marketplace. When you consider all that is involved in getting a fully functioning website developed, live and running properly, it is amazing that there is any real demand for domains in the first place. Additionally, that doesn’t even factor in the much more difficult task of making the website successful, which is infinitely more difficult than the launch itself and directly related to the grip that the three most popular search engines have on web traffic.

The SEO industry is easily the most influential and costly barrier to entry affecting the growth of the web today. The control of traffic is big business and is currently in the hands of the largest and most powerful internet corporations.

The demand impediment is complimented by the less influential, but still important supply factor. Unlike the web development obstacles, domain registration is a much lower bar to hurdle, which many obviously have. There are countless domains listed in the aftermarket, most of which, are not worth the registration fee. Add to this, the endless supply of unregistered domains available in numerous TLD's that ICANN continues to expand on, and you can see how a good quality domain with real value can easily get lost.

So, the market now consists of many interested buyers struggling to make their way through the web development maze and many more uneducated sellers waiting for them at the other end. This describes the bulk of the market, where nothing is getting accomplished.

Meanwhile the registrars, hosts and SEO companies squat at the margin of this massive wasteland feeding off the confusion rippling out from the center of it all. The foundation of their business is built on providing a long list of useless services dedicated to nothing more than separating the masses from their money.

The problems are far easier to identify than are the solutions, and that is not to say that the problems are, in fact, easy to identify.

Regarding the value gap between buyers and sellers. It seems obvious that this is a problem for the seller to overcome. For, without a compliant buyer, the undeveloped domain quickly transforms from an asset into a liability. Without pursuing the many web development options available, a seller must find a way to separate their domain from the sea of others. The best way to do this is through accurate valuation, competitive pricing and aggressive marketing.

If the seller can't identify, quantify and justify the domain value, a sale will only occur rarely and by accident. Refer to the Domain Value section of our Acquisition article to educate yourself about the standards used by professional domain appraisers. This will help you to determine the true value of your domain and then you will be able to better convince buyers that your asking price is of fair value.