The Proper Price for a Domain, Part 4: What Shall It Profit You? | #16 in Series: What Businesses Need to Know about Domaining

In this series I address people running a business or organization of any size, from entrepreneurs to the whole C-Suite, as well as Business Development, Marketing, Sales, Finance and IT. But I welcome all readers, including of course domainers.?Series Table of Contents

In my 14th article, "The Proper Price for a Domain, Part 2: Generating the Basic Numbers," I showed how to continue your analysis of what a specific domain can do for you, by generating projected performance numbers for it. We covered steps 3, 4 & 5 in the evaluation process.

Then in my last article (#15), I showed a way to do the next step wrong (step 6a), because the dangerous principle I used as an example was actually out there on at least one domainer's sites.(1)* It's important to contrast the right way with the wrong way. So now let's do the next step 6 right (step 6b).

In article #14, step 5, you generated projected performance numbers for a domain you're considering, including projected revenue. But how can you translate those numbers into an estimated value of the domain to your company, or a price you should be prepared to pay for the domain? Step 6 (that is, step 6b) begins that translation.

6b) Estimate the domain-derived per-sale profit, as the next step in translating the numbers from step 5 into an interim money-based price cap, the maximum you should be prepared to pay for the domain based solely on the domain's narrowly conceived and time-limited potential financial value.

In my last article, I said, "A domain can only pay for itself from the profit it generates." But profit is revenue minus expenses, and if the domain is deployed as a website, and featured or targeted in advertising, it will have its own expenses which at this point are unknown.

Profit = Revenue - Expenses = Revenue - Unknown = Unknown

So to estimate the domain's profit, we need to get a handle on its expenses.

Each sale, whether derived from the new domain or not, will have associated costs that have nothing to do with the domain: both fixed costs (overhead) and marginal costs (deriving from the sale itself). These costs don't derive from the domain, but in the case of domain-derived sales they'll decrease the profit from the domain.(2)

Unless you have reason to believe these costs will change, or will be different for domain-derived sales from your other (current) sales, you can assume for this analysis that they'll be the same for domain-derived sales.(3)

This means the average per-sale profit from domain-derived sales will be the same as your current average per-sale profit across all similar current sales, minus costs associated with the domain itself averaged across all domain-derived sales.

So if you know your average per-sale profit generally — or more specifically for the product or service categories or brands and/or geographical regions that would pertain to the scope of the new domain — then the only remaining unknowns in estimating the per-sale profit of domain-derived sales are the costs associated with the domain itself, i.e., costs you don't incur now and won't incur if you don't acquire the domain.(4)

There are three cost categories deriving from the domain:

• What you pay for the domain, the purchase price
• Website design, development and maintenance costs
• Advertising and promotional costs of all kinds

At this point in our analysis, we can ignore the purchase price of the domain, whether it's a known fixed price or an unknown bid price, for two reasons:

1. It won't affect the ongoing profit from the domain.(5)
2. Precisely the question we're trying to answer with these calculations is the value of the domain to your business, or how much you should be prepared to pay for it if your can afford it, i.e., the maximum acceptable price. That's independent of the actual price you'd need to pay for the domain.?Since price is the variable to be solved for, we don't need it as in input in the calculations — it's the output.

So now we're down to two domain-associated cost categories to consider:

• Website design, development and maintenance costs
• Advertising and promotional costs of all kinds

How can you calculate those in advance? You can't. And you don't have to.

Or more precisely, you don't have to calculate them independently. And taken as a bundle, you can ignore them.?Here's why.

• The platforms and services you use for domain deployment will vary with the size of your company. But most companies should be able to keep web design, development and maintenance costs so low they're negligible in relation to the domain purchase price — unless that price is so low you should skip this analysis and just buy the domain — by utilizing off-the-shelf components such as WordPress plugins, and perhaps also low-cost freelance digital marketing services.(6)
• With the low cost sophisticated ad tracking and testing capabilities now available, there is no excuse for running promotions that don't deliver a strong ROI — certainly an ROI more than high enough to cover their own costs plus the web design, development and maintenance costs.
• Therefore, the combination of website costs and promotional costs can be dropped from consideration, since with effective ad management the combination should add to, rather than subtract from, the revenue from the domain and therefore the profit. In other words, you can consider the combination to be equal to zero, confident that if you're doing things right, the error this introduces into the calculations will actually make your projections more conservative. (7,8)
• You won't buy the domain if you expect it to be a dud. You'll only buy it if you believe it can really deliver for you. And the more you pay for it, the more determined you'll be to deploy it aggressively and effectively (including advertising) in order to both justify and benefit from the investment.?That will help ensure that deployment costs are erased by the deployment results, leaving only additional profit.
• Web design, development and maintenance costs may depend somewhat on how aggressively you want to deploy the domain, which might be related strategically to how much you pay for the domain — but there's no necessary relationship between these costs and the purchase price.?Deployment costs can be the same for a $10 domain and a $10 million domain.
• The more you're prepared to pay for the domain, the higher your revenue projections for it will be, because if the revenue projections aren't high enough to justify the purchase, you won't buy the domain.
• Since there's no necessary relationship between deployment costs and the purchase price, and since a higher price means higher revenue projections (as we've just seen), it's likely that a higher price means a higher ratio of revenue to deployment costs, and hence less relevance of deployment costs in calculating profit, even apart from the fact that your advertising should more than pay for itself and deployment.
• Therefore, the higher the purchase price is — and hence the more important this analysis is to your decision — the less relevant the deployment costs are.
• Bottom line: If the price is high enough that to make a purchase decision you really need to estimate the ongoing per-sale profit of domain-derived sales, then with skillful deployment you should be able to safely ignore the domain deployment costs in calculating that profit.

Earlier, we said there were two domain-associated costs to consider:

• Web design, development and maintenance costs
• Advertising and promotional costs of all kinds

We've just eliminated both of those from consideration in estimating the ongoing profit from the domain.

Therefore, the only costs to consider in estimating the domain-derived profit are the same costs for the sales you make now.?These are:

• Marginal costs that are approximately proportional to sales volume
• Fixed costs (overhead) that are independent of sales volume

Based on our analysis above, you can assume that the marginal costs for domain-derived sales will be the same as for your current sales.(3)

As for fixed costs, if the domain-derived sales do not require additional capital investment, e.g. for expanded production capacity to service increased demand, then the additional sales volume derived from the domain will dilute the per-sale allocation of those costs by a factor equal to the ratio of (current sales) to (current sales + domain-derived sales), thus decreasing the total per-sale costs for domain-derived sales and other sales.

Therefore, the per-sale profit from domain-derived sales will be at least as great as the per-sale profit from your current sales, and you are being conservative in using the latter in your calculations as the per-sale profit from domain-derived sales.(4)

This may seem like a rather trivial conclusion: Just figure the profit for domain-derived sales to be the same as for your current sales. But it's actually huge, for two reasons.

1. It's not at all obvious. As we've just seen, getting there takes sophisticated analysis with carefully considered assumptions — and assumptions not carefully considered can be dangerous!
2. It positions us to estimate the payback period of the domain, which is critical in determining an acceptable purchase price.

We'll do that in the next article.

(Like this article? 'Like' it! Have a question or comment? Comment! Think it's worth sharing? Share it! Thanks! - Keith)

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* When I started the series, I didn't realize how many footnotes I'd sometimes pile up, so I used strings of asterisks. Now I'm switching to numbers in parentheses.

(1) Immediately after publishing article #15, I sent it to the owner of the sites I found which employed the dangerous principle I discussed therein, the principle which I dissected and I think effectively destroyed in that article.

The site owner thanked me. The sites have not changed. If I credit the site owner with honesty, integrity and good intentions — and with honoring the 'golden rule,' or at least the principle, first do no harm — then the domainer must disagree with my analysis, and still think the percent of anticipated additional annual revenue principle makes sense.

So, is that principle a good investment guideline after all??Did I get it all wrong? This is precisely why it's important that you understand the numbers and the analysis.?It's not a question of authority. (You should assume I have none.) It's a matter of logic.

Guidelines can guide you right, or guide you wrong. If you don't really understand what's happening with the numbers, you're very vulnerable.

(2) I'll use the term domain-derived sales to mean sales you expect to make based on your deployment of the new domain, which you would not have made otherwise — i.e., additional sales because of the domain.

(3) If you expect specific changes or differences, adjust for them regarding the domain. In particular, if you expect the domain to be used only for a subset of you total offerings — e.g., for a specific brand among many brands you carry — then in your calculations for the domain, use the average per-sale profit for that subset of your offerings, rather than the average profit for all sales.

(4) An exception is if this domain would be replacing another domain you already deploy. Then you'd need to compare the anticipated difference in revenue generation between the two domains against the anticipated difference in costs.

(5) An exception may be if you arrange extended payments for the domain, which I'll cover in a future article.

(6) Be sure to do due diligence selecting plugins and freelance digital marketing services. The advantage of these is the dramatic cost reduction they provide for a huge range of functionality and services. But this comes with a drastic decrease in consistency, compatibility, quality and reliability across products and providers. Some you can count on. Some you can't.

For WordPress plugins, try to find a single, well-established, highly rated provider with a coordinated suite of widely used plugins (and/or themes) that offer the full range of functionality you anticipate needing. Short of that, try to go with as few providers and plugins as possible. The more plugins and providers, the more probable problems. Consider a site management service, often offered by the host.

As for digital marketing services, research the pros and cons of agencies vs. freelance marketplaces vs. independent contractors vs. in-house employees, as well as the pros and cons of specific providers within each category. Ask Google. Google knows.

(7) This makes ROI a meaningless measure for domain acquisitions. Since good advertising will more than pay for itself plus the deployment costs, we can consider that cost combination to be zero. Then if we include the purchase price as a cost in the ROI equation, the ROI is solely a function of time, and if we don't include the price, the ROI is infinite. Ongoing profit and payback period are both meaningful measures; ROI is not.

(8) Be ?careful not to inadvertently 'double-book' your advertising response, including in your profit the same dollars you use to pay the website and advertising costs. That would skew your calculations away from conservative, and towards overoptimistic. Not good.