The Proper Price for a Domain, Part 5: It's Payback Time | #17 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 article 15 (step 6a), I showed that your estimation of the financial value of a domain name for your business should be based not on projected domain-derived revenue, but on projected domain-derived profit.?Then in the last article (step 6b), I showed how to estimate this additional profit.

Now we continue slogging our way towards estimating the worth of a domain for your company, or the maximum you should be prepared to pay for it. We're still looking at it just from a time-limited, money-based perspective, because (a) that at least sets a minimum maximum, and (b) it's a necessary foundation for a more comprehensive evaluation.(1)

So let's go. It's payback time.

7) Calculate 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.(2)

Finally, extend your projected per-sale and total domain-derived profit forward several years, by applying the results of this analysis (step 6b, article 16) to your calculations in steps 4 and 5 (article 14).

• This will allow an estimate of the payback period for any specified purchase price, i.e. the length of time from the date of purchase to cumulative breakeven, when the cumulative profit equals the purchase price.(3)
• This in turn will give you an idea of the narrowly conceived and time-limited potential financial value of the domain for your company, based on the ongoing and cumulative domain-derived profit over time.?

Recall once more that a domain can only pay for itself from the profit it generates. We can assume for this analysis that until the domain has paid for itself, all the profit it generates is effectively allocated to that end. Then the point at which the cumulative profit equals the purchase price (ignoring interest, inflation, etc.) is cumulative breakeven, and the length of time to get there is the payback period.(4)

Cumulative profit is a function of time, and of profit per month. Profit per month is a function of profit per sale (step 6b, this article) and sales per month (step 4, article 14), projected over time (step 5, article 14). The specific time value we're interested in is the payback period.

At this point in our analysis, the payback period is an unknown which, as we've just said, depends on two knowns (estimated in steps 4, 5 and 6b), domain-derived profit-per-sale and sales-per-month.

Now we can calculate the payback period. Simply chart the cumulative profit forward over time from the assumed purchase date, allowing for the anticipated delay between purchase and deployment.(5) Then the period from the purchase date to any subsequent point in time is the payback period, if the purchase price equals the cumulative profit up to that point.

In other words, the chart of cumulative profit versus time is also a chart of purchase price versus payback period.

Therefore we can say:

• If you specify a maximum acceptable payback period, and make that your criterion for justifying a marketing asset investment, then paying any price for the domain less than the estimated cumulative profit at that length of time after purchase will be justified by this analysis.
• The projected cumulative profit at the maximum acceptable payback period is your 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.

But should you actually be prepared to consider paying more than that amount??Yes, you should! That's the subject of the next article.

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(1) By 'minimum maximum' I mean the lowest figure at which you should set the worth of the domain to your company, and therefore the lowest figure at which you should set the maximum price you should be prepared to pay for it providing you can afford it. In later steps we'll raise this maximum.

(2) Note the similarity of step 7's objective to the objective of step 6a in article 15. That's because step 6b in article 16 was concerned with calculating profit, the missing step in doing the numbers wrong in the previous article. The whole point of article 15 was that the profit step was missing. To misquote the X-Files, The untruth is out there.

(3) But the effective payback period changes drastically with extended payments, as we'll see in a later article.

(4) From time to time I use the terms effective or effectively. I mean them in a precise technical sense, to designate as if. For example, consider the sentence, "We can assume for this analysis that until the domain has paid for itself, all the profit it generates is effectively allocated to that end." Here I mean that regardless of what you actually do with that money, for these calculations you can proceed as if it all went to paying the purchase price.

Similarly in footnote 3, by effective payback period I mean that with extended payments the impact on the company's?finances is as if the time to reach cumulative breakeven is quite different. (In fact it's shorter, even though the time to actual cumulative breakeven may be longer.)

(5) You can make this very complicated by assuming a multi-stage progressive deployment extended over time, with deployment effects (domain-derived sales, revenue, profit) both lagging after deployment and compounding over time. That may be the most realistic scenario, but I suggest simplifying it as much as possible for this analysis. Compress it into a single full deployment date with instant full effects, or as close to that as you can without abandoning any semblance of reality altogether.