What is a domain name actually worth? 

Price does not equal value.

Let's say you've found a domain name that would be useful to your company.  But somebody else already owns it, and they want what seems like a bundle of money for it.  Is their price fair?  Should you pay it?  What is the value of a domain name? 

First, understand that price does not equal value.  A "fresh" domain name — that is, one that's never been registered — can be purchased for just the registration fee, which is often in the $10 range.  But dozens of domains have sold for millions of dollars each.  The price of others can be anywhere in between — often with no relation to what the domain would seem to be worth.  

Clearly, when it comes to domain names, price is no indication of value.  

Appraisals do not equal value.

To help you assess the value of a domain name, there are a number of domain name appraisal services.  Unfortunately, for a domain to support your business, these services are not a help.  They will only mislead you into dangerous, costly mistakes.  It's important to understand why.  

Most already-registered domains are not sold to companies that would use the domain for their business, either as their main company website or to represent a brand or product category.  Rather, they are sold to domain investors ("domainers") in a thriving aftermarket business.  In other words, most registered-domain sales are from one domainer to another.  This is the market served by domain name appraisal services.

Domain investors make money by reselling a domain "up the ladder" to a higher-level domainer, by reselling it to an "end user" for business functions in the buyer's company, or by "monetizing" it — e.g., with ads that may have nothing to do with the domainer's own business.

Therefore, a domain name appraisal attempts to represent the value a domainer could reasonably expect to get by selling the domain to another domainer.  This has very little to do with the difference that possessing the domain and deploying it effectively could mean to your business.

This irrelevance can be strikingly obvious for new domain name types — such as the recently released "country code" domains ending in ".mx" (Mexico) or ".in" (India) — where the market has not matured enough to allow rational valuations even for domainers.

Formulas can be a springboard.

Some attempts have been made to develop a formula to calculate the value of a domain name.  Of those available to the public, arguably the best is by the domainer Andrew Rosener:

http://www.domainsherpa.com/rosener-equation-value-domain-names/
http://www.domainsherpa.com/andrew-rosener-mediaoptions-inverview/

This formula is a great step forward, and is excellent for the purposes for which it was designed.  Specifically, it is designed to valuate or appraise "generic" or "product category keyword" domains with a .com extension in the U.S.A. marketplace.  Rosener also offers guidelines for .net, .org and .us extensions, as well as country code domains, and points out how one might adjust the formula based on different assumptions of payback period and click-through rate.  This makes it a powerful, versatile, very useful tool.  

It is important to understand that Rosener's formula is based on a particular model of how the domain will be used and how it will generate ROI.  Specifically, it assumes that:

1. the domain will enable the site based on it to reach the top of the search engine results for searches for the product category keywords or key phrases contained in the domain;
2. this will enable the domain owner to discontinue pay-per-click ads for those keywords or key phrases;
3. the domain will not provide value or generate revenue in any other manner;
4. therefore, the value of the domain will derive solely from the savings in pay-per-click ads for a given level of traffic;
5. the purchase value, or acceptable price, of the domain can be calculated on this basis from the monthly search volume and average cost per click of pay-per-click ads for those keywords; given an assumed click-through rate and required payback period; and
6. the monthly search volume, cost per click and click-through rate will remain constant during the payback period.

Within the scope of those assumptions, Rosener's formula allows estimates of domain value, and can be especially useful for comparing domains.  

However — as would be the case with any tool — the more our situation differs from the assumptions on which Rosener's formula is based, the more we need to adjust its results for our actual reality.

• As we said, the formula is designed to valuate or appraise "generic" or "product category keyword" domains with a .com extension in the U.S.A. marketplace.  And although Rosener offers guidelines for adapting the formula to other circumstances, the further afield a domain and its intended usage stray from this core model, the more its results diverge from what you'll probably encounter in reality.
   
• The formula is based solely on the assumption of the domain name replacing or substituting for the cost of pay-per-click ads, because of the boost such a domain name can give to search engine ranking.  But on the one hand, such replacement depends also on effective deployment, and on the other hand, this is a very narrow interpretation of the value such a domain can deliver.
   
• By specifying a limited payback period, the formula tends to undervalue the future.  Unlike most corporate assets, domain names generally appreciate in value over the years, and can continue to deliver ever-increasing returns indefinitely.

  To be fair, Rosener's assumption probably coincides with how the typical corporate finance department would evaluate such an asset.  But if so, then typical corporate thinking is seriously flawed when valuing a unique, non depreciating asset of essentially unlimited potential which can either be in one's own hands or in the hands of a competitor — and which one is in danger of losing at any moment if one does not act.

• The formula acutely underestimates domain value when evaluating "country code" domains in emerging markets, such as .MX for Mexico and .IN for India.  For one thing, the current figures for search engine searches and pay-per-click costs can be obsolete within months as the population surges into the online marketplace — and this exponential market expansion can continue for years
  
  Added to that, in these markets the factors of new customer acquisition, establishing market share, identification of the brand with the category, controlling the category conversation and projecting an image of category dominance — and, on the other side, the cost of a competitor seizing this high ground instead — can far outweigh the narrowly calculated contribution of pay-per-click savings.  These do not enter into the formula at all.
   
• In sum:  a keyword-category domain name is unlikely to be worth less to your business than the Rosener equation indicates, but under certain circumstances it is likely to be worth far more.

Thus Rosener's formula serves as a valuable springboard for valuating any domain.  And when that domain, and the circumstances of its intended use, match the formula's assumptions, then the formula's results are a fine place to take your stand. 

However, to the extent that the domain and its intended use do not match the formula's assumptions, taking a stand on its results may lead to a serious fall, as a competitor picks up the ball. 

So remember that the formula is a springboard.  That means you must spring.  The above bullet points are intended as guidelines for where to leap.  And the next section provides actual handrails!

Business impact equals value.

If neither the price nor an appraisal can tell you the value of a domain name, what can?  It's the impact that owning the domain and deploying it effectively could have on your business, plus the potential impact on your business if a competitor owned the domain and deploying it effectively instead. 

For example, if owning a domain could save you $50,000 in pay-per-click ads and bring in an extra $700,000 in revenue, that's $750,000 on the plus side.  And if a competitor could use the domain to take $300,000 of business away from you (or keep you from getting it in the first place) by siphoning customers to themselves instead of to you, that's $300,000 on the minus side.  The total impact then — and the total value of the domain to your company — is the sum of these numbers, or $1,050,000. 

But wait!  We've left out the time factor.  Are those numbers per month, or per year?  And how many years should you count — at what net present value ratio — to get the total value to your company at this time? 

We can't provide you with the answers, of course, but those are the questions.  Of course, calculating these numbers will be difficult, with a wide range of uncertainty, because they are projections depending on many unknowns.  An informed seat-of-the-pants guesstimate may well be as reliable as a 6-month analysis.  But that doesn't change the fact that this is the only rational way to calculate the value of a domain.

• Consider the cost of your television, magazine, other print, coupon, trade show, promotional, partnering and other advertising, marketing and sales costs each month.  Now, compare that with the one-time cost of the domain you are considering — an investment that can go on bringing in returns forever.
   
• Next estimate the returns on each — the revenue from your normal marketing and advertising, and the potential additional revenue from the domain.  Comparing costs and returns, which expenditure seems more cost-effective?
   
• Now consider the cost to you, in compensatory marketing and lost business, if a competitor gains this domain instead of you, and uses it effectively.  This cost could be ongoing, and may total far more than the price you would have to pay to secure this domain for your company today.
   
• Finally, add the potential revenue from owning the domain and the potential losses to a competitor who owns it.  This sum is the difference, or distance, between the two scenarios.  Which end of that distance do you want to be on?  What is that distance worth to you?.

Bottom line:  the potential impact on your business of your owning the domain, or of a competitor owning it — that is, the business value — is the only valuing of a domain that matters for your business.

The Apple example.

Steve Jobs understood this very well.  On August 9, 2011, the New York Times reported that Apple Computer had become the most valuable company in the world.  So the company probably makes pretty smart business investments.  And earlier this year, Apple purchased the domain name iCloud.com for a reported $4.5 million. 

Now, suppose Apple had the domain iCloud.com appraised prior to the purchase.  What would they have been told was the value of the domain?  

Appraisal services differ, but one of the most respected and widely used is Estibot.  On September 16, 2011 — just months after the $4.5 million purchase — Estibot appraised iCloud.com at $1,700.

What a difference!  Apple bought the domain for more than 2500 times its currently appraised value!  So is the appraisal way too low?  Or did Apple Computer pay way too much?  Which is it?

Neither!  Steve Jobs was a business genius, and this was done while he was still at the helm — but the appraisal may not be wrong either.  Appraisal services advise domain name investors on the typical current market value of "a domain like this one."  What they do not, and cannot, estimate is the business value the domain might have for a particular company that plans to actually use the domain as a business tool.   Fortunately for Apple, Steve Jobs understood this.  Apple saw future business value in owning the domain.  It's a business value specific to Apple, based on what their company could do with it. This ROI potential of specific business uses that could be made of a domain — either by one's own company, or the potential negative impact if the domain was owned by a competitor — is all that mattered to Apple.  Shouldn't it be all that matters to you?