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How Much to Lease Your Domain Name For?

Alex Tajirian
March 8, 2004


This is a guide to help domain-name advertisers/lessees and owners to estimate a fair lease payment for a domain name.

When negotiating a lease payment, the following factors should be considered:

  1. The value of the domain name. (Below is a discussion of the shortcomings of using “similar” leases to determine your own lease payment. For information on valuing domain names, click here.)

  2. The length of the lease and the frequency of payments.

  3. Whether the lessee has an option to
    • buy the domain name
    • extend terms
    • terminate early with or without any penalties.
  4. Whether the owner has the right of early termination with or without penalties.

  5. Other specific provisions (such as no adult content or no popups).

  6. The risk associated with the payments not being made on time.

A domain-name lease is more complex than a lease on a car or an apartment.  Any lease payment is determined primarily by the price of the asset being leased and, to a lesser extent, by any incentives from the manufacturer/dealer. The major difficulty with a domain name is finding “similar” leases to ascribe a fair price. This limitation for domain names is the result of several variables:

  1. Markets for such leases are not very active. Only limited data can be obtained from the major leasing marketplace. For a car, on the other hand, the basic benchmark price is the manufacturer’s suggested retail price, commonly known as the sticker price and widely available.

  2. A considerable portion of the high-value domain leases are arranged through private placement, further limiting public information.

  3. “Similar” domain names are not easy to define. In the case of a car, there are well-defined characteristics that determine its price, such as class (sub-compact, compact, luxury, etc.), type (coupe, 4-door, SUV, etc.), and so forth. However, the characteristics of domain names are not so obvious, except for their extensions (.com, net, etc.). Even the importance of the number of characters is questionable. Thus, the only way to identify similar domain names is by using statistical models similar to those used to price domain names.

A more reliable approach to determining lease payment is a two-step process:

  1. Determine the value of the domain name.

  2.  Calculate the lease payment (LP). The standard pricing approach is to use Discounted Cash Flow models. However, to simplify this explanation, I will use the assumption of a lease with a perpetuity payment. In this case, the pricing model is reduced to

Price = LP/k,

Ţ LP = Price x k

where k is the appropriate discount rate, which can be calculated based on the Capital Asset Pricing Model plus an additional risk premium.

To incorporate any provisions in the pricing model, one can, in principal, use option-pricing theory to value real options. However, for more practical considerations, scenario analysis can be easily incorporated into the lease-payment calculation.

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Topic tags: leasing

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