April 7, 2005
The valuation service is
based on the Net Present Value (NPV) methodology, whereby the expected
cash flows (CFs) are estimated by assuming that the domain
name is parked to generate traffic revenue. The strength of the
approach is that it can be applied to any domain name irrespective
of whether it is parked or not.
The traffic income business model focuses on domain
names that generate clicks. This is achieved by placing advertiser
links on a Web page. Every time a visitor clicks on any of the links
the advertiser pays the link manager a fee, i.e., pay-per-click
The availability of reliable public information
on keyword searches and revenue from PPC advertising have made valuation
based on traffic income a compelling domain-name valuation methodology.
The advantages of the income-based over the market-based methodology
are founded on the following facts:
The median sales price of catalog listings
is about $500. Moreover, only a small number of sales are in
the tens of thousands. Thus, applying statistical models to
value premium domain names will not yield precise estimates.
For a specific level of website traffic, the
extension of a traffic-revenue domain name should be irrelevant,
holding other factors constant. However, sales data suggests
that .com names commands a considerable premium, even after
controlling for keyword composition. Thus, using an income approach
for such domain names yields a more accurate appraisal.
Hyphenated domain names, as in (2) above,
would be undervalued by a statistical model.
Historical market prices, especially those
for domain names sold on auctions, suffer from asynchronous
demand and supply, whereby not all parties interested in the
domain name would be aware of its sale or willing to commit
by the end of the auction. Thus, the sale price might not reflect
the market's true willingness to pay for the domain name.
The income approach allows various CF scenarios
to be considered, typically a "best case," a "worst
case," and a "middle of the road." Such an analysis
provides a more intuitive picture of the range of possible market
The advantages of DomainMart's hypothetical parked
domain name methodology over using historical data from parked domain
Grouping comparable parked domain names based
on historical data involves considerable classification error
(incorrectly including sales within a group of "similar"
names or excluding sales belonging to a group), especially in
clusters with few sales data. Thus, the results would be less
reliable. This error is magnified when classification is based
on arbitrary techniques.
Brokers tend to keep historical parking revenue
information private. Thus, diminishing the transparency and
verifiability of appraisals based on historical parking data.
The advantages of DomainMart's parked-domain methodology
over a historical revenue approach are:
It does not require access to private income
data, which a domain name owner might be reluctant to provide.
It does not require an active domain name.
On the other hand, without historical income data, a revenue
model cannot be estimated.
It is considerably cheaper.
The revenue-generating approach complements DomainMart's
statistical and historical profits models.
Topic tags: appraisal/valuation
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