The Hidden Cost of Dropping Domain Names

In my last post I broke down a real example of how renewal fees can easily consume north of 20% of your annual domain sale revenue.

This week I want to ask the question of domain investors - are renewal fees a ‘sunk cost’ or a ‘cost of inventory’, or is it something you can mitigate effectively? Does it matter?

This only becomes a “problem” once you’ve been a domain investor for 365 days, but after that it’s one that never goes away.

Take a look at this simple diagram™️ of the domain investor lifecycle:

Once you buy a domain, there are two ways out - dropping it, or selling it.

I’d like to take a stab at answering my own questions in this post - mostly as a thought exercise.

Renewal Fees as a Cost of Inventory

Or put another way, “renewals are just a sunk cost you incur to own domains”.

So you spend $11 or $25 or $100 buying a new name. And another $11 every year keeping it. To further illustrate this point let’s use the hypothetical portfolio of 2000 names from that last post. We’ll make some assumptions:

• 2% annual sell-through

• $50 average purchase price

• $2000 average sale price

Year 1 you sell 40 domains and make $80,000 in revenue, but you spent $100,000 purchasing the 2000 domains.

And so on. Here’s the table:

The Impact of Dropping Names on Domain Investor Performance

Three things that stuck out to me;

1. This portfolio loses almost 30% of revenue to renewal fees! (renewals % of rev)

2. Look at years 2 - 5; Renewal fees eat up a significant percentage of overall profit for the first 5 years of your portfolio!

3. The total renewal costs (“cost of inventory after year 1) come to almost $350,000; money that otherwise would be yours!

But are domain investors really paying that much for renewals?

It should be assumed that most domain investors will drop their worst names after only a year -these names have a renewal cost of $0, but have a replacement cost of approximately $50 (per our assumptions).

This is a critical step where many domain investors falter.

Say you drop 200 of your worst names. This will lead to 4 fewer sales next year (-$8000 revenue), but replacing them will cost you an extra $10,000 ($50 each).

To bring this around - Dropping and buying a new domain is ~5x more expensive than renewing a name for 1 year, but 4x LESS expensive than renewing a name for 20 years.

This is why they tell you to buy names you plan to hold forever

We all drop names - sometimes we buy ‘wrong’. Those names are lessons in and of themselves. But is there anything else we can do?

Mitigating Renewal Costs

Is this even a problem? Domain Investing is wildly profitable for someone operating under the set of constraints shown above. So is a 15-30% cost of inventory important?

Well, when your broker fees are also 30%, you’re only taking home 40% of your domain sales after the costs are factored in. And then you’re giving away half of that to taxes!

It seems important to try to offset costs here wherever possible:

• Buy names cheaper

• Sell names for more

• Sell more names (eg via outbounding)

• Drop names

The numbers aren’t as striking when your average sale is $3500 instead of $2000; renewals would only constitute 15% of your revenue then because you’d be earning more.

At StakeWeb we’re looking at the problem from a different angle - asking “how can we make money on this “digital real estate” while we do own it.

As I remarked last week:

Our domain monetization software improves your portfolio performance by offsetting those renewal costs while simultaneously improving the value of domains through increased traffic over the years you could possibly own the domain.

Let us know @StakeWeb what you think - do you just write off the costs, or try to manage them?