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Web 2.0 the second coming of the Internet and related products and services, is in full swing. Back in the early 90s, there were only a few men who knew about the power of Domains. People like Rick Schwartz and Yun Ye (the very illusive Yun Ye) have blazed a trail now being tread by thousands of Domainers all over the world.

One of the main issues that Domainers grapple with on a day to day basis has to do with the value of domains in a red hot aftermarket. Many have come up with their own methanol and indeed, there are many companies out there providing valuation services. The companies claim they have experts on board looking at all the relevant input factors, while some apparently rely purely on an automatic process. Whichever the method, it seems Domainers are never happy. I now present my own perspective. The following essentially comes from a post I made at DomainState.com some time ago.

Based on my on experience in the financial world and my experience in Domaining, I believe a domain's value should be determined thusly:

Book Value + (Net Earnings * Multiple) + Goodwill

Book Value is the basic upfront acquisition cost for the domain (Registration Fee)...therefore, as far as I am concerned, there is no such thing as a worthless domain...the concept of valuing a domain at $0 because one perceives that finding a buyer is dim is at best, spurious. If that were the case, then we could logically extend that to any asset (Real Estate, Motor Vehicle, etc.)...from an accountant's stand point, assets have input cost or replacement cost which form a conservative basis of valuation.

Net Earnings - this is the amount the domain earns monthly from parking, etc, less monthly recurring maintenance (hosting, etc.). Bear in mind, though, that if earnings are expected to grow, some average growth must also be assumed...lets call this F.

Multiple - the number of months or years that net earnings can be sustained...this mystery can be easily solved by looking at the domain in question and the industry category that represents the best fit. The stock market is well developed and can form a basis for the multiples used to value domains. Since the general consensus and actual experience are that domains have increased in value at a much greater pace than stocks, it is not unreasonable for domain multiples to be much higher. Domainers should use the domain sales archives to establish multiples that can be justified.

Goodwill - Even accountants agree that this is a nebulous concept. However, we can agree that this has to do with branding, industry type and growth prospects, seller perceptions, etc. Additionally, the question of the domains strength is critical (one word, two words, easily spelt, easily remembered, etc). For the most part these are the intangibles...they are always open to discussion. So for me, the only aspect of a domain's value that should be subject to ongoing discussion is its goodwill...the other aspects we can assign some value with a certain amount of confidence.

In essence then, if I have a domain that can be categorized with the Banking Industry (assumed multiple 8) and it earns $200 per month parked with hosting of $10 per moth...my domain's value should be:

Other Assumption

The Domain's Value appreciates faster than the Banking Stock its earnings multiple is 12

Base Value - Registration Fee - $9
Net Earnings 190 * F
Banking Industry Stock Trading Multiple 8 * Net Earnings
Banking Industry Domain Trading Multiple 12 * Net Earnings (this can be refined from historical domain sales)
Goodwill - X

Derived Formula

Domain Value = 9 + ((190 * 12 * F) * 12) + X

Learn more about this author, Adrian Keys.
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