In accountancy, and the business world in general, a profit is simply the excess of revenue over cost. So if you sell something for more than what you paid originally to acquire it, then you have turned a profit.
This profiteering concept is played out in the domain industry quite easily. One registers a domain name for $10, sells it for $100 and he has made 900% profit (less any renewal fees, add any domain parking revenue).
What is mainly attractive about the domain industry is that there is this impression that “it’s normal” to sell a domain name for a price in excess of $1,000. A domain name registered for $10 and sold for $1,000 would equate to a 9,900% profit margin. If you drink the Kool-Aid that most domainers try to dish out, you will also be led to believe that selling a domain name for $10,000 is child’s play.
It is indeed a fact that there is a lot of money to be made in the domain industry. But in my opinion, most of the profit is made as a result of what is called the greater fool theory.
“The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by the often irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. Or one may rationally have the expectation that the item can be resold to a “greater fool” later.”
Where domain names are concerned, this greater fool theory is played out with “domainers” registering/buying domain names with the hope of selling it later to someone else for huge profits.
There is nothing wrong with the idea. This is business in its simplest form.
The problem is that most of the domain names that are being registered and bought have no end-user (web developer, entrepreneur, brand etc.) value whatsoever. As such the original registrant or buyer was foolish in their decision to acquire such domains in the first place. However, as there are quite a few other “foolish ones” in the industry, it is quite easy to sell a crappy and useless domain name for a profit. That crappy domain name keeps going down the food chain for as long as there is a greater fool to purchase it.
Over the years this greater fool machine has been fueled by all sorts of gimmicks, with the most notorious being the “stats”. The domain stats would include search volume for the keywords in the domain name, domain age, and past (greater fool) sales price of similar domain names.
The fundamental problem here is that such domainers (domain investors) never quite get the fact that domains were meant to be the names and faces of websites. Or better yet, BRANDS.
If you own a domain name that you do not intend to develop, or cannot see someone else successfully developing into a brand, then you are effectively one of the links in a greater fool food chain.