Domain Names and the Greater Fool Theory

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.

Wikipedia, as usual provides an excellent definition/explanation of 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.

9 Comments on Domain Names and the Greater Fool Theory

  1. maybe… but there is also a shrinking supply once domains find their end user
    For example … IBM will not sell IBM.com

  2. If the names get traffic. Even a very small trickle of traffic, they have value to somebody. Google Adsense pays incredibly little but it is a low level arbiter that there is “some” value to the traffic that comes to a name, even if it’s just one visit a week or one click a month, I can see from my DNS traffic stats that there is some value. Then when you ad that there are constantly new people nipping at Adsense heels for your traffic at some level (zeroclick, lead gen) there is this base level that will always be a tell in relation to the traffic value. I would challenge that if a name is good enough to “go down the food chain” between investors/domainers (usually some of the shrewdest in the room) then a name is not fools gold but rather “real gold” that found it’s clearing price. Age of the name, keyword relevance count and visits per day aren’t useless criteria, rather they are a consistent barometer to the names that actually sell. There are way too many sales that happen and way too much validity for all this to be greater fool theory.

    • @BT,
      That’s the method by which a lot of domain names are sold.
      If the owner can prove that the domain name will earn more than its Registration fee, and provide the stats that the buyer will find useful then a sale may take place.
      But when you take away Adsense/domain parking, and you look at the pure brand value, there may not be much left that meets the end-user’s eyes.
      With the regular Google algorithm updates, search stats are becoming less meaningful these days as well.

  3. Alas, someone with a level head in this hype filled arena.

  4. You’re absolutely right, but domains that define a brand and are generic enough to drive traffic like officechairs.com, are priceless.

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