At the time of reading this it should be Saturday again!!

At the time of writing, it’s Tuesday night. I am quickly writing a post to be auto-published for this week’s domain musings as I have an all-week conference to attend that will also last all weekend.

So these are not necessarily musings, but rather a follow-up on last week’s post.

Domain Parking
Last week I presented a simple illustration as to how one could easily generate serious revenues via domain parking. Domain parking perhaps, is single-handedly responsible for the survival and growth of the domain industry.

Domain parking gave the domain aftermarket a lifeline, by providing the basis on which a lot of domains got traded between domainers. Very few domains are sold to end-users based on their branding potential. This means that the bulk of domains are sold based on their domain parking earnings potential.

In some cases, domains were been sold for as much as 6 times their annual domain parking revenue.

I am going to present 2 scenarios here. Firstly I will look into the reasons why selling domains based on domain parking revenues makes sense, and then the reason why it is just risky business.

Selling Domains Based on PPC Revenue
What makes the domain name extremely attractive is that for successful investors, it is normally a case of a very low initial outlay (start up capital) producing massive returns.

With domains, you earn money by parking them and/or selling them. Now if a domain name makes $0.20 (20 cents) a day, it would be an average of $6 per month, $72 per year in revenue.

If you were buying the domain name at 6 times yearly revenue, then the selling price would be $432.

Now paying for 6 years worth of revenue means that you would have to wait 6 years to recoup your investment. However, if you then sell the domain name after a year, you can recoup your original investment easily. How?

Well you would collect $72 in the first year in domain parking revenues. If you sell the domain name on the same terms of 6 years’ revenue for $432, then you your profit would be $72.

If you are good at selling domains, then you might even earn more by adding a value for the domain branding potential.

The Risks of The Domain Parking Model
However, when I came across this method of domaining, alarm bells went off immediately. IMMEDIATELY.

This is high-risk investment. Seriously. How do you guarantee that the traffic stats are genuine and that the domain will maintain that level of earnings? Traffic can be easily faked. Click fraud was predominant a few years ago (and still is).

So almost nothing was credible when it comes to domain stats.. A lot of people tried to overcome this by asking the seller to give them a chance to test the domain on their servers/domain parking accounts. As a seller, this is something that I would never do. Waste of time.

Now, if the traffic was genuine, how do I guarantee that the traffic will remain high? This is where the source of the traffic becomes extremely important.

If the traffic is generated from back-links, then the links could be removed by the website owners as soon as they realise that the previous website no longer exists.

If the traffic is from search engines that had indexed the pages of the previous website, then the search engines will drop the pages as soon as they realise that the domain name is now parked.

The only domain name that would stand the test of time are those that users type directly into the browser. Domainers refer to this process as direct navigation. Personally, I have never bought into this direct navigation theory. I think it was just a term and theory invented by domainers to add value to domains.

Yes, I do believe domains like shoes.com would get natural type-in traffic. But anyone selling a domain like shoes.com based on its type-in traffic would be leaving lots of money on the table. Such names should be sold based on their branding potential and the credibility that they could offer to the end-user.

There are quite a few other reasons why I don’t sell or buy domains based on the domain parking model. I like to have a degree of control over my businesses. I like flexibility and the ability to introduce creativity and originality. Domain parking notoriously lacks any degree of transparency.

No man can serve 2 masters. Either you choose the “lazy” life of domain parking by choosing to become obsessed with stats or you use your intelligence, or common sense rather,  to market domains based on their branding power.

Now that domain  parking revenues have taken a nose-dive, the whole domain industry is scrambling to find end-users. But guess what? Most of the domainers hold crappy domains. They weren’t focusing on quality, but quantity. Thanks to domain parking.

Arbitrage
This is getting a bit long, after just 5 minutes of typing. However, let me mention arbitrage quickly.

A lot of domain investors who invested in domains based on their domain parking revenues did not mind paying 6 years revenue, as they could pump unlimited revenues out of the domain name through what is called arbitrage.

Arbitrage, in a nutshell exists in every form of business. However in the domain space, this is where one would buys cheap traffic and resell it at a higher price.

So, for example, someone would open a PPC campaign with a smaller search engine, buy the traffic for let’s say $0.10 per click and sell it for anywhere between $0.50 and $3. They would send the PPC traffic to their domain parking page.

This is how a lot of domain investors managed to amass large domain portfolios in a very short period of time.

However arbitrage is now outlawed in domain parking. People still do it, but if caught their domain parking accounts would be terminated.

Arbitrage had to go. Arbitrage in the domain space posed a very, very severe threat to the existence of not only domain parking, but to search marketing as a whole! I will expand on the dangers of arbitrage next time.

Have a great weekend!!