The days of quick profits from flipping desirable domain names are dead and gone. The heady days of speculation, seven digit sales and overnight millionaires that typified the domain name bubble, have sadly passed.
You might be wondering what led to this decline. As with most things in life it was not any single event that led to the crash of domain flipping, but instead a number of factors.
Here we’ll go through the three key factors that we believe were instrumental in undermining the viability and profitability of domain flipping.
The Name Game
Purchasing domain names has a low entry cost and in the past could potentially yield tremendous results. For instance Ebet.com (which was purchased for $100 in 1996 by Rick Schwartz) was sold in 2013 for 1.35 million dollars. Whilst this highlights the potential for an incredible return on an investment it also shows the importance of getting in early. Rick was savvy enough (or lucky enough) to have purchased an excellent domain name and held off selling it for 17 years.
Technically though, what Rick did was not a flip. Flipping is characterized by short term purchases in which the buyer improves the site and then on sells it at a higher price due to the value added. Rick didn’t make any improvements to the site; in fact he didn’t have a site. He purchased a ‘blue chip’ domain name and simply held it until its value was sufficiently high to realize enormous profits. This practice is closer to domain warehousing and it is a key factor in why domain flipping has gone into decline.
With profit potential in the millions and initially low entry costs, domain names were snapped up left and right by investors, businesses and amateur enthusiasts. After the dust settled very few good domain names remained. Those that were left were undesirable for various reasons including: random or nonsensical, in violation of a trademark, hard to spell, bad company names, or too long such as German compound words (like Rechtsschutzversicherungsgesellschaften which means “insurance companies providing legal protection”.)
To find recognizable, marketable and profitable domain names at reasonable prices is now virtually impossible. With the names either being held by companies and investors for later sale, or because they are priced so highly that there is very little chance for realizing profit.
Increased Costs of Transactions through Flippa
Flippa’s Price List as at 4 February 2015. Image courtesy flippa.com
Whilst there are a number of websites that offer a market place for sale and purchase of domains, few are as large or as well recognized as Flippa. Created in 2009, Flippa was an offshoot of SitePoint Marketplace a veritable online bazaar selling all things related to the internet. With over 500,000 users and bidding taking place every minute Flippa is a thriving marketplace and an unmatched behemoth in this arena. Approximately 70% of the website/domain marketplace is cornered by Flippa meaning that if you want to flip domains you will likely end up on Flippa.
Part of the appeal of domain flipping is the low entry cost and potential for reasonable profits. Whilst everyone dreams of 1000% returns on a sale and retiring to yacht in the Bahamas, the reality is very different. Most transactions (particularly domain flipping) have a more modest profit margin. This in itself isn’t an issue unless the margin becomes small enough to make flipping untenable as an income source.
In 2014 profit margins took a hit as Flippa restructured their fees in a way that hurt users’ earnings. Whilst the listing fees for Flippa were dropped (which incidentally is what Flippa’s announcement focused on) the ‘Success fee’ was doubled for all but new websites. Not only did Flippa double its success fee to 10% of the sale price, they also removed the ‘Success fee cap’ previously set at $3,000. Flippa’s restructure has dramatically reduced the viability of domain flipping as it eats into the already shrinking margins seen in today’s markets.
Whilst Flippa isn’t the only way to buy and sell domains, it is still the largest market for doing so and this price increase will have a substantial impact on domain flippers bottom lines. Flippa’s rate increase likely heralds a shift in the overall market for domain flipping and we suspect that its competitors will soon follow suit.
New Search Algorithms
In the past search engines were relatively simplistic in the manner in which they gathered results and the order in which they were presented. These older search algorithms put a high value on EMDs or ‘Exact Match Domains’. If a user searched for ‘pool tables’ the highest ranked site would likely be www.pooltables.com even if other sites had more content, links and a higher relevance. Domains that were simple, marketable and commonly searched were valued above and beyond all other considerations. Many of these domains were ‘parked’ and filled with nothing but click through ads and dead end links. Whilst they often generated a steady stream of revenue for their owners, they were of little value to the end user as they offered virtually no content. Search engines operators recognized the problem with their algorithms and began the development of new methods for ranking search results. This development would see the relevance of domain names as a highly marketable commodity; become a thing of the past.
In the present day, search algorithms are more sophisticated and complex than ever. As with all things technological the rate of advancement is practically exponential. Computing power doubles approximately every two years (see Moore’s Law) as a result so does our ability to develop increasingly advanced software and search algorithms. The company at the forefront of this development is of course Google. With approximately 70% of all searches on the internet going through Googles’ search engines, this comes as little surprise. Since its inception, Google has continuously improved and refined the mechanisms and algorithms utilized to provide search results. One such refinement in 2012 saw the value and relevance of domain names plummet. ()
The ‘EMD update’ as it is called, whilst substantially improving the relevance and quality of end user search results; also caused a dramatic reduction in the viability of domain flipping. Google recalibrated the value assigned to domain names dramatically reducing their importance in how search results were ranked. Suddenly exact match domain names were not only an insignificant factor in determining a websites ranking, but in some instances actually further reduced their ranking. By reducing the overall significance of domain names in determining website rankings, Google dramatically reduced the value which could be ascribed to them. Any website which had previously relied on EMD to achieve high rankings saw their visit numbers decline and rankings plummet.
By now you are probably wondering if the decline in domain flipping has seen the end of online investing. Rest assured, whilst these factors have closed off one avenue of online investing many lucrative options still remain.