I'll give you a personal example. For one of my businesses - email newsletter publishing, a typical click on Adwords runs close to $2. Several years back, I started picking up some generic keywords/phrases related to that business. These domains individually get anywhere from 5 to 200 unique visitors a month. Let's figure that I have a dozen domains that are generic and averaging 1000 unique visitors a month overall. Renewal costs run a whopping $84 a year. If I were to spend that money on PPC advertising @ $2/click, that would work out to 42 clicks a year. Instead, I'm getting around 12,000 visitors a year. If I were paying for that traffic, I'd be spending $24,000 a year. A bit of a difference wouldn't you say?
The best part is, even at the $2 per visitor, I am still making money. All this does is increase my profits even further.
Right now, it's almost impossible to find good generics that will get type-in traffic like this just for registration costs in the .com extension (pretty much any other extension is useless for generics as far as type-in traffic goes). Many of these domains suitable for your business might already be held by your competitors. But it's more than likely a good chunk of them are being held by domain speculators. Basically people that thought enough ahead of time to register these domains.
Most domainers will "park" their domains. I'm sure you've come across a fair share of parking pages in your time using the net. Basically these look like search pages - often with ads. Domainers make money when someone clicks on one of these ads.
The bulk of generic domains are sold based on the revenue generated by them or revenue combined with traffic. This isn't always the case. There are many domains that go for much more just because they are simply great domains for branding purposes.
A couple of years ago, if buying a domain based on revenue/traffic, you could expect to pay between 2-5 years revenue. Now solid generics are getting anywhere from 3-100 years revenue. Even at 100 years revenue or more they can still be an incredible bargain. Let me explain why....
When a domain is parked, the owner of the domain is getting a small cut of the CPC paid by an advertiser. There is the company selling the advertising and the parking company that also have to make money.
To see what the discepancy is between what advertisers are paying versus what domainers are getting paid... I parked a few domains that I use for traffic redirecting. I used the same keywords for parking that I did when advertising on PPC. I found that, on average, I was getting about 1/10th of what the going rate was for a click. So let's say for example, I would normally pay $3 for a click advertising, that means I would get around $0.30 for a click parked.
Now let's apply this to your business. Let's say there's a generic domain that applies to your business. That domain gets an average of 10 visits a day. The person that owns the domain is getting 3 clicks a day @ $0.20 each or $0.60 a day total. One year of revenue would be $219 and 3650 visitors. Let's say they are asking for 5 years revenue for that domain - $1100.
Let's say you have been doing PPC advertising on that same phrase. You are paying $2 a click on average. (And hopefully making money at that rate!) Let's say that 30% of the visitors that type in that generic domain in their browser are as qualified prospects as those that click on your PPC ads. So you'd be getting approximately 1200 qualified visitors in the first year after purchasing the domain. If you got these same 1200 visitors by PPC advertising, you'd be spending about $2400. In year one alone, you are ahead of the game by 1300. ($2400 less the 1100 you paid for the domain.) Everything after that is gravy.
Going back a step here... let's say the owner of the domain wanted 10 years revenue or $2200. Even at that asking price, it would still be a bargain, don't you think? From time to time, those of us active in the domain industry will hear of domains selling for 100 years revenue. Seeing this one example, can you understand why? In this case, 100 years revenue would be 220,000. Let's say that your $2 per click on PPC advertising represents a huge ROI for you and that for every $1 you spend on PPC, you are making back $100 in pure profit. 2400 (what you would have spent on PPC advertising) x 100 (the profit per $1 spent) = 240,000. At that level, you are in the black in your first year.
Spending $110,000 for a domain doesn't seem like a bad investment now does it?If you are a careful shopper when it comes to domains, there's another advantage to it. Let's say you are a true entrepreneur and you build up businesses/websites with the intent of selling them off eventually. Perhaps you move onto a new business every 2-3 years. Sometimes a business may not work out. Well, guess what? Getting generic domains with natural type-in traffic can represent an additional asset for your business. Even if your existing business doesn't work out, you can always turn around and sell the domain - and the way the market is going, likely for much more than you paid for it.
There's been so much hooplah in the past year or so about PPC/CPA arbitrage. Before that it was PPC arbitrage between the different PPC sites. The problem with methods like this is that they are truly opportunitistic. As more people find out about them and as you perfect the system yourself, the opportunity to make money dimishes to the point where you stand a much better chance of losing money than you do of profiting.
Domains represent a different arbitrage situation. Since there are a finite number of generic domains, there are only so many opportunities. As long as the cost paid for a domain can be recouped at SOME time in the near future (ie the next 10 years), the potential risk is nominal.
I was recently explaining this to an entrepreneur that didn't understand why people would pay so much for domains. His reasoning is that when it comes to technology a lot can happen in 10 years. True. But I know I have had several domains now for 10 years myself. There are countless billions invested in the current Internet structure so the odds are pretty good that it won't be changing dramatically within the next 10 years. There's just too many players at this point that would lose too much money for this to happen.
But I gotta tell you, the window of opportunity is getting smaller with each passing day. If you want to take advantage of this for your business, the time to act is now and not in a year or two years from now. Not even months if you can avoid it. It can take time to learn the ropes.
There's three ways I can help you: I handle acquisitions (brokering) for a small number of clients. If you have a budget of at least $20,000, we can work through your needs and I can handle the acquisitions for you. If you are a do-it-yourselfer, each month, I offer a workshop to work with clients via teleconference calls and emails. If you can't make the teleconference calls, you can listen to recordings after the fact. This is a fairly intensive program where we work on your overall marketing strategy combined with domains. I also have a very limited circulation predrop subscription service. This deals with expiring domains that can be backordered via services like Snapnames and Pool. This service can make research for you essentially hands-off. If you're interested in any of these services, please leave a comment on my blog with your contact info. (I have comments set to approval so no one will see it.)