One of the most popular interviews on DomainSherpa is with domain name broker Andrew Rosener, founder and CEO of Media Options Inc. In that video interview, Rosener walks the audience through the equation he has developed to determine the end user value for premium generic .com domain names. In this context, premium is defined as having an exact match local monthly search volume of greater than 1,000.
This article summarizes “the Rosener equation” – including information from many commenters – as well as provides an update on variables used within the equation since the interview took place in May 2011. To fully understand all the subtle nuances, watch the hour-long in-depth interview with Andrew Rosener and the revisit 15 months later (starting at 47:13).
The Basis for the Rosener Equation
The Rosener equation determines the value of a premium generic .com domain name by approximating the value – for a given keyword or keyword phrase – of ranking in the No. 1 organic position of Google.
The idea behind the Rosener equation is that if your domain ranked at the top spot of the organic search results, you would no longer have to continually buy or manage Google AdWords, or worry about the escalating cost of such marketing campaigns. (This requires, of course, that after you acquire the domain name, you develop a quality website.)
Rosener Equation Assumptions
As with any approximation, the end result – in this case, the domain name valuation – can be greatly impacted by the underlying assumptions. The assumptions used in the Rosener equation are stated below, with references given as appropriate:
- The domain name has a .com TLD.
- The sale is to an end user, not another domain investor.
- Having the exact match domain name provides an advantage when being ranked in search results for your main keyword. Matt Cutts, head of Google’s Webspam team, supports this assumption.
- Google data is used as a representative data set for the global search volume and advertising cost around the world. The basis for this assumption is that Google currently owns a 67 percent market share.
- Google-provided data is as up-to-date as possible with respect to search volume and advertising costs. There are other better sources, but Google data is likely good enough and the cost is free.
- The estimated click-through rate of the No. 1 position in Google’s organic search results for any keyword or keyword phrase search is 35 percent, 20 percent for the No. 2 position. Supporing sources include Optify, Free SEO News, CNN, Search Engine Watch and SEO Researcher. A new study by Slingshot SEO released on July 28, 2011, and entitled “Mission ImposSERPble: Establishing Google Click-Through Rates” estimates the click-through rate of the No. 1 position to be even lower: 18.2%.
- An acceptable payback period is 12 months. (Adjusted down from 24 months in original interview.)
The Equation and Its Inputs
The equation, shown below, uses four inputs to calculate the domain name valuation.
Domain Name Valuation = A x B x C x D
A = Exact-match monthly search volume
B = Average CPC
C = Click-through rate
D = Payback period (months)
- Exact-match monthly search volume for a keyword or keyword phrase. (How to determine monthly search volume.)
- Average cost-per-click (CPC) for a keyword or keyword phrase (How to determine average CPC.)
- Estimated click-through rate for No. 1 position in organic search results: 35 percent (revisited at 50:45)
- Payback period: 12 months
Examples of the Rosener Equation in Use
Let’s apply the Rosener equation to some domain names that have recently sold. The input data comes from the Google AdWords Keyword Tool (GAKT) on July 14, 2011, as shown in the table below.
Domain name: DomainName.com
Date sold: May 2011, $1,000,000
Exact-match U.S. search volume: 27,100
Approximate CPC: $10.88
Rosener equation valuation: (27,100) x ($10.88) x (0.35) x (12) = $1,238,361
Domain name: RunningShoes.com
Date sold: March 2011, $700,000
Exact-match U.S. search volume: 60,500
Approximate CPC: $1.49
Rosener equation valuation: (60,500) x ($1.49) x (0.35) x (12) = $378,609
Domain name: GamesForGirls.com
Date sold: February 2011, $500,000
Exact match U.S. search volume: 450,000
Approximate CPC: $0.61
Rosener equation valuation: (450,000) x ($0.61) x (0.35) x (12) = $1,152,900
Limitations of the Rosener Equation
Calculating the value of a domain name is not an exact science. External influences may vary over time, impacting domain name valuations. For example, search algorithms are constantly changing. Also, with seasonal holiday shifts and the addition of new search techniques (social media referrals, local results, product ads, category results, etc.), organic listings may continue to be pushed down the page.
A change in the basic assumptions of the formula also impacts how a domain name is valued:
- Domainers generally pay about 75 percent to 90 percent less than what an end user might pay for the same domain.
- TLDs other than .com will likely only have about 10 percent of the value determined by the Rosener equation.
Double-check Your Inputs
To ensure the soundness of your valuation calculation, you should always double-check the validity of your input data. There are a few ways you can do this:
- Visit Google, type in the keyword or keyword phrase and see if there are any advertisements displayed. What you see here and the CPC data gathered from the GAKT (to use in the calculation) should coincide. If not, the GAKT data could be outdated or seasonally influenced.
- Follow a domain name broker on Twitter (e.g., Rosener, Colby). Build a relationship with them (e.g., comment on their tweets, initiate email correspondence, etc.). When the time comes, ask them for advice and a second opinion.
- If you think that the estimated click-through rate of the No. 1 position on Google should be higher than 35 percent, then adjust the input accordingly.
- If you think the buyer will be focused on a payback period longer than 12 months, then adjust the input accordingly.
[Thanks to Huw for suggesting the article title]
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