I was talking with someone earlier this week and they asked me a question that I haven’t thought about much – “What impact would a recession have on the domain name industry?”
I couldn’t answer the question so I told the person I would think about it and maybe write a post with my thoughts and pose the question to my readers as well…and yup, this is that post. So here’s what I’ve been thinking over the last few days.
A recession will impact the domain industry but in a somewhat counter-balanced way, i.e. in some ways it will help the industry, in other ways it will hurt it. Confused yet? Let me explain what I’m thinking a bit more.
One of the major things that happens during a recession is that people spend less money. So at first you might think, okay so budgets will drop for domain names then…yes and no. Domain names offer huge marketing benefits for B2C companies often saving them a small fortune in marketing costs. Here’s an example.
Suppose I run a company that sells gift baskets, and I currently spend $100,000/month on marketing running ads on places like Google, Facebook, and Instagram. I need to drive traffic to my website in order to make money so online marketing is a must. Now the recession hits and I need to cut my ad budget in half. Buying a domain name like GiftBaskets.com for say $400,000 or so could still provide me with a steady stream of traffic that would cost me 10x the price. I’ll still spend money on online advertising but only $200,000 a year.
In the scenario I outlined above my marketing budget drops from $1.2M a year to $600,000 a year, but because I bought a premium domain, I might actually get the same or more business than I would have spending twice as much. The next year, well I already paid for the domain so all the benefit of the domain I now get essentially for free, less the $10 renewal fee.
Of course, like most things in life there’s a big caveat here. Not all companies realize the impact a good domain name can have on their business – this is the counter-balance. While some companies will realize that domains can give them a huge edge, others won’t, and for them, a reduction in budget could mean holding off on buying that shiny new domain name.
One way I can see domain investors preparing for a recession is shifting focus away from higher-priced names and instead looking at domains that they could sell in the sub-$5,000 range and still take a nice healthy profit. For me, I’m personally going to focus almost exclusively on two-word .COMs in the $150 – $350 range for a while. Domains like these I could sell for $1,500 – $3,500 and lock in a 10x profit vs. buying in the $1,000+ range where I need to sell for $10,000 or more to maintain the same profit margin.
I’m also building up a larger cash position, so when I sell a domain, I’m putting less into new investments and keeping more money in my business bank account. I don’t have a mortgage or a car payment, no credit card debt or student loans, I live below my means so if and when a recession hits I’m not planning on making any major life changes. I think building up a larger cash position could be handy if/when a recession hits because if less domain investors are bidding on names, it could be a great time to buy, so if you have some extra cash you could actually get some great deals while everyone else is panicking…or at least it’s a thought.
There’s no right answer here, but there certainly are things all of us can do to prepare for what’s ahead. So now I’ll pass the mic to you, what do you think? What impact would a recession have on the domain industry and are you doing anything to prepare?