A year-end domain portfolio sales analysis can help inform possible changes to implement. In this article, I consider numerical measures that could be used in an analysis. In determining your profitability, it is important to consider changes in domain portfolio worth resulting from sales and acquisitions. During the past week, Nikul Sanghvi shared with NamePros readers an outstanding analysis of his domain portfolio performance, looking at factors such as price-to-cost ratios, sell-through rate, average prices, and much more. Several people commented that this was one of the best posts ever on NamePros, and I agree. While this article on numerical analysis of a portfolio was in progress well before his post, certainly Nikul’s model helped inform what I have written here. It’s About Sales You probably need to know for your tax report the total value of your domain name sales for the year, but even if that was not the case, every domain investor should calculate their sales total. While sales are probably in several currencies, they will need to be converted to a single currency for analysis purposes. There are immediately a few decisions to be made. Is it better to total the gross sales, that is, the sum of the actual selling prices, or net sales, after commissions and other sale-related charges, such as payment or money conversion charges, have been taken into account? Some prefer to also deduct the money invested in that specific domain name, when they compute domain name sales totals. In this article, I will refer to this as sale return. The following example shows a hypothetical domain name that was purchased for $125, had four renewals at $10 each, sold for $2000 with a 15% commission charge, plus other payment and transaction costs totalling $15. Gross Sale $2000 Net Sale $1685 ($2000-$300-$15) Sale Return $1520 ($1685-$125-$40) Note that I have not yet included any cost for your time, or other costs such as subscriptions and hosting. Also, costs associated with the rest of your portfolio have not yet been taken into account. The return on domains sold during the year is not your overall profit. A domain investor might have a really great return on a couple of domains, but have invested in 2000 other domains, and overall lost a lot of money during the year. But Also About Profits While sales data is helpful, I would argue that the most important single measure of your success in domain investing is whether you are making an overall profit. For this, you need to include all costs, not just those on the domains that sold during the year. I will use the term simple annual profit as essentially your balance sheet for the year. The following hypothetical example illustrates the calculation. Net Sales Total $50,000 Acquisitions During Year $8000 Renewal Costs $19,000 Hosting, Subscriptions, etc. $600 Other Direct Costs $4000 Simple Annual Profit $18,400 Note that the net sales total already has taken into account the commission and transaction costs, but not included funds invested in that domain name in previous years. There are several other important things that have not entered into the simple annual profit calculation, however. We have not taken into account the cost of invested money, or the value of the time that you put into domain investing. You can readily adjust for either or both of these factors, or take into account other things like revenue from development activities, if desired. An important factor, sometimes overlooked, is change during the year in domain name inventory. Your simple annual profit might be very positive, but if that is due to selling valuable domain inventory accumulated in previous years, your net performance for the year could be negative. On the other hand, your simple profit might be negative because you added high-value acquisitions, and therefore have a more valuable portfolio at the end of the year. Inventory Value Adjustments In order to conclude how you are really doing, you need some measure of how the value of your domain name inventory changed during the year. There are numerous ways you can estimate the worth of each domain name in your portfolio. Price paid at acquisition of the domain name Your current asking price (if you use buy-it-now pricing) Your estimate of the anticipated retail selling price An automated estimate of worth Your estimate of likely wholesale selling price for each domain name Worth as estimated by someone else The first decision is whether you use a wholesale price, if you sold the domain name to another domainer, or a retail price, to an end-user. I prefer wholesale price, since inventory costs should reflect the money invested in your holdings, and until the name sells, you have no guarantee that the retail price will be achieved. While acquisition cost would be a wholesale price, and is precisely known, it is problematic to use if you have aged domain names acquired many years ago. Their current worth is probably substantially more than what you paid for them. I don’t think that automated worth estimates are sufficiently precise to be used, although it might be argued that averaged over the entire portfolio they are adequate for this purpose. My personal preference is to estimate a wholesale worth for each domain name. I suggest once a year review your wholesale-price estimates and adjusting them appropriately. For example, if 4-letter .com domain names have gone up, or down, in price during the year, adjust those values accordingly. The idea of having someone else estimate the wholesale worth has merits, and possibly you can agree to do this on an exchange basis with someone holding a portfolio of similar type and size. Whichever method you use, it is important to add up the net worth of each domain in your portfolio at the start and end of the year, and that is your portfolio worth. This can be used to adjust the simple annual profit in order to obtain the annual profit, as demonstrated in the following example. I also included in the example terms for investment cost and labour cost. For this hypothetical example, I estimated the number of hours and applied an hourly rate. If you view domaining as a hobby, you might not want to enter anything for labour cost. For investment cost, I applied an interest rate of 4% on the money invested in your portfolio at the start of the year. Simple Annual Profit $18,400 (see above) Wholesale Inventory Worth Start of Year $6000 Wholesale Inventory Worth End of Year $3500 Inventory Worth Change -$2500 Adjusted Annual Profit $15,900 Investment Cost (4% x $6000) $240 Labour Cost (250 hr x $20/hr) $5000 Annual Profit $10,660 Note that the estimate of annual profit is substantially less than the sales total for the year. I have not included a line for income taxes paid, but that is also a consideration. If desired, you can also calculate a return on investment (ROI) using these figures. Average Quality Most successful domain investors advise quality over quantity, and to improve your portfolio quality from year to year. A nice side benefit of working out a wholesale worth for your entire portfolio, is that you can also easily calculate a figure for the average worth of a domain name in your portfolio. For example, if at the beginning of the year you had 200 domain names with an estimated total worth of $6000, the average worth is $30 per domain name. If the preceding year a similar calculation suggested $25 per domain, then it indicates your average portfolio quality is improving. Sell-Through Rate If you have a sufficiently large domain name portfolio and number of sales, you may want to calculate your personal annual sell-through rate by dividing the number of sales during the year by the number of domain names in your portfolio. If you want to compare your rate with industry-wide rates, this article on sell-through rates can help. One point to consider is the cutoff price for sales included in the calculation. I use $100, but some only count retail sales above a higher figure. Most stated general sell-through rates use $100, since they are based on publicly reported NameBio sales data. A Fantastic Portfolio Analysis This week Nikul Sanghvi gave us a master-class in how to analyze domain name sales for a portfolio. In his portfolio sales analysis, he provides a wealth of data on number of sales, acquisition costs, sales prices, venue where sold, holding time, etc. The summary Nikul gives at the start of his report is a nice framework for any portfolio analysis. It includes the following items. Total revenue Minus commissions and fees Minus renewals and acquisitions Net (before taxes) Number of sales during year Breakdown of sales by venue Breakdown of sales by extension Average sales price Average hold time Average purchase price of domains sold Average portfolio size Annual sell-through rate Because Nikul Sanghvi is a highly successful domain investor who sells about four domains a month, at an average 4-figure price, he has a reasonable personal dataset to work on, particularly since he has been doing a detailed analysis over the past three years. Here are the links for his similar 2017 and 2018 analyses. But even for domain investors who currently only sell a few domains each year, summarizing numbers in the categories listed above, will provide an insightful view of their own performance. Price-to-Cost Ratio One useful measure is the ratio of the price sold to the cost of that domain name. You have a few choices to make, including whether to subtract commission and other costs from the price, and whether to add renewal costs to the acquisition cost term. The graph below, from Nikul’s report analysis, shows the ratio of sales price to purchase price, he uses the term sales multiples fort this. Note that the y-axis scale is logarithmic, meaning that the difference between a ratio of 1000 to 100 is the same length on the axis as that for 100 to 10. The ratio of domain sales price divided by acquisition cost in portfolio analysis by @Nikul Sanghvi. I think, to the degree that we can generalize from his data to other investor portfolios, this is really valuable information. Note that his portfolio is currently predominantly in .co extension domain names. The ratio of sales price to acquisition cost is much higher for lower cost domain names. For example, the lower registration-fee domain names had a ratio of several hundred, while the ratio is five or less for the highest-cost domain names. Outliers Outliers can significantly influence average values. For example, in his report Nikul Sanghvi indicated that his average acquisition cost was $78, but if he removed a single acquisition that cost $2000, the figure would drop to about $35. Similarly, in each year a few large-value sales accounted for a significant part of the total reported revenue in his report. Along with average prices he shows how excluding those outliers would impact average prices. I suspect the same is true for most domain investors. It is something to keep in mind when comparing average values from year to year. Not Just Once a Year The easiest way to handle your portfolio data is to use a spreadsheet that you update after each sale or acquisition. I also add in my cost cell when I make a renewal, so I know the total amount I have invested in that domain name. It is easy to track sales and costs on a continuous basis, although I would only invest the effort to adjust domain worth estimates for inventory purposes once a year. Have Your Say Probably each domain investor takes a slightly different approach to annual analysis of their portfolio. I hope many will share what they do, as well as comment on the model presented in this post. Here are a few specific questions. Do you produce an annual performance summary for your own use? Do you account for portfolio inventory worth changes, and if so, do you use wholesale or retail prices, and how do you determine them? Do you take into account costs for your own labour? What about investment cost for money that you have invested in domain names? Do you calculate a sell-through rate or a price-to-cost ratio? A huge thanks to Nikul Sanghvi for his superb post and permission to comment on it in this column, and to reproduce one of his graphics.