The Fatal Flaw with Domain Auctions and the Cure to Come!

Morning folks!!

The biggest mistake some of the auction houses are making is they don’t know how to ask the right questions, they don’t know what price points are attractive to domainers and then of course they don’t choose the right domains because they are not looking at it through the eyes of a DOMAIN INVESTOR.

And a domain owner is not looking at the audience they want to sell to. Therefore we have had some lackluster auctions over the last few years. We are investors not end users although eventually we might be both. Some already are. But they know the difference in a retail price vs a wholesale price.

I have a List of TEST of questions that must be met if a domain will be making it into the auction. The auction houses are not asking these questions and thus we see what we have seen.

Listen, we all want the end user to be there and buy. And generally 1 or 2 show up and a partly prearranged sale is confirmed in front of everyone. That sale saves face. But screw face. Let’s get to making a difference.

We are selling to domainers. What are domainers looking for? They are looking for an undervalued domain that they believe has a value at a minimum 10x what they are buying it for. But more than that they are asking the $1 Million test question. Can this $10,000 domain really have a $1,000,000 value? That’s what they want. They want at a minimum to know there risk is low. The best way to do that is having really good domains that everyone knows are really good domains. That can be developed if they choose. That mean something.

The domains for 6 figures still have to pass the minimum test or it is too risky and you can use you dollars better. So a $250,000 investment has to be easily worth $2.5M for it to be a bargain, for it to be attractive, for it to sit on the shelf for years while the value appreciates to that level.

There is a “Sweet spot” for selling domains to domainers. Buying a $10,000 domain that you could see being important enough to demand $1 Million is what the audience wants. To buy it for $10,000 and flip for $15,000 is all well and good but that part of the audience won’t be driving up the price to a real value. It will be undervalued.

Having multi-million dollar domains in an auction might look good, but unless there is a REASON to be in the auction, it’s wasting everyone’s time and the “Show-boaters” come out in droves.

It’s all about the upside and what I see in most auctions are domain names that can’t pass this test because nobody understands this test. Sure it is exciting to see a 6 or 7 figure auction. But what is better is watching genuinely great names at domainers prices being put on the table and letting the MARKET drive the value. If you want end user prices you need to go to that industry and have that auction. Domainers are not going to bite unless they see a HUGE upside. Especially now. Money is tight and every purchase is important.

What’s exciting is seeing a GEM come to auction with a low reserve and starting low and letting the market give it a great value. Great value because 1 or 2 saw a great use.

There was only a handful of magical moments in auctions. The first live auction in 2005. I still remember the line that broke the ice that made the audience feel comfortable. Somebody yelled out a ridiculously low bid and the auctioneer responded, “That’s for the bid Mr. Rockefeller”. That had everyone laughing and THAT was the MOMENT history was made. We had lightning in a jar and then we had a damn good run culminating with the 2007 June Auction in New York. $12.5M

Coincidentally, this was the only auction I had hands on input. Not taking away anything from Monte and his crew. They did the heavy lifting. It’s tough work and I know what a pain in the ass it is. But Howard and I had everything at stake because the show itself was going to lose $250,000. New York is expensive and the math did not work. But I also knew the industry needed to get there. There could be a real opportunity bringing domains to New York. The entire show rested on a successful auction. A bad auction and we were out of business and $250k in the hole. Game over. This was the moment and we had to go “All in.”

So when I tell you that everything rested on the auction, I am serious. It was the entire enchilada. I was banking that domains in New York would create a stir. Would be well received. But it was only what I believed in my gut because the spreadsheet let me know what a risk it was.

$12.5M later we did it. The big gamble paid off. I just wanted to break even and get New York under the belt of an emerging industry. Mission accomplished and we had some walking money. Point is, that was the model to copy and because of one thing or another it never was.

That auction was carefully crafted as to what domains would appear when to get momentum and excitement to build. It was done methodically. We had the right domains at the right price points for domainers. We had each domain in those slots for a reason. It was done with a lot of care. Once auctions became like every day events, that type planning never returned.

This October will be the first time I am personally picking the domains along with each auction house. Each auction house has a responsibility to meet the basic guidelines we set. What you will see is a completely open auction with almost every major auction house participating with a small group of GREAT domains at GREAT prices.

And the biggest difference other than those, we won’t look like fools by starting an auction at $1M and then dropping until somebody bids $1000. Each auction will start at $1 or $1000 and quickly bid up. Even if it does not sell, we will establish “True market value.” Reserves will be handled differently as well. This will prevent showboat bidding to look cool in front of everyone or to do somebody a favor. We won’t take non existent bids. If there are no bids there are no bids and we can just move on.

The auctions will be much faster moving and exciting because we will quickly establish a new way of doing business. We have no favors to keep. We have no direct selection of the domains only REJECTION of domains that don’t fit the audience. And we are starting the push for those domains in the next few weeks.

So why pick TRAFFIC as the venue for your domains and commit early? Because our audience means business and we have demonstrated over the years that given good names at good prices the names get sold and we are capable of having a record setting auction.

It takes time to really market a domain. Each seller has a duty to HELP market their domain. Howard and I will do what we can. The auction houses will each be doing what they can. We will all be rowing in the same direction for the first time and you will see RESULTS when that happens.

There are other pieces to the formula that I don’t want to talk about right now. But I think you will see a huge difference. We will have but one auction to do in 2011. We have already begun the process behind the scenes. But the focus on one project to get it right will yield great results.

And here is a little secret. The “End user” will show up because there is enough time to do this right and not hastily putting names together. The sooner we assemble the final list, the sooner we can market.

So we are serious about fixing the auction process and we are serious about increasing all value by doing it right and restoring some credibility to the process. We won’t get it all right, but you are sure as hell going to know things have changed.

Have a GREAT Day!

Rick Schwartz