How to Determine the Maximum Amount You Should Pay for a Domain Name

If you buy and sell domain names you understand that setting a cap on how much you should pay for a domain is extremely important.  It is important because it plays into your cash flow and your profit percentages.  I’m going to do some basic math today that may help you think about how you should be setting you purchase price cap.  Everyone’s situation is different so take the numbers below and play with them to figure out what meets your specific needs.

Assume I start the year with $10,000 in cash on hand to invest in domain names.  Let’s assume at the end of the year I want to have $10,000 on hand.  This second figure gives me the basic premise that I need to calculate off of since it is my ending point.

If you are a domain flipper you need to have a good handle on the likelihood of flipping a domain.  Since my ending point is 1 year out I am going to need to make an assumption about the likelihood of flipping a domain within a year.  For this example let’s say I think I have a 25% chance of flipping the domains I purchase by year end.

Doing the simple math if I have $10,000 to buy domains, and my likelihood of selling them is 25% then that will translate to me selling 25% of $10k (or $2,500) worth of purchases by year end.  If I want to hit my original $10k cash on hand that means I need to earn $7.5k in profit on my $2.5k in sales, or a 300% return.

I would end the year with $10k in cash on hand ($2.5k is from my original cash and $7.5k is profit) and I would be holding $7.5k worth of purchases.

Now that I have the figures I can apply those to my buying decisions.  I need to be able to pay at most a dollar amount that I think I turn around and sell for four times the price and succeed a quarter of the times within the specified timeframe (in this specific example).

You can take the scenario and play around with the figures.  If your likelihood of flipping a domain goes up than your required profit goes down (or vice versa) to meet your cash on hand goal.  I remember when I first started buying domain names to flip I had no math behind how much I was willing to pay.  I had a general/vague idea of what I could sell it for but didn’t understand what the likelihood of selling the domain in a relative time frame was and I learned the hard way by having a cash crunch in the funds I had allocated to purchase domains with.  Having some math behind your bidding also helps keep you grounded.  In the domain auctions I see what people are paying and sometimes I know there is no way they are going to be able to flip that domain in any reasonable timeframe for any significant profit so they are putting themselves in a soon to be cash crunch.  If they had a formula or two worked up they would know this too before they go overpaying.

Good luck all with the flipping.