The domain industry of 2008 has been significantly different from last year’s industry. A lot has changed, not only within our industry but in the economy in general. To speak the truth, it has become more difficult to make money in domain investing.

Domain registration fees are on the rise, parking revenue is declining, and there are less buyers in the lower end of the market. Speculative domains such as four-letter domains or other meaningless names have dropped in value drastically.

All this is a reason why you should take a close look at your portfolio now. Like most, you might find yourself in a situation where it would be wise to change your strategy, to adapt to the current economic situation. Most domain investors have been lazy, and why not? They are used to making lots of money with a minimum of work simply by pointing their domain names to parking pages, every now and then accepting an offer to sell a domain. But that strategy will not work for the smaller investors anymore and even the big players are looking at alternative ways of monetizing their portfolio’s traffic.

What I want to discuss, however, is that you should really analyze your portfolio and reconsider what domains you want to hold on to. When the costs of holding domains are up and the revenue generated from those names is down at the same time, profits are going down due to a growing number of domains not breaking even at the end of the year.

Personally, I have taken a close look at my different domain portfolios and I have let hundreds of domains expire or I sold many at low prices. Even more than during the last years, quality is king. It is not wise to try to build the largest portfolio in the industry; you should only be aiming for the best portfolio.

In order to improve the overall quality of my portfolio I looked at two variables that were relatively easy to determine on a domain-per-domain basis: Keyword Value and Traffic.

I got the traffic stats from the parking companies where my portfolios have been pointed to. The keyword value I determined on a gut level, believing that after more than five years of buying and selling domains in all price ranges I had a relatively good idea of my domain names’ values.

How to quickly decide which domains to let go and which to hold on to? And just as important, which domains should I be putting work and money into in the near future?

In order to make those decisions I made use of a simple classification model developed by the Boston Consulting Group (BCG) for the valuation of single business units. It is a model for corporations to evaluate their individual businesses for strategic decisions, so it is pretty much what you need when evaluating your domain name portfolio.

The model is called BCG Matrix, and as I said, it is quite simple. First, you put up a grid with two dimensions. That grid is divided into four classes.

As you can see in the graphic below, the two dimensions I deemed to be relevant for my portfolio are the individual domains’ keyword values and their traffic. Under traffic I also subsume the revenues generated. For example, if I know that a domain receives only, say, 20 visitors per month, which is a low traffic number, but that traffic converts well and results in $10 monthly revenue, that’s way more than the cost of holding the domain, so that is positive and the domain should be kept. That is why I called that dimension “Traffic Score” instead of only looking at the pure traffic numbers.

Using a calculator like Excel you can create a formula for determining a domain’s traffic score by summing up the visitor numbers and the revenue stats. I would suggest not to simply add up the revenue stats but to first deduct the domain’s annual renewal fee from the expected annual parking revenue (e.g. if a domain makes an average of $.1 per month it makes about $1.2 annually; if you pay $8 for the domain annually, the domain’s annual cash flow is actually -$6.80, so it is negative). Secondly, I would put more weight on the cash flows than on the visitor numbers. You could, for example, multiply the cash flow numbers by 10, but that is really up to you.

Examples:

DOMAIN1.COM, 50 visitors/mo, $1/mo, -$8/yr
TRAFFIC SCORE (TS) = 50 + (12*$1 – $8)*10 = 90

DOMAIN2.COM, 100 visitors/mo, $0.1/mo, -$8/yr
TS = 100 + (12*$0.1 – $8)*10 = 32

You should play a little with the weight you give to the annual cash flows depending on your personal preferences. Or, maybe you come up with a different, better formula.

After you have assigned a monetary keyword value to your domain names and after having calculated the traffic scores, you can then plot the domains in the domain matrix. You will then see what category they fall into. Here it is important to note that you should set the limit values between the classes to reflect your needs.

In Class I on the lower left you should then mostly find domains of comparatively poor keyword quality but with high traffic scores. These are your cash cows. They might not be good for a future end user sale, but they receive quality traffic and result in positive cash flows at year’s end. These are no domains to invest more cash in, but they are certainly domains to keep.

Class II (upper left) will include your portfolio’s best domains. These are domains you should keep. More importantly, renew them well in advance, they might be good for a big-ticket sale and you will not want them to expire. It is likely that most of the domains in this class are generic domains, so another strategy would be to develop domains from this category to further build up their traffic and value.

In the upper right there is Class III with domains that should have valuable keywords, so they might be eligible for a profitable future sale, but they have a low traffic score, maybe they even generate negative annual cash flows. In this case, you need to decide on a domain-by-domain basis. If I keep the domain and continue paying for its registration, can I still make a profit from it by selling at a later time? Gut feeling, again.

Finally, Class IV (lower right) should include mostly the not-so-good domains from your portfolio. If you don’t think they will be an easy sell in the future and if they don’t rake in enough money to pay for their renewals, look into selling them now or let them drop.

This is only a simple tool to value your portfolio, but it might provide a useful rule of thumb for you when deciding which domains to develop, renew, sell or delete. You must still pay close attention to the individual domains within the categories before hitting the “delete” button, because this model most likely isn’t bullet-proof and some domains (especially those around the borderlines) might end up in the wrong categories. Don’t let the model replace your brain power. Still, I hope it makes sense to you. Maybe it will be useful in deriving a good domain name strategy for you for the months ahead.