Categorized | Developing Domains

Rick, the Cash Register Idea Is Unfortunately Not Scalable

Posted on 09 November 2011 by Andrei

Rick Schwartz wrote a blog post today about an idea that sounds great in theory but based on my experience as a domainer who owns several online businesses (with employees, products and so on), the idea in question is unfortunately not scalable.

I wanted to comment on his blog initially but the comment ended up becoming a novel, so a blog post is more appropriate because I can format it better.

Alright, let’s start with two quotes from Rick’s blog post:

Our #1 common problem is we have great real estate and we have yet to have many ideas to turn that real estate into income producing businesses.

“Here are a couple of guidelines. The site should have a “Cash Register” and there can be no 3rd party PPC ads on the site. This MUST be a business.”

The concept is as follows:

1) you as a domainer, own some excellent Internet real estate [CORRECT]

2) you want to turn your domains into revenue streams [CORRECT]

3) why not do it by turning them into real businesses with actual products? [PROBLEMATIC]

#1 and #2 are obviously true, we own some impressive Internet real estate and, naturally, want to turn our domains into revenue streams.

But can we do it in a sustainable and scalable manner by turning them into businesses with actual products? In my opinion, that is not possible because this business model is unfortunately not scalable.

Let me explain why.

There are basically two approaches:

1) Turn it into a business yourself
2) Hire a development company

If you want to turn a domain into a business yourself, you have a lot of work ahead of you. Let me just give you one example, a business I personally own:

Even though it’s a relatively new hosting company, there are a lot of variables which need to be taken into consideration. When people submit tickets, they expect answers within minutes, so I have staff on the call 24×7 to make sure that each ticket is answered in a timely manner. I hired people for level1 and level2 support (so support for relatively uncomplicated problems), I hired people for level 3 support (complex issues) and so on.

Then I have to market the site, manage my relationship with the datacenter, with the hardware providers etc.

You get the point.

The message that I’m trying to get across is that even if your business runs like a well oiled machine, you’ll have to invest quite a bit of time to make things happen and that brings us right back to my initial point:

The business model is not scalable.

Realistically speaking, you can definitely run a site like yourself without turning into a zombie. You can run two, three or even 5 – 10. But you’re only human, so there’s just no way to manage everything after a certain point and if you were to spread yourself too thin, there would be consequences: some of the businesses would turn into money pits, you’d lose focus and the list could go on and on.

Alright, so why not hire a company or several companies and let it/them take over?

You could. You can.

But would this approach be profitable? In my opinion, it would not.

Running a business and running a regular website are two different things and the level of involvement necessary to turn a project into a success varies accordingly.

Unfortunately, you can’t just hire a development company in a “set it and forget it” manner for a business as you would for an AdSense site (for example) because the process is fundamentally different.

Finding a reliable development company which works exclusively on revenue or profit percentages will be pretty much impossible because most serious companies (the overwhelming majority) want to be paid for their time/resources.

Kind of like an employee.

If you have a profitable month, the employee needs to be paid. If you lose money the next month, the employee still needs to be paid.

If you try finding companies which work exclusively on revenue or profit percentages, then you’ll probably end up attracting one of the following:

1) beginners who don’t know what they’re doing and will only waste your time

2) companies which, in order to make the deal worth it on their end as well, will want terms that are less than appealing for you as a domainer (domain ownership, an initial infusion of capital, subsequent infusions of capital and so on) and these terms will unfortunately make profitability a far away dream

I’m sure you guys get the point.

I like Rick’s partnership idea (selling the domain for cash + revenue/profit percentages) and I think that it’s an excellent way to establish a solid foundation. Scalability is not a problem in this case, you simply make this concept a part of your end user negotiation strategy, add a reliable lawyer to the equation and bam, you’re good to go.

But developing your own domains into businesses, totally different story. Why? It all boils down to scalability and, as I hope I’ve managed to explain through this blog post, the cash register approach is unfortunately not scalable because the fundamentals are just not there.

11 Comments For This Post

  1. fizz Says:

    Excellent post, great insights BDM.

  2. Xdreamer Says:

    most developers would not do this

    its simple to bill for content sites but I wouldn’t know how much to ask if you want me to handle a business

    plus if you want me to develop as a business then I couldn’t do it because I know how to create sites not how to sell furniture

    so aother partner is needed who knows the furniture business

    very hard this way and the best way is if a real furniture business buys the domain and uses it because they already know how to sell the item and all they need extra is a site

  3. Fastjoe Says:

    Hate to say it but parking has its merits as a way to make money just by changing dns.

  4. hqdn Says:

    I agree this wouldn’t make much sense if you have a lot of domains to manage. What are your thoughts on leasing the domain to someone who wants to develop it into a business (with option to buy)?

  5. Andrei Says:

    @hqdn: it can be an excellent alternative to reducing your asking price. In a lot of cases, the buyer genuinely can’t afford to pay the initial asking price and instead of settling for less, it might be worth it to let the buyer pay in monthly installments while retaining ownership until the amount has been paid in full.

    Or if a sale is out of the question, then you can simply lease it without a purchase agreement. You’ll make considerably more than you would have made by parking the domain and will get to keep your asset. But remember to make sure that the buyer does not want to do something shady with it because if that is the case, you as the owner will end up dealing with unpleasant consequences.

  6. Mark Jeftovic Says:

    I think this article goes straight to the crux of “the domainer fallacy”. Domainers tend to think that getting the right name is the hard part, and if you own good quality names, then you can just “plug in some businesses” and presto, you have an income producing property.

    But the reality is that building the business is the hard part. Even worse, if you successfully build the business, then the domain name you build it on is less important (dare I say, unimportant).

    This is where domainers get into a hissy fit. I’ve always said, having a great domain name helps, and it’s certainly better than having a crappy one.

    But the name WILL NOT make the difference between success and failure. Having THE category killing domain name in some vertical will NOT take an otherwise unsuccessful business and turn it into a success. And a successful business that doesn’t own the category killer will not be hindered but not owning it.

    When I see press releases for domain companies announcing some category killer they “plan to develop” my eyes glaze over. I haven’t seen a compelling one come through the pipeline yet.

    My advice to people is this: start with the business idea. Let’s say you have a category killer domain name. Pretend you don’t. Does your business concept make sense, get you energized and have legs even if you don’t own that domain name? If it doesn’t, your domain name isn’t going to help you. You’ve already failed. If it does, then you are in an enviable position: you have a compelling business concept AND a nice name to brand it under.

    The former is essential, the latter is optional. I’m sorry domainers, but it’s true.

    Let the flaming begin.

  7. RB Says:

    perfectly said Mark! I agree that an awesome domain wont help a bad business and I’ve seen many websites that had a great business yet a terrible domain. I do think however that a bad business will gain credibility with a better domain name. (at least for a little while)

  8. Andrei Says:

    @Mark: thanks for dropping by and commenting. You raise some very interesting points but I firmly disagree with this part:

    “Even worse, if you successfully build the business, then the domain name you build it on is less important (dare I say, unimportant).”

    In a lot of cases, the domain can and will make the difference between success and failure and I’ll explain the statement I just made in a post I’ll write later today. This is one of the most important topics we need to analyze as domainers and I feel it deserves its own blog post. I’ll shoot you an email after the post has been published and am looking forward to reading your opinions.

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