Studies
& Opinions
Parking
or Ecommerce?
Alex
Tajirian
January
31, 2007
Introduction
The debate as to what is the best use of domain name
development will get center stage at the next TRAFFIC conference.[1] Unfortunately, however,
even in the absence of financing and capabilities constraints,
there is no unambiguous answer, as the decision depends on the
risk-return preferences of the domain name owner.
The article sheds some light on the source of ambiguity
and outlines some tips to assist in the decision process.
Taxonomy
of Debate
There is no unique taxonomy to address the question.
The TRAFFIC conference has phrased it in terms of park vs. develop.
However, one can interpret such taxonomy as a continuum of degrees
of development. An alternative taxonomy can be based on a website’s
business model.[2] A second alternative can be based on functionality of the website,
such as a marketplace, broker/agent, or market maker.
Below, I consider two business models, parking (which
is built on a business strategy of limited product/service differentiation)
and ecommerce. More specifically, the question I address is that
of when should an owner switch from parking to ecommerce, given
the characteristics of the domain name and the owner’s risk-return
preferences?
Risk-Return
Ambiguity
Ecommerce can provide higher returns than parking because
it involves solving a more complicated coordination problem and
represents a higher revenue margins business. However, operating
costs tend to be higher too. Thus, ex ante profits need
not be positive. Moreover, the coordination problem and demand
uncertainty increase risk.
Nevertheless, the simultaneous increase in risk and expected
return can complicate the decision process. For example, consider
the following risk-return tradeoffs:
Example:
Risk-Return Options
|
Parking |
Ecommerce |
Expected Return |
40% |
50% |
Risk |
5 |
10 |
Given the above example, two rational domainers looking
at these numbers may come to different conclusions. One might
prefer parking, while the other ecommerce, as there is no risk-return
dominant strategy.
When
to Switch From Parking to Ecommerce?
When contemplating a switch to ecommerce, the following
issues need to be considered:
1. Not every domain is suitable for ecommerce. The following
checklist needs to be completed first.
a. Insure
the appropriateness of the domain name’s TLD signal.[3] For example, “.info” conveys
the image of an informational site rather than ecommerce.
b. Insure
that user intent,[4] as implied by the domain name, is congruent with the content of
the to be developed ecommerce website. For example, MusicDownload.com
is not suitable for selling music CDs online.
c. Verify
that the domain name is not more suitable for leasing.[5]
d. Verify
that the domain name does not infringe on someone else’s trademark.
2. If
the owner of the domain name is facing a budget and/or capabilities
constraint, and thus, not be able to invest in an ecommerce site,
the domain name may be leased or co-developed.
3. One way to resolve the decision’s
potential ambiguity is to simplify the preference decision by
looking at the respective alternatives’ expected return per unit
of risk. Under this simplifying assumption, the respective ratios
are 8 (=40/5) and 5 (=50/10). Thus, the parking option, although
it has a lower expected return, should be rationally selected.
4. Due diligence:
a. Obtain
clear and robust estimates of expected revenues, costs, and risk
associated with the opportunity cost and cash flow estimation
error.
b. If you are leasing your domain name
to an ecommerce development company, the performance of the manager
must be carefully assessed, in that, average performance, in this
case, is not a robust performance measure of performance, unless
your domain name is an integral part of a managed portfolio. Thus,
look at the manager’s top performers and laggers. The lagers might
have similar characteristics to your domain name, and thus, can
provide valuable insight into the success of your domain names.
c. To reduce cash flow risk, have your
domain names be managed as an integral component of a portfolio
of ecommerce domain names.