Are Domain Name
November 16, 2005
Domain name marketplaces charge 12-15 percent
commission on the sale price. The commission can be paid by the
buyer, seller, or divided between them.
At a first glance, this might seem high compared
to something like the 6 percent real estate commission. Below
I will provide arguments as to why a higher commission rate for
domain names is justifiable.
In their recent bestselling book, Levitt and Dubner point
out that the 6 percent commission does not give a buyer’s real
estate agent an incentive to secure the best price for the client.
They point out that for a sale of a $300,000 property, the commission
to the seller’s agent is only 1.5 percent, yielding a $4,500 commission.
However, they point out that if the house is sold for an additional
$10,000, the seller receives a net additional amount of $9,400,
while the agent only receives an additional fee of $150. The agent’s
commission, they point out, is not enough of an incentive for
the seller’s agent to go the extra mile to secure the property
at, say, an additional $10,000. Hence, the agent would not work
in the best interest of the owner. Moreover, Levitt and Dubner
point out that an agents’ personal property is sold, on average,
at 3 percent higher than a client’s and that the agent’s property
is kept on the market for 10 days longer.
Unlike the real estate market, in which property
that is similar to other properties on the market frequently changes
hands, works of art and domain names are unique or nearly unique
and are infrequently traded. These two major characteristics contribute
to higher commissions in both the art market and the domain name
market. In the art market,
for example, Ashenfelter and Graddy report that an average commission,
called the “buyer’s premium,” paid by the buyer is 10 percent
to 17.5 percent of the sale price – called the “hammer price”
- but is lower for large purchases. Thus, a winning buyer pays
the hammer price and the buyer’s premium. Sellers also pay a negotiated
commission of 10 percent of the hammer price. In some cases sellers
pay no commission. As with domain name marketplaces, art markets
provide a wider range of services than real estate agents.
Like in the art market, domain name commission
is justifiably higher than a real estate agent’s so as to provide
an incentive to the agent to go the extra mile. Moreover, domain
name marketplaces, besides providing an exchange mechanism, they
provide additional services including bringing in the other side
of a transaction to the negotiation table, qualifying buyers and
sellers, and participating in negotiations, escrow, title transfer,