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Why Do Domain Names Cost Money (detailed explanation)

Why do we pay for domains

A usual question about domain names is why do we need to pay for them. I had the same question when I first started building websites.

So, Why do domain names cost money? Domain names cost money because we pay for the expenses and profit of 3 different entities: Government organizations that regulate the Industry( ex. Icann) Registries (wholesalers) and registrars (retailers).

Example of .com top-level domain cost

Let’s focus on a real example of the .com extension and how the cost is distributed.

Icann oversees the activities of registries and registrars. You can consider the Registries as wholesalers and the registrars as retailers. Icann also owns some root servers (a specialized type of computers) that store data about the IP addresses related to many domain names.

Keep in mind that computers connect between them with numbers (IP addresses). Domain names were invented because it is easier for humans to remember words than long numbers. The whole domain name system is built for this purpose, to connect the domain name (human-friendly address) to the right server (IP address – machine address).

At least for .com, no company can be a registry or registrar without ICANN’s approval. Icann sets some requirements to act as a registry or registrar.

The only registry for .com is Verisign. They own some route servers as Icann does. They also have all the data related to the ownership of the domains (.com) and which nameservers are related with each domain.

Meaning with which server your browser will interact with, to show you a website or a temporary page that indicates the domain is not in use yet or for sale.

In the case of .com, Verisign has a contract with ICANN which sets the fee that Verisign charges for each .com to 7.85$ (with some small increases in the next years).

Icann also adds a very small fee about 0.18c since it isn’t a business that seeks profits but mostly a government-related entity.

The registrars (retailers) such as Namecheap, GoDaddy they add some more dollars to the previous amount and we have the final price that consumer pays. There are no limitations on how much registrars will charge but since there is a lot of competition their profits per domain are limited.

It is usually around 10$ -12$ per domain but really depends on the approach that each registrar follows based on its long term strategy of getting new clients.

Your questions probably in that point are why Verisign takes so big fee comparing with the total price and in that case why they don’t offer themselves the domain to the final user instead of a registrar (GoDaddy, Namecheap).

In the domain industry, there are many voices that question the agreements between Verisign and Icann but since there was never an open competition for Registry role this is assigned for years now to them.

On the other hand, Verisign says that the huge prices for some domains (multiple hundreds or thousands of dollars) exist because of the unregulated activity of domain name investors, secondary premium domain name marketplaces that sometimes are owned by the domain name registrars.

I explain that part under the paragraph: “Why some domain names are so expensive? “.

Verisign is not allowed to sell directly to consumers based on the agreements with ICANN and the US government.

Registrars need to comply with some requirements to have the right of offering domains to the public. Some of these requirements are to have at least $70k in working capital and be able to get general commercial insurance for at least $500k that will cover any mistake that might harm end-users.

Example of .uk top-level domain cost

Let’s take a quick look at the cost of a different top-level domain such as .uk. In that case, the registry is a non-profit with the name Nominet. The wholesale price that they set is £3.75 per year so the usual price you will see from the registrars is £5 – £11 per domain per year.

Why domain names are not free?

As I explained previously domain names are not free because there are expenses related to the domain name system infrastructure and companies that seek profit for their contribution to that ecosystem.

There are some cases that registrars offer very cheap domains names (lower than their wholesale cost) or even free ones.

That happens for 2 reasons: 1.)They will probably charge you a bigger amount after the first year (domain names can only be rented and never fully owned). Of course, you always have the first priority to renew them and you get notified ahead of time if your domain is about to expire.

2.)They want to sell you other services like email or hosting and the overall price of these services, in reality, has included domain name cost too. The reduced price for this kind of services applies only for a year or for the first paying term.

Another reason that domains are not free is that even more domains would be unavailable since many domain investors would have registered them to seek a future profit of a resale.

How much does a domain name cost per year?

I collected some info from some popular registrars so you can be aware of what you should pay for a domain name. As I said previously sometimes registrars have promotional offers or coupon that reduce a price a lot. For example, godaddy.com offers 0.99$ .com domains only for the first year and mostly for new users. In the table, you will see the regular prices excluding this kind of promotional offers or coupons.

Registrar .com price for 1st year .com price for renewal
Godaddy $11.99 $17.99
Namecheap $9.06 $13.06
Google $12 $12
Hostinger $8.99 $10.99

How much should I pay for a domain name?

If you are planning to build a website quickly after registering your domain name, the best thing you can do so you can get the cheapest price possible is to register the domain with your hosting provider (you need hosting to create a site). The usual case is that hosting providers offer a free domain when you choose to purchase hosting too. Read that post for more buy domain and hosting.

If you are going to purchase many domains then you need to consider also the renewal prices too and what options each registrar has to offer. For some registrars, there are memberships that offer good discounts for those that buy domains in bulk.

Why some domain names are so expensive?

If you try to register a domain name now with some common word included you will probably face one of this situation: Either the domain would not be available for you to register or you will see the option of buying it by paying multiple thousands of dollars! We call these domain names as premium.

But why is that happening when we already know that the domain should cost less than 15$? The reason behind the expensive tag is that the domain probably is owned by a domain investor.

Domain name investors buy domains with the intention of a potential profit from a future resale to someone that will actually use the domain to build a website about his business.

The registrars participate in that secondary marketplace since they take a fee from the domain investor for every sale. There are also many sites that are focused on selling only premium domains.

Since the price is increased they take a good fee for any sale that happens in their marketplace. It is a usual scenario for registrars and those marketplaces to cooperate for better results.

Are premium domains worth it?

Sometimes it makes sense to spend more money on buying a premium domain than the usual 10$-12$. If you are planning to have a big budget for your business expenses then it makes sense to spend some hundred or thousands of dollars for your domain especially if the online part of your business is crucial for you.

If you are a small business owner that you don’t rely mostly on the web for your potential clients or a site is just a “nice to have” add-on to your small business then you don’t need to spend more than 10$-12$ dollars for a domain. For example, if you own a local coffee or restaurant it wouldn’t make sense to spend a lot of money for a premium domain.

On the other hand, if the site is the first point of contact for your potential customers (such as an e-commerce website) or you are an established company with a big revenue then it is normal to spend a bigger amount of money for a premium domain.

Conclusion

I hope after reading this post you will have a better understanding of why do we pay for a domain name. If the content of the post was helpful to you, please don’t forget to share it on social media!