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Monday, February 18, 2008

Is Your Registrar's Multi-year Deal Worth It?

Almost every domain name registrar out there is offering a deal these days: pay up front to register your domain name over a multi-year period and save money. The question that my clients and colleagues alike invariably ask is whether or not these deals are worth it.

My answer: Maybe.

Realistically, whether or not a multi-year registration is worth the cost depends on a lot of variables. For instance, the first question I ask is "Will you still have a website in 5 years? What about in 10?", and, "If so, do you think your business' name will be the same as it is now?"

Usually the blank stare is enough to tell me that a 10 year deal is probably not a good investment. But let's assume for a second that my client knows for sure that her online venture will still be up and running 5 or 10 years from now. Is it still a good deal? Well, then it all comes down to finances.

Common Knowledge and Misconceptions
Of course it's your registrar's duty to make you think that you're making out like a bandit when you opt-in to a multi-year deal, which is why it likes to tell you what percentage you're saving if you take the multi-year option: "Save 50% with a 10 year plan!"

50% of what? Indeed, that is the question. By making some quick calculations it's usually pretty easy to see that you're saving when compared to 10 years at the full price (whatever that may be). What your registrar doesn't want you to know is that you may not be saving as much as you think.

Anyone who has been subjected to a collegiate finance course can tell you that $1 is worth more in the future than it is today. How is that possible? Well, imagine that you have $1 right now, and you put it into a high-yield savings account that has a 4% annual yield. A year from now your $1 will be worth $1.04. Hence, your $1 will be worth 4 cents more a year from now than it is today.

We can use a similar approach to figure out what $1 in the future is worth today. Again, let's imagine that the current annual interest rate on a high-yield savings account is 4%. We would like to know how much to deposit today in order to have $1 a year from now.

$1/1.04 = $0.96*
(*rounded to two decimal places)

So, we'd need to deposit 96 cents into our high-yield savings account in order to withdraw $1 a year from now. $0.96 is the present value of $1 in one year if the current interest rate is 4%.

Multi-year Discounts and Present Values
Now let's use what we know about present values to determine whether or not we're getting a good deal.

As of today, Register.com is offering multi-year registration of top-level domains at the following prices:

1 year: $35
2 years: $70
5 years: $149
10 years: $249

Clearly, the alternative to purchasing one of these packages is to simply pay the regular price of $35 per year. But, as we already know, $35 is worth less today than it will be in the future, so we need to know what the present value of making a $35 annual payment is over several years, keeping in mind that we'll be making our payment at the start of each annual period. The current annual yield of a business savings account with ING Direct is 3.75%, so the present value of $35 paid annually with an interest rate of 3.75% is:

1 year: $35
2 years: $68.73
5 years: $162.80
10 years: $298.23

From this we can see a few things:
  1. We will indeed save money if we opt for the 5 or 10 year plan. However, we are not saving as much as Register.com would like us to believe (for instance, we're really only saving $49.23 rather than $101 by going with the 10 year plan).
  2. We actually lose money by taking the 2-year plan.
Point #2 is important to note, as most of us would simply think that paying $70 for 2 years up-front is the same as paying $35 now and $35 a year from now, but it is not. Instead, we could pay $35 now and put $33.73 into a high-yield savings account earning 3.75% interest. In a year we'd have $35 which we could use to pay for another 1-year contract. Thus, our second year really only costs $33.73 rather than $35.

Deal or No Deal
In this case we see that the longer-term deals (5 and 10 years) with Register.com are certainly money-savers right now, but will they always be? Maybe, maybe not.

In our analysis above we assumed two things:
  1. The annual registration fee will remain constant at $35 over the next 10 years.
  2. The annual interest rate of our high-yield savings account will remain constant at 3.75% over the next 10 years.
If both of our assumptions remain true over the next 5 or 10 years, then we know that we've saved money by taking the multi-year deal. But what if we take the multi-year deal and one (or both) of our assumptions prove to be false? Let's find out what happens...

What happens if the annual registration fee changes?
If we take the multi-year deal and the registration fee changes then we may not have made a good deal. If the annual fee goes up, then clearly we'll have saved even more than we'd initially thought over the contract term. However, if the annual registration fee goes down, then it's certain that we're saving less than we initially thought, and it's possible that we're actually losing money over the course of the contract. It all depends on how much the annual fee goes down and how far into the contract term we are. Generally speaking, smaller price changes will have a greater impact earlier in the contract than they will later.

What happens if the annual savings yield changes?
Similarly, if we take the multi-year deal and the annual yield of the savings account changes, then it is possible that we've not made a good deal. Generally speaking, if the interest rate goes down then we'll have saved more money with our long-term contract than we initially thought. But, if the interest rate goes up then it's certain that we're saving less than we initially thought, and it's possible that we're actually losing money. Again, this depends on how much the interest rate goes up and how far into the contract term we are. And, just like price changes, smaller interest rate changes earlier in the contract will have a greater impact than the same changes later in the contract.

What happens if both the interest rate and the registration fee change?
Once again, the extent to which our potential savings is affected depends on how much each changes. If the interest rate goes up AND the registration fee goes down, then the two effectively compound and we'll have saved far less money than we initially thought when we signed the multi-year contract. However, if the interest rate goes up but the registration fee also goes up (or if they both go down), then it's possible that the two changes will simply cancel each other, and the net savings will be comparable to the deal we had initially.

Other Risks of Multi-year Deals
There are certainly other risks associated with multi-year domain registration contracts that go beyond interest rates and registration fees. Chief among your concerns should be the longevity of your potential registrar, however there are other things to consider as well. Be sure to read your contract carefully, as there may be additional fees incurred for certain services, and the terms of the contract might make it painfully difficult and costly for you to get out of the deal if it goes south (or if you find a better deal...).

At the end of the day, the question of whether or not you should engage in a multi-year domain name registration will depend largely on your firm's goals over the next 2 to 10 years, while the financial implications of a long-term deal may not be the first thing that comes to mind. Nonetheless, it is important to take those financial concerns into consideration! If you're unsure about it right now, stick with a yearly renewal plan. After all, you can always decide at a later date to go with a long-term commitment.

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