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The psychology behind domain name valuation.
When it comes to understanding the psychological phenomena involved in valuing a domain name, various interconnected cognitive factors are at play.
Psychological effects of pricing
When a domain name is purchased at a specific price, an anchor (*) is set. If one perceives it as a bargain, subsequent valuations will be higher than this anchor, even if that price is significantly higher than the acquisition price. In this article, you'll read about the various psychological effects at play.
FOMO (Fear of Missing Out)
When a well-known individual or company buys a domain name for a certain amount, this can be seen as validation. The thought process is: if they find value in it, then it must be its actual worth. Thus, there's an unconscious influence at play, closely tied to the 'Fear of Missing Out (FOMO).' Upon acquiring a premium domain, it generates a sense of urgency and scarcity. Potential buyers might suddenly feel they've missed out on a great opportunity, prompting them to make even higher offers, even if they hesitated before.
If an interested buyer initially doubts the value of a particular domain name and then sees a major player acquiring it, that buyer might experience cognitive dissonance. This is the discomfort of holding two conflicting beliefs: Is this domain truly worth it? vs. A significant player finds it worthwhile!
To resolve this discomfort, they might conclude that the domain is indeed valuable, leading them to pursue it and even be willing to pay more.
The Halo Effect
Associating a domain name with a highly reputable company can lead to the 'halo effect': people believe that anything associated with this company (such as the domain name) is also of high quality or value.
Essentially, the prestige of a digital brand (domain name) lies not only in its immediate utility but also in the psychological and social capital it brings.
Digital Real Estate: Overbidding on a Domain Name
The decision to still want to buy a domain name, even at a higher price, is often a mix of recognizing the business importance and the psychological benefits of validation, prestige, and association.
The world of digital real estate can be compared to physical real estate. Location and perception are tremendously important. Once someone acquires prime digital real estate, others can't help but see its value even more. In practice, this is often observed with domain names sold through auctions. Soon after, another buyer appears willing to acquire the domain name at a higher price.
Value as an Anchor (*)
The initial price set for a product or brand serves as a sort of 'anchor' in our minds. Once this is established, every subsequent valuation, higher or lower, is adjusted based on this anchored price.
This is a translated summary of this LinkedIn post by Fred Mercaldo (CEO of Geocentric Media).
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