Introduction

Whenever you need a domain name, prevailing wisdom on the Internet often seems to be: "get it from whatever registrar is cheapest." Those registrars might employ flashy tactics like advertising domains as being sold "at cost," including "free" domains for a year with hosting purchases, or providing other enticing perks like free basic SSL certificates or "free" WHOIS privacy services. (If you're still paying extra for basic WHOIS privacy for gTLDs nowadays, I sincerely encourage you to look at other registrars; it's effectively a standard, free feature almost everywhere due to policy changes. You could send me half the difference you save for a year as a thank you!)

But how does this all work? How can a registrar afford to sell something "at cost" or give valuable services away for "free"?

Let's Belabor an Analogy: Buying a Car

If you've read my explanation of key internet entities, I liken domain name sales to auto sales (at least, here in the US, and not counting certain direct-to-consumer car brands). We're going to expand on that analogy a bit.

Typically, car dealers acquire their inventory from the manufacturer, often through purchase or specific consignment agreements. So, if a manufacturer provides a car to a dealer at a wholesale cost of $10,000, the manufacturer might also suggest a Manufacturer Suggested Retail Price (MSRP) of $15,000. Let's say the dealer has $1,000 in operational costs for that car (prep, salesperson's time, finance department's time, etc.). If the dealer sells that car for anything over $11,000, it's generating gross profit on the vehicle itself. The dealer could market the car for $14,000 and truthfully say it's "Below MSRP!" They make a few dollars on this core transaction, but the real money often comes when they sell you upgrades, accessories, extended warranties, financing plans, and other miscellaneous items during the sales process, potentially ballooning your $14,000 car purchase to a (hypothetical) $20,000 total transaction.

Under some arrangements, if a dealer holds a car on consignment and doesn't sell it within a specified period, they might then be required to purchase it from the manufacturer, tying up capital until it's sold.

Of course, volume plays a huge role. If a dealership moves a lot of cars because it's in a busy metro area that favors a particular brand, the manufacturer might offer them better wholesale pricing or rebates, say $9,500 per car instead of $10,000, knowing they'll make up the difference through increased volume.

The same logic applies to promotional pricing. If a manufacturer wants to boost sales of a particular model, it might offer those vehicles to dealers at prices closer to its own cost. This allows dealers to offer a lower price, making the car a more attractive option for buyers.

This business model has benefits for both sides:

• As a manufacturer:
  • You move inventory and generally get paid for what you build.
  • While you still need to build desirable products, your primary "sales" focus is on managing relationships with a finite number of dealerships, not millions of individual consumers.
  • The specifics of how each car is ultimately sold by the dealer are less of your direct concern.
• As a dealer:
  • If you can price the core product (the car) competitively, even near your cost, you can focus on upselling customers on higher-margin add-ons (financing, accessories, service plans).
  • You can build recurring revenue through vehicle servicing.
  • Even with some customer turnover, as long as there's a neutral or positive flow of sales and service, you can maintain profitability.

Plus, each entity primarily worries about the government rules and regulations applicable to their specific part of the business—manufacturing or retail.

Selling A Car Domain

Contemplating the above, here's how the analogy maps to the domain name ecosystem:

• Registries are the manufacturers. They operate specific Top-Level Domains (TLDs) like .com or .org.
• Registrars are the dealers. They are accredited businesses that offer domain name registration services directly to the public (registrants).
• ICANN is like the global coordinator and policy-making body, akin to an international standards organization or a specialized regulator. ICANN coordinates the Internet's unique identifiers, including domain names, and develops policies (with community input) to keep the domain name system secure, stable, and interoperable.

A registry "manufactures" the possibility of domains for a given TLD by operating the TLD's core infrastructure, ensuring it's accessible for both registering new names and resolving existing ones globally. The registrar "deals" these domain name registrations to customers—you and me. As an individual or business, you almost always interface with a registrar when registering or managing a domain name. While you might escalate an issue to the registry or ICANN in rare cases, or be affected by their policy changes or enforcement actions, your primary relationship is with your chosen registrar.

Registries often require registrars to maintain a pre-paid deposit. Each time a registrar facilitates a domain registration, the registry deducts its wholesale fee for that domain from the registrar's deposit. (I use "consign" loosely here, as it's more of a pre-payment system, and crucially, you don't "buy" a domain in perpetuity—you license it for a specific term). So, if a registrar deposits $100 with a registry, and the registry charges the registrar $1 for each domain registered (for a 1-year term, for example), the registrar must continually replenish its deposit as it's drawn down. The registry typically keeps that $1 wholesale fee (especially after a short "add/delete grace period").

As for the registrar, its profit depends on what it charged the registrant. The registrar's true cost for that $1 domain from the registry is actually more than $1, once you factor in infrastructure, payment processing fees, customer support, and other business expenses. So, if they sell that domain "at cost" (meaning, at the $1 registry fee), say for $1.10 to the registrant to cover immediate transaction costs, they might only make pennies, or even operate at a slight loss on that initial domain sale itself, hoping to recoup it elsewhere.

Yikes, right? Well, much like a car dealership, the initial domain registration is often just the beginning of the customer journey. On your way to checkout (and in subsequent marketing), your registrar will likely offer you a galaxy of add-on services: email hosting? A virtual private server (VPS)? WordPress hosting? "Have you tried our premium DNS for faster resolution and better security?" "Do you want that same name but in a different TLD for only $X more?" The profit margins on these additional services are significantly higher. That tiny profit (or loss) on the domain itself can easily be offset by a $10 or $20 profit from upsells during the initial transaction or later.

And that's just the initial registration. What happens at renewal? Let's keep it simple: assume the registry still charges the registrar $1 for the renewal year, but the registrar now charges you, the registrant, $15 for that renewal. Suddenly, that domain name is generating a much healthier margin for the registrar (e.g., $14+ before their operational costs, instead of pennies). It's just like visiting a car dealership for service after your warranty expires — their margins (and your costs) for services are often significantly higher than on the initial car sale. And we haven't even talked about the renewal of those high-margin add-on services you might have purchased.

Not a bad business model... if you can effectively market and sell those upsells and retain customers for renewals. This also explains why you often feel like you're navigating a gauntlet of promotional offers and upsell attempts when registering a domain name at many registrars, especially the larger, volume-focused ones.

Making A Car Domain

As North Americans have recently learned with vehicles, there is a lot of logistics, suppliers, and behind-the-scenes work that goes into making a car. Parts cross borders, raw materials are imported, it takes time to ramp production up and slow it down, and there seemingly isn't a piece of the globe that does not somehow contribute. Unsurprisingly, making a TLD available for domain registrations is the same—albeit with a little less logistical complexity. The registry is free to determine how much they source and handle internally, or they can choose to outsource much of their operations to other specialized entities.

Let's say a newly formed organization is accredited by ICANN to operate a new TLD. What does that registry actually need to make this possible?

• Technical Infrastructure: Globally distributed servers (and the hosting space and bandwidth) to answer DNS queries for the TLD itself and to operate the Shared Registration System (SRS) that registrars connect to for registering domains.
• Support & Operations Staff: To investigate and resolve technical issues, manage registry operations, and handle customer service with their registrar partners.
• Counsel & Compliance Staff: To handle audits, ensure compliance with ICANN policies, manage legal matters, and respond to law enforcement and other official requests.
• Sales & Marketing Staff: To market the TLD to registrars, manage channel partnerships, and track promotional deals and agreements.
• Finance & Accounting Staff: To manage the flow of money from registrar deposits, handle billing, and oversee the registry's finances.

This is where a new registry has to make key "build vs. buy" decisions: do it all internally? Outsource some functions and do other parts in-house? Or outsource basically all of it? This is where backend providers come in.

Companies like GoDaddy, Tucows, CentralNic, and Identity Digital offer services that can cover all of these technical and operational aspects. Given that building and maintaining the global infrastructure to run a TLD is a very expensive and technically demanding undertaking, a majority of registries (especially for newer TLDs) choose to outsource at least the technical part of their operation to a backend provider. While large, legacy registries like Verisign (for .com) operate their own bespoke infrastructure built over decades, outsourcing is the norm for many others.

The backend providers then charge these registries a fee, often based on the total number of domains under management (DUM) for that TLD. Each additional service, such as marketing support or dedicated compliance management, can then be added as another fee.

The registry, of course, has its own costs on top of whatever they may spend on backend services. The owner(s) may want a salary, investors may expect returns, and there are standard business expenses like corporate filings, taxes, and insurance.

Total up all these operational, technical, and business costs, and the number generated is what determines the wholesale price of a domain—such as the hypothetical $1 we discussed earlier—that the registry charges to the registrar.

Volume Discounting and Promotional Pricing

Now that we've covered the basic money flow, let's touch on how volume and promotional pricing play into this.

In today's scale-driven world, it makes sense that registrars selling a higher volume of domains in a particular TLD might receive more favorable terms from the registry operator. However, ICANN's agreements with gTLD registries include rules that require fair treatment and encourage competition. So, a registry cannot arbitrarily offer a lower wholesale price only to its largest registrar while keeping prices higher for everyone else.

A common solution involves rebates or marketing incentives. Under ICANN's framework, registries can offer registrars rebates on their registration fees if they meet certain conditions (e.g., volume targets for new registrations or overall domains under management), as long as these incentive programs are made available on equivalent terms to all accredited registrars for that TLD.

Expanding on our earlier numbers: a registry might offer that if a registrar achieves 1,000 new registrations in their TLD within a promotional period, the registry will rebate an additional $0.10 for every domain registered over that 1,000-unit threshold during that period. Suddenly, for high-volume sales, the registrar's margin improves. Sell enough, and it becomes a meaningful financial incentive!

Alternatively, registries might offer significant marketing funds or rebates if registrars meet certain targets. For example, before the wholesale price of .com began to rise, Verisign sometimes offered massive rebates to high-volume registrars, effectively lowering their net cost significantly. Imagine getting a $5-$6 .com domain in today's environment! This benefits both sides: participating registrars get a price advantage, and Verisign gets an influx of newly registered domains that might turn into meaningful, long-term recurring revenue.

Furthermore, some registries and/or registrars might strategically price certain TLDs very low, even for renewals, perhaps because they make the bulk of their profit on other TLDs or, more commonly, on those other bundled services and offerings.

By the way, just because a registry offers a rebate promotion doesn't mean all registrars will qualify or even participate. "Mega Registrar X" might easily hit the volume targets, while "Startup Registrar Y" might only dream of doing so. But the offer was available to all, allowing Mega Registrar X to leverage its scale, and Startup Registrar Y to aim for it in the future.

What's Next?

Understanding the economic relationships and incentives between these entities is key because it lays a foundation for exploring more advanced topics, such as the economics of domain abuse, the impact of different policy models, and other areas I have in mind for future discussion.