GoDaddy: Domains, Upselling, and Competing with Shopify

Domain has and always will be an entry point for many people. To the extent that the other entry points shift power, control and choice away from GoDaddy to Shopify, Wix, Squarespace, Amazon or Google, those are the existential risks that GoDaddy faces. - Former SVP, Domains at GoDaddy

GoDaddy (GDDY) is the largest domain registrar globally. The business model is simple: acquire domain customers online and upsell higher-margin ancillary services like hosting, email and website building software.

Over the last decade, the company has spent $2.4bn+ in advertising to build drive traffic and resell domains like .com and .co.uk. Reselling domains is a commodity business if it’s standalone. However, GoDaddy’s ability to upsell high-margin ancillary services drives a higher LTV / CAC relative to standalone registrars.

The chart below shows how a customer who adds a website on top of a domain has ~5x the recurring revenue and 43% of the churn level as a customer that only buys a domain. A customer that adds both email and a website with a domain generates 10x more recurring revenue with a third of the churn level.

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The higher the attach rate of ancillaries, the higher the LTV, and the greater GDDY's CAC advantage over standalone registrars.

Our key takeaway from our recent interview with the Former SVP of GDDY Domains: Shopify poses the biggest risk to GDDY.

[Shopify] has created a different entry point. If you want to sell something of value, you need a way to transact with people digitally, and Shopify is the top choice, as opposed to getting a domain and putting a website on top of it. They have flipped the entry point by allowing you to set up a website in 15 to 20 minutes and start selling your stuff. You can worry about a domain later. - Former SVP of Domains, GoDaddy

Historically, the domain business was the lead generator for higher-margin services like website and email. Today, Shopify has flipped the entry point and now controls the top of the funnel. SHOP’s slick software attracts many new businesses which significantly changes the customer journey of purchasing a domain, hosting, and other add-on services that typically started on GDDY.

Not only is SHOP attracting more SMB’s at the top of the funnel, Wix and SquareSpace target somewhat higher-value customers that want quality, design-focused websites:

Their differentiation initially seems centered on doing a better job than GoDaddy of getting people to the website, so their entry point was helping people build websites. They think they might want a domain on the way in, so because their focus was on the website, they did a superior job of focusing on the design templates, tooling, capabilities and functionality for that instant website, which was initially superior to GoDaddy. Squarespace predicated its positioning around design heavy, sensitive and focused website building. GoDaddy had a lot more DIY in mind when people came and they still have a large hosting business. - Former SVP of Domains, GoDaddy

The big question we’re exploring for GDDY is who has the most control over the new customer journey?

GDDY visualizes three elements on a wheel that steer the entrepreneurial journey: identity, presence, and commerce.

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This was the CEO at the recent investor day:

Each of the elements are starting to be deeply interdependent and the overlap is increasing… Where does identity end? And where does presence begin? An entrepreneur may start with a handle on social media, post content, perhaps those posts link back to a buyer side or their website or drive traffic to their physical store. The [new SMB] probably started in a simple model with a domain and an e-mail address. But soon after, they face the emergence of multiple engagement models, including social platforms and online marketplaces, Etsy, Amazon, Instagram, eBay, Twitter, Houzz, Facebook and TikTok, so many paths to market and sell for our customers. - CEO of Godaddy, 2022 Investor Day

As more businesses are built natively online, the SMB customer journey is far more complex. Although each element may be interdependent and overlap, if the customer starts building an offering on SHOP, GDDY will lose the high-margin revenue that drives its LTV.

SHOP is taking control of a key entry point into the customer journey by offering a fully-integrated solution for reporting and analytics, payment services, and other marketing and commerce tools to SMBs. If new SMBs start with how and what to sell online rather than buying a domain, this presents a problem for GDDY.

SHOP and GDDY are both looking to own the full customer journey for new SMBs, but are approaching the problem from slightly different angles. SHOP starts with Commerce, the largest segment of the industry, and GDDY is bolting on ancillary services to a scaled domains business. And then Wix and SQSP are somewhere in between fighting for quality, design-led SMBs.

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This is leading to a convergence in GDDY and SHOP's offering but with slightly different customer bases:

You are seeing some stratification of the audience between GoDaddy and Shopify. GoDaddy could be more DIY where you only want a domain or a domain and some email, instead of the whole Shopify experience. However, there are people who deliberately set up businesses on Shopify. The issue you're asking about is the risk of the entry point becoming a website versus a domain, and that is already happening. GoDaddy recognized that, which is why the investment in their own website building capabilities was so paramount, but Shopify is obviously leading in that particular race. - Former SVP of Domains, GoDaddy

While GDDY may be at risk in losing control of the funnel, its domains business provides great resiliency and has compounded at 10% compared to 4-5% for the market over the last 6 years.

GDDY owns over 22% of all domains globally and offers the widest selection of TLD’s (top-level domains) in the market. This provides GDDY with the largest domain transaction data set which leads to superior domain pricing and merchandising.

A wider selection, deeper transaction data set, and the ability to outbid competitors drives GDDY’s domain revenue growth well above the market.

Also, GDDY’s aftermarket platform is a unique asset that drives high-margin revenue growth. Over 50% of domains searched are unavailable and typically owned by domain investors. GDDY owns the marketplace to trade these assets and is growing at 29% per year with a 20-30% take rate per transaction:

GoDaddy has brought those portfolios into a marketplace with all the apps, features, technology, security and safety and escrow services, so someone can acquire a domain for their business at a reasonable cost. That grew the market which had begun to slow. It used to be stigmatized in the beginning, but we now understand that it is simply an exchange marketplace, which has been critical for GoDaddy over the past few years. - Former SVP of Domains, GoDaddy

Even in the face of consistent .com price increases, GDDY’s domain gross margin has improved from 46% to over 62% over the last 5 years. This is likely driven by a combination of a wider selection, increased ownership of registries like Neustar, a unique secondary marketplace asset, and superior merchandising that drives conversion.

Although the Domains gross margin has expanded, the increased competition from SHOP, Wix, and SQSP has compressed the non-domain gross margin from 82% to 68.8% in the same period.

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The attractiveness of GDDY lies in the stable retention and profitability of existing cohorts: in each of the five years to 2018, the retention rate was over 85%.

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In 2010, GoDaddy spent $80m in advertising acquiring customers. This 2010 cohort has generated $1.6bn in revenue at a 66% gross profit and 54% contribution profit margin. This is a 10x return on marketing spend.

However, given these cohorts were acquired when SHOP wasn’t around, it's possible GDDY is over-earning. .

Look no further than Costco for a high-quality business that successfully attaches high-margin revenue to commoditised products. GDDY follows the same strategy by using domains to get access to high-margin website and commerce revenue.

The real challenge arises when there are shifts in the competition at the top of the funnel that reduces the volume of new customers entering the system. Put simply, in 2010, new SMBs likely thought domain first, website second. Today, many SMBs think about websites and selling first, and possibly domain second or even third. If GDDY loses the ARR from add-ons, the LTV / CAC declines and GDDY’s terminal value is materially impaired.

Although this may well be a risk, the company’s older, sticky cohorts generate a healthy 20%+ unlevered FCF margin excluding SBC. The company plans to return $3bn via buybacks by 2024, nearly one-third of GDDY’s market cap. The buybacks amount to 80% of FCF with the remaining 20% reinvested into payments and other commerce services to improve the offering.

GDDY is trading at ~4.5% forward FCF margin excluding SBC and management believes the company can compound FCF per share over 20% until 2024. A highly cash generative business with a unique set of assets give GDDY a great opportunity to compete for SMBs, but SHOP is the new elephant in the room posing a risk at the top of the funnel.