How Much to Pay for a Domain?
There are no magic formulas for computing the right price to pay for your new domain name. I would love to give you a cool formula with lots of neat math symbols, but sadly things aren't that simple or elegant. In order to understand what you are going to have to pay, you need to learn a few things about the domain aftermarket.
First, there is way more supply than demand. This at first may sound encouraging, but unfortunately it isn't. Most domain resellers are very inexperienced, and tend to price their domains way too high, and as a result drive buyer away. Haggling often results in little movement in the price.
Real words are bought up: Second, the really great names, one or two real word .com domains in high traffic, high margin internet sectors are essentially all bought up. They do sometimes become available for sale, but always at extravagant prices.
Trademark or Copyright risks: Third, you have to be very careful when buying non-generic domain names (domains containing words that are not in the dictionary, or domains containing words that are in the dictionary but combine to form an unusual phrase that the courts will not consider "public domain"). These domains may be protected by a trademark. In such cases, the trademark owner can sue for ownership in court, and quite possibly be able to confiscate your domain without remuneration.
The Bottom Line
At this point you're probably wondering how much to pay for that domain on the aftermarket. As stated above, there is no precise formula for that. However, some broad conclusions can be drawn based on the above principles, via reference to contemporary sales history. The basic idea is that I can provide you with anticipated price ranges (rather broad ones) that seem to be well in sync with recent domain auction closings.
At the very top of the spectrum, you have one word, and very high quality two-word, generic domains in easily monetizable internet sectors. These may sell for $100,000 USD or more, and will usually have .com extensions, although occasionally some will be in other high value TLD's (such as .net, ,org, .info, .mobi, .co.uk, and .de). The very best of these domains may approach $10,000,000.
Global (non-country specific) TLD's other than .com's rarely sell for more than $100,000. The best of these, again one word and very high quality two-word generic domains in easily monetizable internet sectors, usually sell for between $10,000 and $100,000, but sometimes may go as high as about $250,000. The best country specific extensions, mainly .co.uk and .de, lend themselves to the same kind of pricing as the non-.com global TLD's ($10,000 - $100,000). Some excellent domains in the .eu (Europe), .se ( Sweden), .tv ( Tuvalu), and .ch ( Switzerland) extensions are starting to command these prices too.
Every week, there are several dozen sales of .com domains in the $10,000 to $100,000 range. These tend to be one to two word generics, but not as easily monetizable as the ones that sell for over $100,000.
There is an active aftermarket in two to three word .com names that are long (10 letters or more) and sell for $2,000 to $10,000. These tend to be generic, although some non-generics may be found here as well. These domains will in general be harder to monetize than the more premium names, either due to industry (not a high profit internet sector) or scope (serve only a subset of a larger sector).
There is also a market in global TLD's other than .com's in the $2,500 to $10,000 range. .net's and .mobi's tend to dominate this space, although you will also find .org's and .info's here. These are generally one to two word generics that are less monetizable than their otherwise equivalent brethren that sell for more.
Certain country specific domains tend to sell in the $1,000 to $10,000 range. These tend to be one word or short two word generics in the most attractive country extensions (especially .co.uk, .de, .eu, and .tv). Needless to say, these are not as monetizable as their more premium brethren.
If the domain you want does not fall into one of the above categories, you should think long and hard before spending more than $2,000 or so. Admittedly, there will be times when purchasing a particular non-generic name may be unavoidable (e.g., you already have an offline business name which is not trademarked, and need the corresponding domain for your online presence). The key point here is that absent proof of pre-existing heavy traffic, and/or profits from an already deployed web site at the domain, these names are just not that valuable.
The main consideration should be that unless you have a truly urgent need to obtain a specific domain, you should use common sense principles and not overpay. Remember, in spite of the fact that so many good names are taken; most domains just sit and wait at aftermarkets like Sedo and Afternic because of the vast supply overhang. If the owners of the domain you want will not sell for a reasonable price, try to be creative and find alternatives, like using a different TLD, pluralizing, reordering the phrase words, etc.
The internet domain market will never lend itself to discounted cash flow pricing like financial securities, and the value of a domain is really nothing more than what the market will bear. Ultimately, values are determined by sale prices of similar domains. This information has hopefully armed you with that knowledge so you can negotiate with confidence.