The first thing to understand about domain appraisals is that there is no absolute, de facto manner to determining the value of a particular domain name. That's one major reason algorithm-based domain appraisals fail time and time again. It takes a human touch. Machines don't understand the intricate meanings behind and relationships between words, phrases, and acronyms.
There are a three main ranges for a domain name when determining a price tag. The first is the reseller price, which is the price a person in the business of buying and selling domain names (a reseller) is likely to pay for the domain. Second is the end user price. This is the price an end user (a company, web developer, etc) is going to fork over. The third is a domain investor price. This is how much someone who intends to buy the name and hold onto it for an extended period will pay.
For the purposes of everybody using the ListAppraise system being on the same page, we use the reseller value for offering a domain appraisal. It is the best standard, given the information provided when asked to appraise a domain.
If you've seen the show "Flip This House" on the Discovery Channel, flipping a house is a similar concept for what a Domain Reseller does. The goal of a reseller is to buy a domain name at a bargain price, emphasize the best qualities of the domain while downplaying any drawbacks, and market the name to potential end-users.
There are considerable risks to purchasing a domain name. Problems can include trademark infringement, domain theft, and reverse domain hijacking, not to mention being unable to find a buyer or having to take a loss in order to sell the domain. Due to the relative risk involved with buying and selling, the price paid by a domain reseller is relatively low. It has the best baseline from past sales and established market values, however, making appraisals on a domain's value to a reseller easier.
The price a company or web developer is likely to pay for a domain is all over the place. End user values have, by far, the most inconsistent factors influencing a price offering. Often times these factors include personal preference, how precisely the domain matches the intended use, the scope of the project/website to occupy the domain, and the end user's budget. This information is very difficult to determine, and in some cases just plain impossible. That makes doing accurate appraisals based on end user values very time consuming and problematic.
The strategy for resellers attempting to sell a domain to an end user is often to shoot for the moon. If an end user requests an asking price, the reseller will either ask them to make an offer or give a much higher value than they expect to get. Since the end user is not going to come back with a higher offer and the domainer can't read the prospective buyer's mind, this is the only real option to avoid under-pricing. Leaving money on the table is never a good feeling.
A downside to this approach exists. An end user can be discouraged by a high asking price, and may simply look elsewhere or settle for registering a less desirable name. Selling a domain name to an end user is definitely an art. For this reason, experienced domain brokers are often brought in to handle the sale of valuable domain names.
These guys (and gals) are the buy and hold revenuers of the domain industry. A domain investor aims to buy domains with an established value, or an established trend of increasing value. They buy domains with well established dimensions and price models, and will often acquire low-maintenance domains with established traffic and revenue.
Domains with very specific dimensions are more easily appraised, since there is vast historical data to compare prices and establish price trends. For example, any 3-letter domain with the dot com extension has a well established base value and price trend with domain investors. Only a few factors remain to be considered in modifying this base value. Does the domain have an established meaning (is it a word or popular acronym)? How commonly used are the letters contained in the domain? Does the domain infringe on any trademarks?
A couple great examples of letter values come from popular games. If you've seen the gameshow "The Wheel of Fortune", the letters the winning contestant is given automatically for the final puzzle are among the most commonly used letters of the english alphabet (R S T L N E). The popular board game Scrabble offers numerical value for each letter of the english alphabet, based on how commonly it's used. Letters like Q, J, and Z are used rarely, making them more challenging to use in a word and thus more valuable when played.
This reasoning is extended to domain name values, since it is more likely for words in an acronym to contain commonly used letters.
To value traffic and revenue domains, a domain investor will look at the monthly traffic and revenue of a given domain, and make an offer based on a number of months of revenue. The offer is usually higher or lower based on the perceived risk (such as dwindling or temporarily inflated traffic, how far back the stats show steady traffic/revenue, and so on). Domain appraisals of this type can be done with a high amount of accuracy, assuming all the necessary data is available and has not been manipulated.