Starting a Hosting Company: Profitable?

It happens quite often: A person new to online business looks at the possibility of starting a hosting company, typically by utilizing a reseller plan, and the dollar signs light up when they realize the potential for profit that exists. All too often, however, they don’t realize the vast complexities that such a business endeavor entails, and find themselves in over their heads.

First, let’s take a look at reseller plans offered by HostGator. The smallest available package (Aluminum) offers 50 GB of disk space, 500 GB of bandwidth and costs $24.95 a month. The largest package (Diamond) has an alloted 200 GB of Disk Space, 1400 GB of Bandwidth and costs $99.95 a month. Fortunately, all of their packages offer free WHMCS (the software that allows your customers to make orders and have their hosting setup), which would otherwise cost you $15.95 a month. Now, in the Aluminum package, you’re not offered very many resources, but the price is quite reasonable. The challenge is dividing the resources up and pricing them properly for your clients.

Right now, you’re spending approximately $25 right off the top. Your goal is to at least make that back, and hopefully bring in a profit as well. Keep in mind that profit should not be your primary goal in the beginning. You need to establish yourself and get the customers coming in. Now, let’s say you want to charge each customer a simple $3 for a basic package. In order to break even, you’ll need 9 customers. (Math: 25 / 3 = 8.33, which is rounded to 9.)

What about the resources?
Those need to now be divided according to the number of clients you need.

50 / 9 = 5.55555556
500 / 9 = 55.5555556

Your best bet, with these numbers, is to either round down to 5 and 55, or up to 6 and 56. Which you do will depend on your preference of overselling, which is offering more resources than you have, in the hopes that some clients will not utilize their full package. To some, this is unethical, to others it is smart business idea as long as it’s controlled. You may also consider dividing your resources to allow for more customers to increase your profit margin.

After doing these calculations, we see that your first package is:
5 (or 6) GB of Disk Space with 55 (or 56) GB of Bandwidth for $3 per month.

This package will break you even in regards to hosting costs, and may result in a dollar or two of extra profit each month. In this situation, you need to decide if you can live with that, and hope that you’ll get more customers, which will increase your margins, and eventually allow you to offer bigger packages with higher levels of profit, or if you’ll need to adjust the above numbers to make more in the here and now. There is a pizza shop in New York that sells their product and only gains a profit of less than a dollar on each order. While this may sound stupid, it’s working for them because they receive an extremely high volume of orders, which makes their profit completely worth it at the end of the day.

The thing about starting a hosting company is that you never want to just jump into a dedicated server with thousands of features, because you will lose a high amount of money each month, until things get going. Start small and grow as you need to.

Now, your alternative to shared reseller hosting is to purchase (or rent) a dedicated server that offers an exponentially higher level of available resources and often times, faster performance. It’s much more expensive and labor intensive, however, so be cautious. You should be able to find an entry-level server from a reputable company for about $100 a month.

Try playing around with this to get an idea of the expense of running a sever. You’ll need the server, hard drives, RAID, RAM, control panels, anti-virus and firewall, management services if you aren’t too familiar with the technical aspects, etc. It’s no cakewalk, rest assured. However, the same mathematical concept from above applies. Find out how many customers you will need in order to turn a profit, and adjust your packages accordingly.

So, is it worth it? Well, that’s usually the question that most people find themselves asking after a month or two of investing a lot of time and effort into their business. You will need to spend a significant amount of time on technical issues and ensuring everything is running smoothly. You’ll also need to promptly reply to support tickets from your clients and answer sales related questions from potential customers. Furthermore, clients won’t just magically appear at your site. Be ready to do some heavy promotion and advertising. (Speaking of advertising, if your margins allow it, consider running an affiliate program to let your clients advertise for you.)

Remember that in hosting, probably more than any other business, you will need to find something that sets you apart from the competition. Give your customers a reason to come to you! Are you going to pride yourself on rare features? Cheap prices? No overselling? Great customer service? Now, my intentions here are not to discourage you from ever starting a hosting company, but to instead allow you to see the reality of how difficult the process can actually be. It takes a lot of time, money and effort.

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