Hi all,

Was wondering if anyone would care to share some insight on how they have chosen to expand (and whether it worked or not? :) )

As far as I see it, expansion can either be internal or external ... and by internally I am referring to such things as marketing, PR, word-of-mouth (all the same?), pro-active sales, etc ...

External would be purchasing other companies and/or customer bases (anything else)?

We have been very aggressively expanding internally for some time now, and have been rewarded by our fair share of clients (the vast majority of whom I am pleased to say seem to be quite happy with our services).

At what point does it become more economical to begin purchasing other smaller hosting companies looking to exit the market ... or does it ever?

Thanks in advance,

It really depends on a lot, but mainly your financial situation, and if you can handle to bring in 200+ customers as far as support goes.

Some points to keep in mind-
What is your price per customer acquisition? If you are paying $100 for new customers, and you usually spend $50/customer, it may not be worth it. Then again, if you can afford to throw out the money, it may be worth it.
Can you handle that many customers at once, and continue to provide the service that you are?

I've contemplated looking into a few of the companies that post on here selling their customer base, but I'm growing at a very steady rate, and have a low cost per customer acquisition. Eventually I think it would be good to buy a nice customer base, but if I did it would mainly be to generated word of mouth and extend my reach.

Zak

Depends how many $$$ you have to play with, and how fast you want/need to grow. You might be chasing furious growth to keep investors happy etc. Hence aquiring other company's clients could be beneficial for you.

If you're just happy to cruise along and grow organically [word of mouth and existing promtional activities], then that's good too. Just comes down to what you want. :)

Yep, we don't know, nor do we want to know what your financial situation is but that is completely up to you.

Can you handle the support load? With acquisitions will you be moving clients to your servers or will you just take over the original operation, and keep the clients as is? As tempting as client acquisition is, keep in mind that you must do your research. You don't want to be taking a company in with a poor reputation as it will reflect on your service. Whether you improve that reputation is up to you. Generally speaking an aquisition is always a hard transition.

The best part about word of mouth clients are - you paid nothing to get them. Always make sure you know how much you've paid to bring your current clients in. It'll help in negotiations. You won't take anything above a certain price per client.

Also ask yourself is it worth the time and effort at this point. Just as Bob said you may have investors who want to see external expansion but if you don't have that pressure you might just want to stay with your current rate of growth. It's all too often that we see businesses explode due to overgrowth. Don't get caught in that.

We have basically been the same size for about a year now, and I have had the vast majority of my customers for over a year, so I have been playing with marketing my hosting to a new niche in order to try and get some expansion in the number of clients I have going. I will be primarily using direct mail, and have accumulated several lists in the particular niche I am looking at that list in the hundreds, and will likely grow into the thousands, I am not sure how many customers I can get out of this but I am going to give it at shot.

David,

Curious, we have always been careful to avoid any sort of direct-mail or promotional mailings much for the same reason that we have never used SPAM or any other bulk promotion to advertise our services.

Is there a particular reason you have chosen direct-mailing vs. advertising in a local newspaper, or something equivilent?

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Bob, thanks for your input ... as always, its well thought-out and to the point!

I think you might find many of the longer term web hosts on this forum have stayed in business due to a steady and slow, positive growth pattern.

'Aggressive expansion' is often fraught with unseen issues and distasters, and may well kill more businesses than it helps. It's fairly easy to get money, but unless that money is well spent it's going to hurt when the bills arrive.

Any business, whether online, or based offline should have a focus for long term growth and expansion. It takes time to build something solid and worthwhile.

Most business that fail do so not because they are unprofitable but because they run out of cash. Growth puts a great strain on cash flow and unplanned for growth has led to the beginning of the end of many companies. Ask, a group of managers from a high growth business ‘how has business been?’ Marketing, Sales, product development, HR and general managers will all say it was excellent – the financial manager will say it was a nightmare.

Originally posted by akashik
I think you might find many of the longer term web hosts on this forum have stayed in business due to a steady and slow, positive growth pattern.

'Aggressive expansion' is often fraught with unseen issues and distasters, and may well kill more businesses than it helps. It's fairly easy to get money, but unless that money is well spent it's going to hurt when the bills arrive.

Any business, whether online, or based offline should have a focus for long term growth and expansion. It takes time to build something solid and worthwhile.
I agree. Slow and steady is goooood!! :smokin:

There are two forms of growth - internal growth and external growth. Internal growth can be done by investment in new servers, new branch offices, ecetra. External growth (integration of amalgamation) can be done though expansion (through mergers with other companies/firms), mergers (mutually agreed partnership), acquisitions/takeovers (hostile buy-over of the majority (at least 51% of a firm's shares by another firm)).

I'd like to share my knowledge on external growth. It comes in 4 main forms.

Firstly, there's horizontal integration. This invlolves the mergers or acquisitions of firms in the same stage of production in the same industry. In this case, an example would be UnitedHosting merging with HTTPme. This is usually done for two reasons. Firstly, to exploit the potential economies of scale reaped from a larger scale of production (EOS comes in various forms including technical and managerial EOS. I could give you a thousand word essay on it but it's a whole new ball game). Secondly, to achieve monopoly power in order to capture market share. However I don't think the second reason applies here in a saturated market with relatively elastic demand.

The second form of external growth is vertical integration. This involves the integration of firms engaging in different stages of production within the same industry. There are two types of vertical inegration -- backward integration and forward integration. Backward integration is the acquiring of firms engaged in the previous stage of production (eg. UnitedHosting buying RackShack). Forward integration is the acquiring of firms in the next stage of production (eg. RackShack buying UnitedHosting). Vertical integration is done for 4 main reasons. Firstly, to achive greater control and stability in the supply of inputs through backward integration (eg. If UH could control all of RS's servers, they could ensure optimal uptime and put greater focus on their own servers). Secondly, it is to restrict the supply of inputs to competitors through backward integration. This is pretty self explanatory -- with backward integration, you can make your competitors suffer and deny them access to your servers, which they require to run their business. The third reason is to obtain greater control of the demand for your products through forward integration (eg. RackShack could market their services adequately to different markets with different packages if they bought out UnitedHosting). The fourth reason would be to penetrate and capture new markets through forward integration. Again, taking the example of RS and UH. RS would be able to appeal to the lower end users who consume less resources if they bought UH.

The third form of external growth is lateral integration. This involves the integration of firms engaged in the same stage of production in related industries (eg. UH buying out DemoDemo). Again, this is done for 4 reasons. Firstly, to diversify and spead risks. If one of their businesses went bust, they have another one to fall back on, in a relatively different market. Secondly, to achieve economies of scope from R&D and marketing. Products can be marketed together, and this saves advertising cots. Thirdly, to develop greater compatibility and dependency between products so as to make the demand more inelastic (eg. UH could put up a promotional offer like "If you buy 10 tutorials from DemoDemo, you get plan 2 at a 50% discount!". The fourth reason is to penetrate related markets in order to jointly market products; this has been explained earlier on already.

finally, the fourth type of external growth is congolomerate integration. This is the integration of firms in completely unrelated industries (also known as 'diversifying' integration). An example would be UH buying out a local chicken farm. This is done for 2 main reasons. Firstly, to acquire and strip the assets of sunset firms for the purpose of converting its real assets (land and capital) into more productive alternative uses. For example, UH could eventually use the chicken farm's land as a site for a future datacenter that it's about to build. The second reason is to diversify into different non-related markets in order to spread risks and exploit potential infant markets.

I hope you find what i said here useful and meaningful. Good luck with the growth of your company. :)

great post - it brings me back to those management classes - love your examples, especially UH buying a chicken farm :)

Originally posted by sanjiv
Backward integration is the acquiring of firms engaged in the previous stage of production (eg. UnitedHosting buying RackShack).

We can always dream! :)

Sanjiv,

Thanks for the post. Certainly does help, and was very well written and indepth!

I'll second that!! Well written and with specific examples.

i think there is one more Expansion way which is making more than 1 brand name, for example .. i run 2mhost.com with unlimited traffic with hard TOS, so i have another brand name with same price but limited traffic and no TOS. I have another brand to sell locally in Egypt and another brand specialist in reseller plans ... 1 unbdranded helpdesk will do good safe in support costs

Has anyone found that one particular strategy works better than others, assuming that your target growth rate is the same?

EG: You want to add 500 new customers this month, so option 1) advertise to reach those 500 new customers or option 2) buy a 500 customer company or 3) etc ....

What a coinkidink! Chicken farming!

When I was in the 9th grade, the Army (if I recall correctly) came by to give aptitude tests to all of the students. The results of my test said that I would be best suited to a career in poultry farming (devastating news to any young student).

Now I finally know how to combine this innate talent with my interest in web hosting. :D

Excellent post, Sanjiv.