Hey folks. Let's do some little math. :)

If you're using the regular formula when buying customers, then I don't understand anything.

By regular formula I mean 1 year gross income = the price.

Let's say you've bought 1000 customers who pay $6.5/monthly. Then the price for them will be = 6.5*1000*12 = $78 000

Let's say it costs you $1 to handle 1 customer/month. Then your income from 1 customer is $5.5.

With a 5% churn rate you will get:

1. $5255
2. $4963.75
...
...
27. $1376
---
Total: $78 148

And if we'll add some 6% billing comission then it will take even 31 month to cover the initial cost.

So you will cover your costs only after 2.5 years and what you will have is some lil part of those customers who pay you about $1 000/month.

Now's the question: What's the catch ? Is this reasonable to put so much money/work/time just to get this $1000 in 2.5 years ?

Please, share your thoughts with me. I don't understand something. :)

I suppose with larger purchases like that, economies of scale come into play, and you may be able to work out a deal with the seller for a lower price.

However, for smaller purchases, e.g., 100 or so, I agree, in some cases it may not be worth the bother.

Don't forget you sometimes have the cost of migrating the clients into your own system as well (and that never goes to plan!)

You have a churn rate of 5%, however you haven't taken into account any plan upgrades, new customers, etc.

Also as ambioplex said, if you currently had 1000 customers and you add 1000 customers, you may be able to increase profits on the first 1000 by buying on a larger scale.

We've purchased several smaller companies over the last 4 years, and all of them have been excellent decisions. We are now making money on these purchases.

Yes, it often takes over a year (or 2 or 3) before you "see" any profit from the purchase... but this is expected and planned. It is the cost of purchase.

If you have cash sitting in the bank, then purchasing customers can be an excellent use of that money.

:)

Well, I would agree with you, mrzippy that if in comparison to the US banks APR (as I now it's about 2-3%/year) - hosting is a good investment. But the problem that it's not the investment. :) It's business and looks like this industry has got too little profits margin. (well, in case of buying the customers).

The problem is that you will have much less customers to sell in those 3 years. After those 27 months your payment will be $1376 so your purchased customers base value will be $1376*12 = $16 512

So after 2.5 years you can make $16 512 plus cover your 78k. That's not too much, if to behonest.

Lubby, I'm not counting new customers because I'm talking about buying customers, not the whole hosting companies.

Lubby, I'm not counting new customers because I'm talking about buying customers, not the whole hosting companies.

Even if you buy customers are provide good hosting, word of mouth would provide more clients...

Just a couple things to add.

1) The 5% churn seems a little high as for us, a BAD month has 2% churn. Change the churn to 2% and your numbers change drastically.

2) The person buying the customers is buying an asset, not just a revenue stream. The purchaser can sell those customers for the same price per customer at any time, but the purchaser has also made revenue/profit off those customers.

3) Yes, it may take 1 year plus to actually see profit on it, but in business, that is a pretty quick return on investment. You think building a $100 million hotel will see that kind of return, etc.?

OK, just running some quick numbers, based on 2% churn, 1000 customers, $6.50 a month paid by each customer, cost of $1 per customer, etc. After one year, the $78,000 purchase would be worth over $121,000. There would be 800 customers remaining, with a value of $52,000 and the purchaser would have pulled in a profit of over $59,000. That is with no plan upgrades, no additional customers, etc. and that is a 55% return. After running those numbers I should definitely look at buying some more hosting companies...

KarlZimmer, what a great answer!

It really looks very different with 2% churn rate. So it's all about the churn then. :) If you beat it you will be good.

With the same numbers I've provided (5% churn) and your calculation method I got:

570 clients after I year valued at $44 460 + $45060 in profits throught the year.

This nets to $11 520, which is 14.76%, which isn't that much.

It's really all about the churn rate.

Plus, of course, the word of mouth would do an additional income, and upgrades, etc.

. . . Lubby, I'm not counting new customers because I'm talking about buying customers, not the whole hosting companies.
But those customers tell their friends, and you'll get organic growth from them. :)

But those customers tell their friends, and you'll get organic growth from them. :)


Sounds nice but in numbers I trust :)

Have any numbers ? I know it varies from hosting to hosting, but maybe some regular ? Or maybe know where to find them ?

Sounds nice but in numbers I trust :)

Have any numbers ? I know it varies from hosting to hosting, but maybe some regular ? Or maybe know where to find them ?
We've never advertised. All our new clients are word of mouth and we have several thousand now. It's taken about 4 years to get to this point.

The “reason” to “buy” customers lies in the ability to grow at a fixed cost versus an organic, blended market-driven CAR. As a footnote, any small company (5-10k customers) that has a 5 % churn rate in the current market won’t be in business much longer, additionally don’t look for referral growth from a migrated base for at least 6-8 months post migration- and that’s only if you can pull it off with minor hiccups. Acquired, migrated customer bases ten to churn at the 20-30% rate for the first 6 months immediately following migration.

I wonder what the math looks like when compared with the investments in ads at something like the AdSense program and the cost of acquiring a customer.

KGIII

I wonder what the math looks like when compared with the investments in ads at something like the AdSense program and the cost of acquiring a customer.

KGIII


From what I've heard it's much better to be placed on the search pages than on AdSense sites network.

The “reason” to “buy” customers lies in the ability to grow at a fixed cost versus an organic, blended market-driven CAR. As a footnote, any small company (5-10k customers) that has a 5 % churn rate in the current market won’t be in business much longer, additionally don’t look for referral growth from a migrated base for at least 6-8 months post migration- and that’s only if you can pull it off with minor hiccups. Acquired, migrated customer bases ten to churn at the 20-30% rate for the first 6 months immediately following migration.
One thing that really annoys me about your posts, is that you don't post enough. :D

20% to 30% churn 6mths following a migration, seems steep. Why do you think that is? Bad migration planning? (*cough* WHP) New owners changing pricing etc?

Customers do not like their apple cart upset. But other than that it is mostly bad planning and bad change over that would casue that kind of churn.

From what I have seen, that happens when a host buys another with plans that do not match his current ones and trys to force upgrades and higher cost or just takes over the entire customer base and treats them like dog poo (I will take what is Affordablehost for 50 Alex.)

20% I think is realistic for the first month, there is always a group that just does not like change after that things settle down a bit.

Here is my 2 coppers worth,

Your first month or even two after a buy out or migration you will lose a few clients no matter how hard you try to get them to stay. They may have been personal friends of the previous owner liked something about the previous provider that you don't offer and many other odd reasons but you will have some churn the first month or two. After that keep them online, offer them extra (something) and it settles down quick.

The reason to buy clients is you immediately are able to acquire x amount of new customers, no sales, no trial period, less support, and overall gain in monthly revenue.

Say for instance you acquire a company with 1000 clients; you lose 50 in the transition. I'm going to say these clients are paying 10/mo because I don’t buy companies that have an average of less then $10/mo per user, just no profit to work with.

(950 x $10) x12 = 114000 (this is your top offer purchase price. Never offer more then 12 months -5% unless you have a good reason to)

So now you have 114,000 extra in revenue for the next 12 months plus growth from WoM off these 950 new subscribers. (key is to treat them better then the previous host. This = good WoM growth)

Figure minimum +10% every year from WoM, if your not getting at least 10% your doing something wrong.

So now you’re at 1045 within a year and your revenue has made it up to 125,400

Less expense:
~ 3x servers
~ 30 hours support per 100 subs
Software licensing, backbone, etc... This is all dependant on your setup.

You should be making about 50% off of your clients after expenses unless your going for the budget thing then your in another boat.

(Keep in mind the higher the number of clients you are buying the better the price and the lower the churn during transition)

One thing that really annoys me about your posts, is that you don't post enough. :D

20% to 30% churn 6mths following a migration, seems steep. Why do you think that is? Bad migration planning? (*cough* WHP) New owners changing pricing etc?
The answer is "d' all of the above... As you well know Bob what folks buy when they buy hosting is really stability, peace of mind if you will- they want to focus on growing their businesses and enhancing their sites, not worry about hosting; people don’t care about hosting any more than their phone- unless it doesn’t work.
After a migration gets under way, the accusations fly, the problems surface, and the environment gets rather caustic – this doesn’t go away quickly- remember, even a medium sized migration can take months. Once the apple cart is upset and their sites and businesses are at stake, it doesn't take much to push a loyal customer to a satisfied customer then to an ex- customer. Post acquisition customers feel alienated, disenfranchised from the control which they bought in the first place and in general are ready to leave the acquired host at the slightest inconvenience, whereas previously they would have given the benefit of the doubt- There is latency and a cumulative effect on churn; the reminder of the base that remains largely unaffected usually has few e-mails, static pages, common settings and a site that is about as complex as a tube of toothpaste. The things that forces churn even in the best of migrations? Easy, e-mail problems and post brand-partum syndrome- which can be fatal if there is a referral or even affiliate organic growth dialed into equation. At the end of the day there a few hosts that can analyze an acquired brand, the base and forecast the landing and even fewer that have a truly compatible target platform- it’s a lot like an organ transplant- and the success rates are similar, most new organs just don’t take to the new host… and there are only a few skilled surgeons out there.

A well done migration has zero-10 minutes of down time at off peak hours. In most cases the only thing they will notice is where they send the payment each month.

A well done migration has zero-10 minutes of down time at off peak hours. In most cases the only thing they will notice is where they send the payment each month.

Even a well done migration has to deal with things like third party name servers (getting customers to update their dns records), personalized name servers (getting resellers to update their nameserver IPs), cached DNS entries at the client end, etc.

Migrations, mergers, and buyouts also tend to wake up dormant customers who are still paying for services but not actively using them, and they end up using the migration as a reminder to cancel service. This is particularly true when dealing with customer on longer term billing periods (6,12,24 months). I would expect this type of churn to be around 2.5% (one-time) ... around 25 per 1000 customers will cancel because they have been meaning to cancel but haven't bothered.

Despite the pitfalls of buying customers, purchasing customers is faster and more cost effective than relying on organic growth and advertising for many. Advertising in this competitive market can be extremely expensive, particularly when PPC advertising is involved. Growth through referrals can be hit or miss. But you can buy a mass of customers for $X and in a relatively short amount of time, pay for the cost of acquisition and then enjoy the extra cash flow, plus additional organic growth from your expanded client base.

Of course, the outcome of any customer acquisition is really highly dependant on both the seller and the purchaser. The purchaser needs to have the requisite technical and business skills to successfully execute the migration of 1000s of customer accounts smoothly, both from a technical and operational perspective. The purchaser needs to have the proper systems and procedures in place to handle the new customers, and to also communicate the migration process to their new customers. The seller needs to be reassure his client base that the transition will be smooth, and that key people on his team will be assisting with the transition and will be available after the transition to help, etc.