Hey people,

I've been lurking on these boards for the past week or so as I am interested in starting a hosting business. However, I don't plan to dive into it right now. I'm still doing research and this seems like the perfect place for it.

I'm not a "newbie". I'm a programmer (.NET/C++/etc.) by trade and a network administrator. I figured I'd start to put my skills to better use than what I'm doing right now.

My question is with numbers. Let me put out a scenario and please let me know if my calculations are wrong or not.

Suppose I have my own Dell server with the following specs:
3.06Ghz
1 GB DDR RAM
600GB HD (not SCSI, prolly SATA)And I'm going for a co-location plan for $150 / month (1000 GB bandwidth)

I also plan to outsource my tech support for $100 / month.

Now, here is how I will partition my plans to fill up 590 GB of my server space:
395 x 1000 MB Accounts @ $24.95 / month
160 x 500 MB Accounts @ $14.95 / month
1150 x 100 MB Accounts @ $9.95 / month(Remember, these are COMPLETELY FICTITIOUS! I'm just trying to run some calculations)

Now, assume I went with 2CheckOut for credit card processing and they take 5.5% + $0.45 / transaction.

I will be charging services yearly and not monthly.

So, with the above, my fixed costs for the year would be:

$150 for colocation + $100 tech support = $250 / month = $3,000 / year

As for the customers, I would make:
(($24.95 x 12 x 0.945) - $0.45) x 395 = $111,580.79
(($14.95 x 12 x 0.945) - $0.45) x 80 = $ 13,526.64
(($9.95 x 12 x 0.945) - $0.45) x 1,150 = $129,240.45Total = $254,347.88 / year
Advertising = $6,000 / year (<--Not entirly sure on this one :p)

Final profit = $245,347.88 / year

Now I know these numbers are too good to be true, so I ask, did I make a mistake in my assumptions or calculations? What is more closer to reality? Especially on the first year of business? What else am I missing?

I know for most of you this may seem trivial. But I'm not sure about webhosting from a business side of things. The technical side I've got hands down. I'd like to hear from the veterans and hopefully they will give me some numbers that are a bit closer to reality.

Thanx for any input guys!

That sounds about right, if you happen to get 1150 or so clients in 1 year :). Highly unlikely, especially in your first year of business.


--Michael

You did a nice research there, but it just isn't possible to get that within 1 year of time. Hosting business is HARD, concurrention = HARD, but you can always try :)

Ok, I'm not sure how to edit my post :p

I made a slight calculation error above:

Instead of 80 customers for the middle plan, it should be 160 :p So the calculation should go like this:

(($14.95 x 12 x 0.945) - $0.45) x 160 = $27,053.28

The rest of the calculations should follow using the above result :)

Thanx for the reply guys.

I was taking a best case scenario and just wanted to check if I was at least headed in the right direction.

What, in your experience, is a more realistic number of subscribers for the first year?

I am doing advertising in the local magazines and newspapers. The web hosts in my region are VERY few and even their prices are more inflated than the sample that I povided in the example above. And they don't even advertise! Yet, they still remain in business.

I'm still doing market research in my country to see how well I would fare.

Any more people wanna chip in their 2 cents? I really would like to hear more input.

Sounds like you're on the right track with it. I would try to undercut the competitors prices (if possible). For customers, hmm. there is no realistic number, it all depends on how much time you put into this. If you go door to door of a few businesses and drop a business card here and there I think you will do well. There is no magic number for the first year.


--Michael

ooops. double post... but yea what ^he^ said :D

The pricing of your packages above is, in general, way too expensive (unless your targetting a niche market, you may be able to get away with it).

Example, for $9.95 per month (1100 clients), this works out to be around 20% of your server's resources. You would provide 100mb space, and around 186mb data transfer (bandwidth) per account (none-oversold, add this in later).

Your general international competition offer around 500mb space and 5000mb bandwidth for the same price (even this is considered HIGHLY expensive!!!).

If your idea is just "yet another" general hosting business, you'll need to compete otherwise you'll never get customers. I'd recommend keeping an eye on http://www.webhostingtalk.com/forumdisplay.php?f=4 and see what others are offering.

Your profit figure will be more close to $5,000 - $15,000 per year per server in this industry (including server costs but not including support, billing, etc).

I think your expenses would get to be far more over time. 1100 clients is very optimistic. I doubt a single server could handle 1100 clients, so you would need to expand to multiple servers. It may have the HD space, but not the processing power. Additionally, with 1000 GB transfer and 1100 clients, you could easily use that up, even if each client only used 1 GB.

Instead of estimating how many people you can fit on the server and how much it would make, you should look at growth estimates. How much would you be spending with no customers? How would different growth rates affect you? 2 new customers a month versus 5 or 10. How would different churn rates affect you? How many clients do you need in order to break even? How much does each of your plans cost you in terms of disk space and bandwidth.

I usually get my estimates in terms of $50 for the 1U space, and $100 per 1000 GB of bandwidth (or something like that). So disk space costs $50 / 600 GB = $.083 per GB. Then $100 / 1000 GB = $.10 per GB bandwidth. Then look at how much diskspace and bandwidth your plans offer. By doing this, you get a better estimate of how much each customer costs you per month and how much is profit.

You also need to plan for things like advertising. Customers will not come to you, you have to come to them. So you need to figure out some sort of advertising budget and try to come up with a cost per new customer.

The amount of clients you wish to have in one year is really high. Take 15% to 20% of that and it will be realistic at best.

Assuming that from the 1705 clients you wish to get, you really get 20%. That is 341 clients. Then 100 USD a month for tech support is really nothing.

Lets assume at best case that you have real cheap support at only 2 USD an hour.

There are multiple ways to calculate what you need. Here is one way:
You should offer atleast 16 hours of support a day that is outsourced. So a 31 day month would need 496 hours or 2 full time and one partimer. So at cheapest your tech would cost you around 1000 USD a month. Assuming that you do the other 8 hours of support yourself.


My personal advice is go for quality and service. That are too many companies offerting hosting for 1 USD a month and having bad support and service!

Thanx for the great reply guys.

The 1000+ subscribers I put in the example is a best case situation which would exist after maybe 3 or 4 years of business. Trouble is, I don't know what a worst case scenario for the 1st year is. I think Johnburk put it best when he said the BEST I can hope for is 340 clients on the 1st year. Which would more or less cover my costs for the year.

And forgive my ignorance, but what is "churn"? I've seen this term used a lot on these forums but I can never figure out what it meant :p

Shockuk: $5,000 - $15,000 profit does not sound like this business is really worth it. Is this a standard norm?

Qgyen: Thanx for that advice. Never thought to calculate the cost per GB :p


Johnburk: I see your logic, but why is $100 not enough? I've seen recommendations from people on these forums to go with bobcares.com for support and, on their site, they say that it costs $100 / month for dedicated 24x7 support staff. Did I miss something here?



Thanx for all the feedback. Keep 'em coming!

Your churn rate is howmany clients you lose per month.

The churn rate would be the amount of turn over you would have. Customers won't stay with you forever. Often times, people will switch hosts for as little as a 50 cent savings. I think it is common for a 5-10% churn rate to be normal... meaning if you have 100 clients, expect 5-10 to leave you per month. The goal is to keep the rate at which you get customers higher than the rate at which you lose them. :) Or to give good service/support so people don't feel the desire to leave.

Churn rates of 5-10% per month are highly abnormal. If you churn 5% of your customers per month, you will turnover your entire customer base in 20 months. If you run a tight ship, you should have a churn rate of 10% per year or less.

However, let's come back to reality here. A single server is not going to generate $250,000 of revenue. Even if you have the capacity to do so, putting all of your eggs in one basket is foolish. Secondly, you will not be able to support 1100 customers for $100/mo. If you outsource your support, you will likely require a fully dedicated team by the time you get to 600+ customers, and that's going to cost you $1200-$1500 per month. If you have any sort of volume do not use 2Checkout ... get a real merchant account and you will save thousands a year.

Charging your customers $25 per month, they are going to expect everything to be damn near perfect. Fast servers, fast support, competant support, 24x7 support, etc, etc, etc.

Your server specs are out of whack. More RAM, less hard drive space, have to have RAID.

Shockuk: $5,000 - $15,000 profit does not sound like this business is really worth it. Is this a standard norm?
As you might of guessed; it's really difficult to say, it obviously depends on a number of factors, including business plan and server hardware.

From all of my hosting experience, $5,000-$15,000 is the general amount of profit that a host targetting the "no-frills international hosting market" would likely achieve per server. This is still a fair amount, and well worthwhile to begin a business. For example, I know of a provider that started in 2002 and had a good reputation: Iv'e just counted their shared-hosting servers. In total they have 161, so using my very vague rule, they should be making around $805,000 > $2,415,000 (which I would like to guess that they are making a healthly annual profit just about sat towards the high-end of this, although that would be a total guess).

Please do note that this is my experience, and may vary widely. For example, if you decided to target a local niche, I would expect much bigger profits per client (however obviously, less clients). It's difficult to predict (that's one reason why many new host start-ups fail).

This whole hosting industry in it's nature does vary widely, so to be honest, i'll leave you with this very obvious statement:
How much money you make will depend on you and your decisions

The business plan is good. But how about the marketing plan?

What is your USP? How do you gonna get most of the clients? From online advertising or offline?

If you are targetting online customers, your advertising budget will be significantly higher...

But I believe you will do best if you start promotions offline. For price you offer, you should find customers & made them aware of the need for a good hosting.

It's best if you can make them a package for a website too... It's easier to convince people that they need a website.. :)

Thanx for the input guys. This is exactly the kind of info I'm looking for!

JaySuds: What you said was interesting on many points. I checked BobCares again and their service is for $200/month per server for a maximum of 500 domains :p Looking by your profile, I can tell you have some sort of experience in this field. So my other question to you would be, with the server specs I posted, what is the optimal number of clients I can keep? It looks like HD space is not the issue, but instead, it's the RAM.

Now I've ran servers before, but I've never had to host clients on it in this way. And in those big numbers.

Shockuk: The market I'm in is a niche market and the thing is, other webhosts are charging 4 times what I posted! I know none of you beleive me, but those are the raets here. And there are only a handful of them AND I know for a fact one of them is only a reseller to some American host.

As for advertising, I'm starting to get some real number. There is a very popular PC magazine here but they charge about $5,750 / per issue A4 size ad. That's pretty steep :p One thing I have noticed is that I've never seen an ad for webhosting.

Anyway, let me turn this around, how are all you new startups surviving by hosting 1GB at $9.95/month?

That would be: 150 x $9.95 x 12 = $17,910 / year (best case scenario).

Your costs would be: $200 / month support + maybe $200 / month dedicated server = $400 x 12 = $4,800

What you end up with : $17,910 - $4800 = $13,110

Again, that's in a best case scenario. As Shockuk said, expect somewhere in the range of $5,000 - $15,000, so I would guess that the above numbers are realistic.

Are these calculations any better? Any input you guys have would be great. I'm trying to narrow it down to some pretty realistic numbers in terms of clients and costs.

Thanx again people :)

Oops..double post :p

Oh, and the above does not even include advertising costs.

Here's what you would have so far as monthly cost:

Dedicated server: $200 / month
Advertising: $500 / month
Outsorced support: $200 / month
Total: $900

Assuming you have 150 clients on the 1GB Account and you're using the 2CheckOut service for billing, you would have (if you charged yearly):

(($9.95 x 12 x 0.945) - $0.45) x 150 = $16,857.45

Therefore, your monthly profit would be:

($16,857.45 / 12) - $900 = $504.79 or $6,057.45 / year

Not nice :(

These numbers are pretty discouraging. Anyone wanna life my spirits up a bit?

Most of my experience is directly related to Windows. Odds are you will be hosting with Linux (??), but I can tell you that when we run mail services on a seperate server, here's a pretty typical configuration:

Web Servers: Dual Xeon / 2gigs memory / 200gb ~ 600-800 sites on the server
Mail Server: Dual Xeon / 2 gigs memory / 80GB HDD (os, spool, logging), 250GB (mail data 1) and 250GB (mail data 2) ~ 3000 mail domains

The above servers are running RAID ...

As for revenue ... there was a time when $5K/mo from a shared server was pretty standard, when resellers had no problem paying $10 per month per domain hosted; that ship has sailed. Today, you have kiddie hosts offering hosting for $10 per year on their $50/mo dedicated server the buy with their milk money.

We really don't focus on direct shared hosting customers any longer, so it's been a long time since I have really checked out the competition, but a basic site with the standard bells and whistles for around $50/yr seems to be pretty standard these days. 50*3000 = $150K/5 servers ... 30K/yr/server / $2500/mo/server -- not too shabby for top of the line numbers.

The biggest problem you'll face is filling those servers up though. Shared hosting is damn competetive ...

Great info there, JaySuds. And FYI, I plan to be using Windows2003 hosting. No linux for me as most of my experience is with Windows adminstration and I do a lot of .NET stuff.

If I may ask, if you are not focusing on shared hosting anymore, then what exactly is your business generating most of its revenue from? Doing dedicated hosting? CoLocation?

I ask because I checked your website and it seems that your hosting packages are WAY too expensive. And, as you stated, shared hosting is extremely competitive, how are you getting by? Especially with a $10m datacenter :p (Or are you colocating with some other host?)

Anyway, let me turn this around, how are all you new startups surviving by hosting 1GB at $9.95/month?
Serious web hosting is just like any other venture, and most businesses lose money the first year.

I commend you because you are taking the time to work out the numbers before you start. This will help you avoid any surprises and predict when you will break even. Once you know that, you will know how much you need to start and run the business until that point. Just be sure to include your salary and professional services (lawyer, accountant, etc.) in your calculations.

BigZee, since you said you will mostly be focusing on Windows, you have to remember the WIndows licensing costs. You would need to get an SPLA license (data centers commonly have them, or it is free to register yourself). With SPLA, Windows 2003 is $18/mo/processor, and something like SQL Server 2005 Workgroup is $50/mo/processor. So if you get a dual processor system, that server will cost you ~$138/mo in licenses.