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  1. #1

    The Economics of a VPS Company

    I'm trying to understand the economics of a VPS company. Let's leave marketing expenses out of this for the moment, as I understand marketing pretty well. I'm interested in operational costs.

    Here are a couple VPS companies for sale ads I've seen. These are old ads, just using them for examples:

    http://www.webhostingtalk.com/archiv.../t-933582.html

    http://www.hostingdiscussion.com/bus...sale-50-a.html

    So looking at the first one...

    The guy was paying $100/month to lease a server. I deduce it's a single server running his whole outfit. 8GB of RAM, 1TB of hard drive. I'm hoping that's 1TB after RAID ;-)

    That sounds very painful from an uptime standpoint. But I know it's pretty common practice for small outfits.

    On it he had a total of 43 monthly, 5 quarterly, 5 annual = 63 VPS accounts. If they were all 128MB, that's the whole 8GB shot right there. Or am I missing something? Significant overselling apparently?

    63 accounts with an annual revenue of $5066 = $80.41/account = average of $6.70/account/month. Seems kind of high for a 128MB account.

    1TB of disk over 63 accounts = 16GB disk/account. Perhaps that's possible.

    He says he was 4000GB of bandwidth/month...that's only about 70GB of bandwidth per account...that sounds light. Maybe not.

    Now, revenue is $5000. Server costs him $1200/year. I assume there are others costs...does he pay something to the datacenter? How much would you guess? And what would 4000GB/month of bandwidth cost? Additionally, he's got to own a block of IPs - one per VPS. How much do you think that costs? And I assume there is some software licensing cost.

    The second guy seems similar - $5400 of revenue, quad-core box so a little more beef but not much other info.

    $5000 annual revenue is $417 a month. Can one really get everyone needed for that?

    Obviously, these are a very small operations - bigger companies have economies of scale, etc. But what I really don't get is the cost of providing support. Let's say someone scaled this up to 20x. That's $108,000 a year in revenue (before expenses!) Still not enough to have competent techs to provide 24x7 support. Even at 40x it appears at a glance to be too tight.

    I suppose for these small operations, "support" is the owner and tickets at 2am don't really get answered.

    I'm just curious how the financials work...

  2. #2
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    Well, the first example you sent us is very possible - it is smart overselling if he did it correctly, as you are talking in averages it may seem as if he is overselling but you must understand that if he managed his sales legitimately he would of definitely being able to pull that off.

    Also - for low outfits such as those examples, I would say it was more of a provider/hobby than a company/job - because anyone can throw 100$ at a server for 6months and slowly build a client base just for fun, when you think about it in reality setting up a profiting small-time hosting provider isn't that hard.

    Just my input

  3. #3
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    Leasing simply isn't cost-efficient for VPS companies unless they have some very special arrangement with a DC. By having your own racks and hardware, you'll cut down your monthly operational costs significantly.

  4. #4
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    Most low cost VPS providers are unmanaged and therefore support doesn't go beyond OS installation and reboots when needed. So it is not really a cost center for them.
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  5. #5
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    IP blocks are usually allocated by the DC if you can justify them as per ARIN. Software licensing for a control panel such as Solus only costs about $20/month per server, and allows the client full control over re-installs, reboots, console access, etc.

    The real key is centralized storage , but that skyrockets the upfront costs.

    Splitting 64 clients on 8gb of ram is not the only thing to consider. Assuming the VPS technology is Xen, you are also splitting the CPU cores each time you divide them for new clients.

    I'd like to see the CPU speed allocated to each of the 64 clients (100mhz?) after all is said and done.
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  6. #6
    So I'm curious a bit further...

    Do smaller players typically start out by renting dedicated servers? i.e. they go to softlayer.com and rent a dedicated server? That looks expensive. Or are they renting rack space and installing their own boxes? That would presumably mean living near a DC.

  7. #7
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    Quote Originally Posted by raindog308 View Post
    So I'm curious a bit further...

    Do smaller players typically start out by renting dedicated servers? i.e. they go to softlayer.com and rent a dedicated server? That looks expensive. Or are they renting rack space and installing their own boxes? That would presumably mean living near a DC.
    Most smaller players will either rent from somewhere like Softlayer or more common these days resell another company's VPSes like burst.net.

  8. #8
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    Renting a 1/8th , quarter or half rack isnt that expensive. It might be intimidating to some , but its completely do-able if they have enough experience.

    The profits are much higher that way as well.
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  9. #9
    VPS Hosting, as with any hosting niche (or business, for that matter) is all based on buy price and sell price. There are a few business models for you to consider:

    Overselling on VPS's is only possible on OpenVZ Virtualization. Therefore, your business model must be based upon the fact that you CAN (and probably will) stick more clients onto a single server than is technically "physically capable". Of course, this can cause slow downs, angry clients, etc. so you should probably either use this sparingly, or intelligently.

    Overselling VPS's is impossible on Xen. Therefore, your business model will look almost opposite to that of the Openvz business model. Generally speaking, you'll either need heavier hardware, or many more servers to accomodate for this business model. Probably not cost effective for the first few months.

    Now, as it was brought up earlier - its true that smaller players tend to get their servers from larger companies. However, that's a good place to start for just about anyone. If you're building a company from the ground up, the smartest thing to do would be to limit your initial overhead. Instead of downing a few thousand into physical hardware, and then sending it to the DC - instead throw in about $200-$300 into a decent server hosted at a reputable DC by a reputable pre-established host. If your business goes south, you can pack your things and go home without the burden of unused assets. Of course, if your business does well, you can easily diversify into Colo hosting, instead of server leasing. You can think of the server leasing as a foundation for a future potential.

    Finally, the actual cost break down of a VPS company:
    If you notice, most main stream companies who offer VPS's, don't JUST offer VPS's. Simply put, VPS's don't have enough of a central market for them to be established as a full source of revenue. Diversification is probably one of the strongest aspects available to a VPS company. Your costs will include: server costs (Colo or Lease), Software (Solus, WHMCS, etc.), and peripherals (Backup servers, IPs, secondary Dedi servers if you choose to offer them).

    As said earlier: Unless you're offering managed services, staff really isn't necessary as the client can control just about everything from their end.

    I hope this post helps, and I apologize for its length. I figured I'd part whatever knowledge I've gained from the industry to whoever cares to read it!

  10. #10
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    Quote Originally Posted by Shayan|Evolucix View Post
    Overselling VPS's is impossible on Xen.
    This is not true. You can oversell memory on Xen via ballooning.

  11. #11
    Quote Originally Posted by kevinnivek View Post
    I'd like to see the CPU speed allocated to each of the 64 clients (100mhz?) after all is said and done.
    Modern cpus are pretty fast these days. If you cut out the top 10% of your cpu usage customers as "abusive", or ask them to upgrade plans, the other 90% will likely be using low enough cpu to get 50 accounts onto a quad core without any issue. We're not doing that because it's not our business model, but if we were a sub $10 / mo openvz account provider, I would say 30-60 accounts per quad core would be fine. The disk i/o is likely to catch up with you before the cpu at that point.
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