Web Hosting Talk : Other Forums : Web Hosting Lounge : How do you guys do it?

[acetate]

I'm wondering how does these company make any profits offering $2-$5/month hosting packages. Do you guys pay taxes??
Let's say tax is 40%.. So that leaves you with $1.20 if you are offering $2 a month packages.. If you add in credit card transaction fees, which is about $0.35 + 2%.. Now your down to $0.81.. Wow.. $0.81 per account (can't buy a Big Mac with that). Also lets say you have 200 accounts per server.. Which is about $162 per month.. If you lease a dedicated server, it'll cost you about $200 a month. So.. $162-200 = -$38.. A loss of $38 every month per server (not including extra bandwidth).. So... How do you guys do it???

[davidb]

There are a couple reasons. One post before said that it is usually a company that has VC money and they are trying to get a client base then raise prices later. Other times its just poor thinking. You are right though, it does not make much sence. Also they might not have great support, if any. Also just might be a bad service.

[JayC]

Originally posted by acetate
I'm wondering how does these company make any profits offering $2-$5/month hosting packages. Do you guys pay taxes??
Let's say tax is 40%.. So that leaves you with $1.20 if you are offering $2 a month packages..

I agree with your basic point, but that part of your math is flawed. Tax isn't paid (in any jurisdiction I know about; certainly not in the US) on the hosting company's gross income, it's paid on the company's profit. So some probably aren't paying taxes... no profit, no income tax!

[MCHost-Marc]

Originally posted by acetate
I'm wondering how does these company make any profits offering $2-$5/month hosting packages. Do you guys pay taxes??
Let's say tax is 40%.. So that leaves you with $1.20 if you are offering $2 a month packages.. If you add in credit card transaction fees, which is about $0.35 + 2%.. Now your down to $0.81.. Wow.. $0.81 per account (can't buy a Big Mac with that). Also lets say you have 200 accounts per server.. Which is about $162 per month.. If you lease a dedicated server, it'll cost you about $200 a month. So.. $162-200 = -$38.. A loss of $38 every month per server (not including extra bandwidth).. So... How do you guys do it???

Correct That's why so many small hosting companies close down after 2-3 months. Best thing i've seen here so far was $2/year

[acetate]

Originally posted by JayC
I agree with your basic point, but that part of your math is flawed. Tax isn't paid (in any jurisdiction I know about; certainly not in the US) on the hosting company's gross income, it's paid on the company's profit. So some probably aren't paying taxes... no profit, no income tax!

Ahh... Sorry about that.. I'm not a business major or an accountant. =) I guess it's a game of risk for them... There's always risk when investing in a business but the risk of losing money is higher for them. I wonder if those customers that do business with these company are getting their money's worth (ie good service and support).......................................

[acetate]

Also to add my point of view to this.. I rather sponsor them for free provided if they place a link or a banner back to my site than to offer packages for $2..

[Dollac]

How they do it, my math is as follows

Dual 60 gig drive server with above average processer/RAM is (according to a quote I got) $2,800. Co-Location of the server, this price varies but I will go with a higher figure of $300 per month for this. Web Hosting management software $850. You can get bandwidth for $250 per 1 Mbps (225 GB at 70% load). You can put 1,000 50 MB accounts on the server with 1 GB of bandwidth each.

So here is where we stand total onetime setup costs is $3,650 plus $350 just for misc and to bring the total to $4,000. So for the bandwidth at full load would require 5 Mbps for a cost of $1,250 per month plus server co-location for a total of $1,550.

Taking the cost of the server and breaking it down for payment over 12 months and all that good stuff the bottom figure on a per account basis of $1.88 per month, take the cost of the server out (ie. second year) the cost per account is $1.55, but we will contibue on with the $1.88 per month.

Going for the retail price of $2.00 per month (gurantee that you have to pay per year) that is $24.00 per year. Take away the processing fee of $0.35 plus 4% (going with 4% since American Express is 3.XX%) that brings the operating income down to $22.69. Now subtract the cost of an account for the year ($1.88 X 12) and the new total is a grand total of $0.13 per account. If you change the amount of diskspace that each account has from 50 MB down to 25 MB thereby giving you 2,000 account per server, but keeping the bandwidth the same, that would raise the above grand total of $0.13 to $5.29.

So you see it is possible to do it, I would not want to do it since you have to do all the support yourself and to do that for 2,000 accounts is more than a full time job. The purpose of this is to show purely from the money side of things it is possible.

[TheComputerGuy]

servers are tax deductable because they are required for a company so...minus the 2800

[SoftWareRevue]

Originally posted by TheComputerGuy
servers are tax deductable because they are required for a company so...minus the 2800

Wouldn't it have to be the depreciated value per year??

[Dollac]

The cost of servers are part of the business and there are certain tax law(s) benefits for them. I am not an accountant so I am not sure what the acceptable deduction rates for computer equipment are (ie. 100%, 50% or 20% per year). Regardless the cost is written off as an expense of doing business and that does have a direct impact on the Net Income of the business as year end. The above calculations that I did are rough and basic but do get the intention across and also regardless of the tax implications of the cost of the servers you still have to put the money up front to get the servers and have it built into the cost of the service to recover the capital outlay for the servers.

Also take into account (depending on your country) that to be considered a business in the eyes of the goverment you have to be profitable within 3 years. Like any goverment department and definations this is subject to a million and one exceptions, conditions and circumstances. Another thing that would change the figures is leasing the equipment which inturn leads to more tax implications but for me to start covering all that information would (a) take page after page of information and (b) as I mentioned I am not an accountant, tax lawyer, etc. so I do not want to go into to much detail as I do not wish to give out misleading information.

[Cyberpunk]

That caught my interest.

Anyone know if similar criteria could be employed if youre in the Uk? What other aspects could be tax deductable (depreciation/running costs) running a hosting company based from the Uk (servers in america)?

[microsol]

Originally posted by Cyberpunk
That caught my interest.

Anyone know if similar criteria could be employed if youre in the Uk? What other aspects could be tax deductable (depreciation/running costs) running a hosting company based from the Uk (servers in america)?

I think it doesn't really matter where your servers are. You are a hosting company, you have the servers (leased or colocated). You have the running costs. Why shouldn't they be tax deductable as long you pay your taxes? Ok, i could be wrong, but then you would have to get this money from your customers.

[c0bra]

Originally posted by Cyberpunk
That caught my interest.

Anyone know if similar criteria could be employed if youre in the Uk? What other aspects could be tax deductable (depreciation/running costs) running a hosting company based from the Uk (servers in america)?

The servers in america would be tax deductable. If (like me) you buy at least one new computer a year that you use to operate your company from that too is a business expense. You can also include: your ISP costs for your connection to the Internet, your BT phonebills, right down to the paper for your printer. Best thing you can do is talk to an accountant and he will help ensure you don't pay too much tax.

[microsol]

Originally posted by c0bra

Best thing you can do is talk to an accountant and he will help ensure you don't pay too much tax.

I agree

[Dollac]

The comment was made to get an account to help you with the books and make sure you are not paying to much taxes, do not hire an account. Hire a bookkepper, basically an accountant but cost 30% - 40% less. The only down side is that the account has to review the books at the end of the year to sign off on them. This can cost over $1,000 but is still cheaper to have a bookkeeper do the day to day of the books.