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  1. #1
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    Reality Check: If you're about to start a webhosting provider...

    Today I'm going to teach you a quick lesson about what the hosting industry ISN'T.

    First off let's get started with what you're currently charging clients:
    Feel free to read the other 'related thread' available at (you'll get the amount you're charging clients from this): http://www.webhostingtalk.com/showthread.php?t=480472

    All right. Now that you've performed that you know you're making absolutely nothing and this ISN'T the getrich quick scheme you originally intended.

    So you're averaging around 1 cent per hour, per client (just an assumption -- anyone from 2 dollars up to 7 is about 1 cent per hour per client or less). Not too great?

    Just think of how many clients you're going to need to make a decent wage at that.
    Let's pretend for a moment that you consider 10 dollars an hour a decent wage (which I don't, but it's what I happen to make).

    You now need a total of: 1,000 clients to generate your 10 dollars per hour (USD, I'd hope) excluding all of your expenses (and you know all about those if you run a provider: bandwidth, electricity, cage space or rackspace, licensing out the wazoo, phones, office (Even mommy charges you rent for that basement you're in kiddo) and the list just goes on.. and on.. and on.)

    Suddenly you have two choices. You either solo your entire operation and setup a sick monitoring system, wake up at random hours to answer random calls/tickets or.. you hire.

    I'm afraid that batch of cookies your Mom baked upstairs isn't going to cover support costs.
    You're suddenly now neckdeep in doo-doo. You have to increase your clientbase to make this affordable and make a decent living. Suddenly you need 4,000 clients.. to make 40 an hour (not including expenses, don't forget that part ) because you want 20 for yourself and 10 an hour per tech!

    You greedy, greedy man.
    Now let's go a bit further.. you now have 4,000 clients to support with a 1-2 man team (that is if you can hire someone at 10 bucks an hour, don't outsource it'll only cause problems like higher profits ).

    Now let's halt for a moment and do some math.
    Let's just use an example..

    Let's say there was a guy.. his name was You.
    He had two choices: He could charge 5 dollars a month for hosting or charge 10.

    He did some calculations, made his company named Fauxhost and got started: He decided he'd charge 5 because he'd end up getting 50% more sales!

    Wow?! Call the press! 50% more sales all because of a ... (wait a minute..) because of a 50% decrease in price.

    Now we're getting somewhere. Let's say You decided to go with that 10 dollars a month pricing scheme. Suddenly he'd be getting 50% less sales (1 a day instead of 2, 5 a day instead of 10, whatever it may be..) but he'd also have 50% less clients to support.. yet magically he would make the same amount of money!

    Wow! Look at that..

    Okay, so it's not magic. My point is (if you can call it a point) raise you're bottom-of-the-barrel prices before considering launching your host. :p

    Note: What are you doing in an industry where you make 1 cent per hour from each client? You're a masochist, just like me!

    Requirements for this industry:

    1. You have to love providing support - in fact you have to THRIVE on it. If you're going to become a leader in the industry you're going to need to learn to professionally interact with your clientbase. That doesn't just mean 'fixed' messages every ticket you receive. Provide your clients with some quality or they'll go elsewhere, make them feel special: even for that 1 cent an hour.

    2. Don't think this is the industry that you're going to get rich quick in overnight. If you want to get rich quick take that reseller account or server you have and start sending 419 scam e-mails. Don't waste your time attempting to fight on these margins if you don't have the guts to stick with it. We don't want to hear about 'You host dissappeared h0mey!'.

    3. You're going to have to take some time and really build a business plan. You have to plan for those rainy days when no sales arrive. Do NOT build a hosting company on the idea that you will 'always get enough yearly sales to cover your expenses' -- rainy days SHALL arrive and you'll go down like a titanic and your existing clientbase might just not have it in them to renew.

    Now with all that said.. even at 1 cent per hour (or 10 cents, or 60 cents..) the hosting industry is one where if you thrive on customer service, feedback, management.. you can make it out there. It's quite profittable and is a 'service industry' - which means as long as there are people needing websites there will be hosts! It's not what I would consider a 'luxury' (ipod sales drop when a depression hits, hosting sales not so much, toilet paper even less: got it? good Note: Which reminds me I need toilet paper, may I use your last month's budget?).

    Feel free to add your own tips and tricks. Mines sort of just a quickly thrown together 'rant'.

    I'm bored, can you tell? Nor can I proofread/write!
    Enjoy your evening!
    Last edited by David; 01-24-2006 at 03:13 AM.
    David
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  2. #2
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    Lol, enjoyable read .

  3. #3
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    Agree with above poster.
    Thanks for taking your time a write it
    -Mr Bister

  4. #4
    This is great advise for someone who is just coming into the industry....This is what it all about, learning and having fun at the same time if that is possable.

    By the way...back to my point...Thankyou for article

  5. #5
    thats a really cool and somewhat enjoyable n very informative research effort.
    Good work

  6. #6
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    Also, charging $5 rather than $10 will limit your upgrading ability later on. If you need to upgrade your server, hire staff, etc, When you're barely getting enough to pay for toilet paper then you'll have no chance at improving your service!
    Web Handyman - Website and Internet Marketing Service

  7. #7
    Fabulous read. Learn more and more by the minute. Thanks.
    You live and you learn.

  8. #8
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    Great posts - very informative, this should help a lot of people.

  9. #9
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    A must read for all new hosts (and most current). Nice job.

    Can you put an emoticon of little kids being slapped?

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  10. #10
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    Thank you!

    I have been thinking of going into this business and even started designing a website for it and registred a domain I had the same thoughts as you, im gonna be earning peanuts and spending hours every day on the PC.

    My plan is simple. Charge a bit more than usual BUT provide quality support i.e response times of under 12 hours guaranteed! Am I thinking right?

  11. #11
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    Quote Originally Posted by UK_Guy12345
    Thank you!

    I have been thinking of going into this business and even started designing a website for it and registred a domain I had the same thoughts as you, im gonna be earning peanuts and spending hours every day on the PC.

    My plan is simple. Charge a bit more than usual BUT provide quality support i.e response times of under 12 hours guaranteed! Am I thinking right?
    Well it certainly doesn't sound like a bad plan: depending on the pricing your charging just ensure that you provide quality support to your clients and I'm certain things will work out

    If needed get yourself a blackberry, that way you can guarantee something under 1 hour or less if the clients are really paying a high premium.
    David
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  12. #12
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    Quote Originally Posted by David
    Well it certainly doesn't sound like a bad plan: depending on the pricing your charging just ensure that you provide quality support to your clients and I'm certain things will work out

    If needed get yourself a blackberry, that way you can guarantee something under 1 hour or less if the clients are really paying a high premium.
    Well I work from home anyway so blackberry isn't needed but yeah in future might consider it.

    My plan is something like this.

    - Invest approx $150 per server per month(decent quality/spec server with plenty of bandwidth)
    - Have packages ranging from $10-$20 with good bandwidth and space and support
    - Limit the number of customers per server to 30 so assuming I get average $15 per customer thats $450 per month - $150 = $300 per month
    - Invest another $150 from the $300 into one more server and carry on.

    This way I grow slowly and also can manage number of customers I get. Just one question. 30 customers per server is ok? Is it too less or to much?

    My aim is to provide a near 1-1 support experience so that involves supporting customers with their sites, suggesting improvements and generally maintaining the servers. Any thoughts on this?

  13. #13
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    Quote Originally Posted by UK_Guy12345
    Well I work from home anyway so blackberry isn't needed but yeah in future might consider it.

    My plan is something like this.

    - Invest approx $150 per server per month(decent quality/spec server with plenty of bandwidth)
    - Have packages ranging from $10-$20 with good bandwidth and space and support
    - Limit the number of customers per server to 30 so assuming I get average $15 per customer thats $450 per month - $150 = $300 per month
    - Invest another $150 from the $300 into one more server and carry on.

    This way I grow slowly and also can manage number of customers I get. Just one question. 30 customers per server is ok? Is it too less or to much?

    My aim is to provide a near 1-1 support experience so that involves supporting customers with their sites, suggesting improvements and generally maintaining the servers. Any thoughts on this?
    30 clients per server seems a bit low: With the majority of clients 100ish should be fine. If you keep the # too low suddenly you'll have 50 servers to manage and not enough time in the day to keep up on it.

    Aim a bit higher, as long as you keep a constant watch you'll know when it's time to get another server. Proactively migrating users around (with appropriate DNS modification ahead of time) depending on their size can really prolong the need for additional servers in the fleet as well, so it's something to consider.
    David
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  14. #14
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    Quote Originally Posted by David
    30 clients per server seems a bit low: With the majority of clients 100ish should be fine. If you keep the # too low suddenly you'll have 50 servers to manage and not enough time in the day to keep up on it.

    Aim a bit higher, as long as you keep a constant watch you'll know when it's time to get another server. Proactively migrating users around (with appropriate DNS modification ahead of time) depending on their size can really prolong the need for additional servers in the fleet as well, so it's something to consider.
    100 customers? That's alot indeed unless I only aim to host very small customer sites.

    My thinking was to give customers ample resources to host their sites. So if someone has an active site not suitable for most shared hosters I can host them due to the lower numbers on the server competing for resources.

    Ofcourse, I could host 100 customers with a much powerful server but the initial investment would be much higher than my planned $150. Something in the region of $300 and more, I would estimate.

    Although your point about managing more servers is important. I guess I can be flexible with the customer numbers per server depending on what sites are being hosted

  15. #15
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    Quote Originally Posted by UK_Guy12345
    100 customers? That's alot indeed unless I only aim to host very small customer sites.

    My thinking was to give customers ample resources to host their sites. So if someone has an active site not suitable for most shared hosters I can host them due to the lower numbers on the server competing for resources.

    Ofcourse, I could host 100 customers with a much powerful server but the initial investment would be much higher than my planned $150. Something in the region of $300 and more, I would estimate.

    Although your point about managing more servers is important. I guess I can be flexible with the customer numbers per server depending on what sites are being hosted
    True, it would mainly depend on the server quality. I only use dual cpu systems (opterons/xeons) which is why I state around 100. The majority of the sites on my servers avg. 60ish concurrent users and we never go over load 1. Which is why 100ish is where I aim per box, although generally 250 or so wouldn't have any ill performance effects whatsoever.
    David
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  16. #16
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    Every website is different. One company may be able to hold 200 websites per server, while others may have larger sites onboard that result in a smaller number of total websites the server can handle. There's really no telling how many you'll be able to fit because there's no telling who you will end up hosting.

  17. #17
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    Yet another post that outlines common-sense - why not take away the safety lebals and let the problem fix its self?

  18. #18
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    Quote Originally Posted by mtcrilly
    Yet another post that outlines common-sense - why not take away the safety lebals and let the problem fix its self?
    To be honest I agree -- but at the same time the industry would get scarred by the amount of idiots.
    David
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  19. #19
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    David,

    Not quite - because they wouldn't last long. Infact, I really wish it wasn't so easy to setup a web hosting business these days; it's due to the fact it IS so easy that we have these "idiots" in the first place.

    I have plans on starting a hosting "project". It wont be anything grand or special, nor will I be hiring members of staff to look after a single VDS server for me

    If people "took the safety labels" off things (i.e., didn't write articles on starting a business online, didn't make it look so easy and with lots of £££ potential etc) then the problem would indeed sort its self out.
    1. Customer signs upto "great" web hosting deal
    2. Server is overloaded by a 12 year-old that has bought a cheap $75 a month dedicated server (with daddy's CC) and a hacked CPanel license (from his pals on IRC) and just spammed the server with customers
    3. Everyone gets very annoyed with the lack of speed and response from their provider and leaves
    4. 12 year-old cries, DDoS's someone out of anger, leaves the business, grows up, gets laid and moves on.
    The lack of safety labels just paid for its self.
    Good night, and thank you!

    - Mike.

  20. #20
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    Quote Originally Posted by mtcrilly
    12 year-old cries, DDoS's someone out of anger, leaves the business, grows up, gets laid and moves on.
    Get laid? At his age he will probably make the same mistakes as he he made with the server: no protection, get a bunch of kids, who in their turn will be doing the same at an age of 9.

  21. #21
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    I apologize, in advance, for the length of this post as well as for any grammatical mistakes or logical blunders that I made. This was thought of and typed as rapidly as I could manage it and there will probably be a few problems here and there.

    There was probably a better medium for this (if I get banned due to length of post, do not mourn my loss).

    A bit of a warning before I type this, and, consequently, before you read this. This is just my opinion and you are entitled to agree or disagree with it as you see fit. If you agree then that's nice and it will make me smile. If you disagree then that is not so nice, but, so long as you explain why, I will probably still smile. That said, I intend to limit my post to simple observations and extrapolation.

    The downside to structuring the post like this is that it will probably highlight some of the shortcomings of the methods that I used. The primary shortcoming being the fact that I have not crunched any large amounts of numerical data on this. This is a shortcoming because if I could then I would be able to check my arguments against a broad sampling of data. My attempts to find large scale studies and data compilations (either raw or in report format) were in vain, so that means that I have heavily basing certain portions of this on assumptions where there could have been some solid data behind things. [Before I get any further into this, I would like to thank David for his two nicely done posts on the subject. I may end up contradicting him in here (things are never that straightforward really, thus I said may), but for what its worth if it had not been for his posts I would have probably never found the time and energy to compile this.] I intend to get some hard data and make some definite sense of things as soon as I can, but time is a major limitation right now. To soften the blow I will use hazy terms as a substitute for where some actually formulas should have gone (this has the, hopefully beneficial, side effect of making this little post easier on the eyes).

    The secondary short coming being that there are probably a handful of flaws I my argument simply due to a lack of certain types of data to crunch. There are somethings that I will never be able to *really* know. For example, how much is that spikey-haired teen really receiving for his work? Is he being payed per support ticket or hourly? How many hours does he work? To answer this question conclusively for the entire industry would require a bit of omnipresence on my part, and while google provides a bit of that, I'm afraid that I fall horribly short of the goal. If I had actually ran down some formal numbers then I would probably have just used the industry (internet services or services depending on the regional data that I had available) average, but who knows if that is correct on a per-company basis?

    The final shortcoming is due to a absence of industry experience. I have been able to setup, maintain, and secure servers for all kinds of purposes for quite some time but it never occurred to me to investigate the inner workings of the hosting market until early this year when the thought occurred to me that I could use my knowledge for something other than tossing together game servers and nursing my obsession with testing content management systems. I could actually make money! (never really so simple as that.) With this in mind, if you see any mistakes or false assumptions please correct, I greatly appreciate corrections (I also appreciate anyone reading all of the way through this, thank you for your time).

    Enough of the warnings and caveats. I will start with some observations, mostly pulled from this forum. I will then extrapolate on these observations in a way to highlight some things and make some observations. Finally, I will explain some of the phenomena that is found within the hosting market using these observations and make a truly vain attempt to answer some of the oft asked questions. This is the general layout, I will try to keep to it but there will be the occasional diversion. Throughout the entirety of this report I will have a general sprinkling of applied microeconomic theory. For those that nurse some manner of distaste for economics, this is theory without the graphs (though I would love to pepper you with them and they would be a great addition), without the numbers (I did not have time to gather these), and with a precious small amount of actual theory (the focus here is on the application).

    Part I, a handful of observations pulled from those with more experience in this business than I.

    "There seems to be a large number of 12 year olds in the hosting market."
    - Pulled from a variety of sources

    "Hosting is dead."
    - Pulled from an inciteful thread started by 'PickleZone'

    "There seem to be multiple levels in the hosting market. Budget, where there are people looking for something for nothing (primarily individuals). Services, where people expect excellent service for a premium comparative price (small businesses). Elite, where companies pay seemingly incredibly high amounts of money in return for access to a higher level of service, reliability, and quality."
    - Extremely poorly paraphrased from a poster who's name I can not remember (if anyone could point me in the direction of the original post, I would appreciate it more than you know). This subject is too complicated to cover in this post, maybe later.

    "In order to succeed in the hosting business it is necessary to find a niche"
    - Pulled from a variety of sources. I will give this a shallow treatment. The clock is working against me.

    "If it seems to good to be true, then it probably is."
    - Pulled from a variety of sources. Once again, I do not have time to cover this in detail.

    Part II, extrapolation and the application of basic economic principles.

    Before we can talk about applying economic theory, we need to find an acceptable model to talk about. For the dual purpose of saving more of my time and making things easier to understand I will be creating a simple market in which the only service that is considered is the actual hosting itself (everything else is held constant between firms - quality, uptime, services, etc). I will use this simplified model to comment on the real situation.

    Let's review the characteristics of the hosting market with all other factors (services, brand, etc) being held constant: firms can not alter prices as all of there services are identical, firms that go above the equilibrium price will face a demand for their product of 0. It is a perfectly competitive market. Those of you who are familiar with things in the world of hosting will probably realize that this "model" does not seem so far from a certain reality, more on this later. Now let's apply our model and see if we don't get some light shined on some things.

    "There seems to be a large number of 12 year olds in the hosting market."

    In a perfectly competitive market, any firm that wishes to enter the market faces no barriers to entry. These firms will enter the market so long as there is an above normal economic profit to be had. Economic profit being a positive number on the balance sheet minus what you could have been doing with the money instead. Let's think about this, carefully.

    Pretend you are a 12 year old (if you already are one, then good, follow along and get some books on economics because you'll probably find that it is your calling in life), and you just received $100 dollars in cash for your birthday. Let's further assume that you earn about $20 dollars a month in allowance. Well, not too long ago, you discovered this nifty forum called WHT. On this forum you learned some rather interesting things about how to run a hosting business. You figure that you could acquire a cheap dedicated server or vps, setup modernbill (never underestimate those 12 year olds) and then run you own hosting business and make a tidy return on investment. What are your opportunity costs? (i.e. What else could you do with the money?) Well, you could spend it giving you a gain of $120, you could put it in a savings account (giving you an unacceptably low gain). You could setup a lemonade stand, but the material costs as well as the time required to man the stand and make lemonade totals to a loss once opportunity costs are factored in (you highly value your time). With all of the options reviewed, you decide that hosting offers the best return on your investment. You talk to your parents and they concur, as a matter of fact they are so impressed that they will pay for your equipment for you (reducing costs to zero, leaving only reward). And the rest was history. Until summer vacation ends and you closed your company leaving a couple hundred customers out in the dark.

    “Hosting is dead.”

    I mourn the degradation and subsequent closing of a thread with such great potential, but some things have to be done. Moving right along now. Of all of the threads that I've read here at WHT (and I have read quite a few), this was the one that hit the nail solidly on the head. The fact that the title has the word 'hosting' in double quotes is very telling. Allow me to explain.

    Earlier, when I defined an economic model for the hosting market, I held all things constant. Now, lets let one thing run. Time. With time, as was noted in that thread and many others, the costs incurred while running a hosting business have decreased. Applied to our model that means that the hosting market is a market in which the costs of the factors of production are decreasing. This means that there is an above normal profit present in the industry, and this results in more firms entering the market as well as a price decrease. Firms that fail to adjust to the price in a timely fashion face dramatically decreased demand and firms that lower their price below equilibrium are swamped by demand. Nimble firms that are capable of staying on the line by keeping up with the decreasing costs are the ones that survive.
    There is a further complication. The demand curve for hosting is shifting outward. Meaning that the hosting market is growing. It is growing at a near phenomenal rate. There is also more room for growth. This complicates things because as the demand curve shifts outward, the price increases. However, the price increase caused by the shift in demand is negated by the firms making an entrance to the market. In other words, with all other factors held constant and hosting as the only thing of consideration, over time the price and the profit will decrease.

    Let's take a look at the decrease.

    Now, if I may, I would like to quote “JohnCrowley” to make a point:

    “Hosting has been around long enough now, and the "magic behind the scenes" is no longer magic with control panels, OS's out of the box, datacenters with reliable connections, etc... The nuts and bolts of hosting are becoming a commodity, and with a commodity, only a small group of big providers can deal in a commodity and turn a healthy profit. This is why the more agile small and medium sized hosts (those that comprise the majority of WHT and the hosting industry) have to position hosting as a service by offering the intangibles and marketing them in such a way as to be successful going forward.”

    If I could add emphasis to a word in there, I would underline commodity (multiple times). What has happened is this. As the hosting industry expanded in size, it created its own industry of services surrounding it. The larger the hosting market grew the larger this “support” industry grew as well. This effect is called industry economics to scale and, in a nutshell, it is the specialization of firms that results as an industry grows in size. Hosting is not the only market that has seen this effect. Look at the personal computer companies. The earliest of them made their own components. The modern companies purchase components wholesale and toss computers together on an assembly line. This is a trend. The quicker growth that an industry experiences the sooner it will see this effect.

    Now I have to stop here, though there are a number of things in this thread that I have left unexplained (such as consumer behavior and interpretation of information, this is the big one and I apologize for its absence). I would also like to apologize for not being able to do this topic true justice at the moment.

    “In order to succeed in the hosting business it is necessary to find a niche"

    I don't have time to go over this in detail. But “hosting” (remember those dual quotes) is, while not dead, not the most profitable enterprise available to any firm that possesses any kind of experience in some other field. This....... I won't be able to finish this. Unfortunately, I am out of time, and I am really out of space.
    Last edited by Spyro; 03-18-2006 at 12:28 PM. Reason: Factually suspect sentence at the end, removed

  22. #22
    What a great thread!

    Webster7... I think you just blew my mind.

    I came to WHT today looking for something and I got sucked into this thread and forget what I was looking for!

    I just wanted to add my take and experience in the hosting business which btw I have only been in for a year, but I have built a nice sized business and my Return on Investment is staggering and I will tell you why...

    Webster7 Posted:

    As the hosting industry expanded in size, it created its own industry of services surrounding it.
    I believe that is true, but I'd like to take it a step further and point out that hosting doesn't have to be your core bread and butter... At least in the beginning. Or in can be part of a larger profit strategy.

    Think about the service itself... Who needs hosting?

    Answer that and you can find yourself in a little different situation.

    I'm a big believer in multiple streams of income... I don't build things with a one dimensional construct. I build things that create a web and funnel that leads to other products and services and then those lead back to the other.

    When you lay out numbers that take into consideration JUST the monthly cost of hosting, you are not seeing the big picture.

    What do you have when you have hosting clients? You have an opportunity to cross sell them... Offer more services... Offer more products... You have a captive market.

    So the hosting clients you do get need things. Figure out what they need and you can make WAY more then the little hosting fee you are charging them.

    Example:

    You have 1000 Clients paying you on average $10 a month... That's only $10,000 per year. Right?

    Wrong... You have an incredible opportunity to make much more. You have a market that will be receptive to a quality newsletter every month where you can give them great tips and advice and work in affiliate marketing.

    You can offer webmaster or marketing services and get clients...

    You can even build in an Adsense Model and provide content on your web pages... after some good SEO work generate another stream of income there so you are not only getting hosting clients, but the site itself generates income without you lifting a finger.

    What else can you do...?

    Once you are up and running and you have yourself a quality service, you can joint venture with other businesses and marketers. THIS... has been one of my strengths. One IM related membership site that I run with 2 other partners alone has created a decent sized client base. And here's the best thing about this one...

    The hosting is a bonus for members. If they leave the membership they will need to continue to pay for the hosting of course. But the bottom line is, I am getting clients by providing other services... And I make a whole lot then the $10-20 per month the hosting would be stand alone.

    Plus... I have built other products and services around the hosting. Products that naturally attract people that --> Need hosting.

    I wanted to provide some insight here because I think there is enormous potential online, but there is often occurs a tunnel vision syndrom I see among online businesses. And it's understandable with those new to this business or those that aren't familiar with internet marketing.

    I think the key is not to just build a hosting business, but build something that provides much more. The only way to win in such a competitive market is to have a marketing strategy that has many facets... Getting a client is the most costly part of what we do... But once you have them, you can have a long term relationship with them that can lead to many more opportunities for revenue than you might imagine.

    Also... It's a tremendous motivator when you look at what you are doing is building something of value. Your business has value. If you have a 1000 happy hosting clients, what do you think your business would fetch if you sold it?

    Just some personal insight...

    -Matt

  23. #23
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    IMCoach,

    Thanks for the additional input.
    One note though: Your math was off. 1000 x 10 = 120k a year.

    But yes, definitely: The services you can offer 'on the side' really continue to mount up. Whether it's backup services, other communities, web design, seo, etc..

    There's so much potential going to the wayside with most companies
    David
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  24. #24
    Quote Originally Posted by David
    IMCoach,

    One note though: Your math was off. 1000 x 10 = 120k a year.
    Thanks for that! Right you are!

  25. #25
    First I must say that this is an excellent post

    Second not to flame or start an argument. but in todays world if you made a dollar you made a profit. thats the way i look at it.

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