Strategies for startup hosts that are building hosting plans
After getting the software and servers (or reseller account), the next step most web hosting startups look at is creating hosting plans and building a sustainable business model around them. This article covers the shared hosting and reseller hosting models.
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Business models and average revenue per client
One of the most important aspects of creating a sustainable profitable business model through your hosting plans is ensuring that the average revenue per client remains as high as possible, within the range of packages you offer. The higher your average revenue per client, the more support technicians you can hire, the better your servers can be, and the more profit you can make. But most importantly, if your low-cost hosting business has base plans starting at $5/month, but your average revenue per client is $15 or $20/month, you can offer a higher level of service to your low-end customers, encouraging them to upgrade and reducing your churn rate.
Business models that have low average revenue per client tend to provide poorer service and have higher churn rates, resulting in the eventual collapse of their business.
The amount of disk space you offer has often nothing to do with average revenue per client. Big, successful companies offering lots of disk space tend to have very well-planned and thought-out business models (not just client volume) that help them succeed. They may offer super-cheap, high-resource plans, but high average revenue per client enables them to provide satisfactory if not good service. Startups that try to replicate their success tend to fail because they aren't able to achieve higher per-client revenues.
Often startup companies think that high client volume will make their business succeed in the long run. In the real world, it’s often the opposite. Hosts start off well but start falling apart when they get the volume and their business model is put to the test.
So how do we achieve healthy average returns per client? Here are some strategies.
Give clients a REASON to upgrade
Base hosting plans that offer the world is the biggest mistake a hosting company can make (unless they have a one-plan hosting model). A base hosting plan (especially in shared hosting) should have reasonable limits on domains or databases or other quantities a client is dependent on. Since most companies these days give out an excessive amount of disk space/bandwidth, the base plan is often more than sufficient resource-wise to meet their needs. Hence, providing a solid reason to upgrade in the form of domain/database limits is a good idea. However, each host is different, and if you can find your own unique way of doing so, go ahead and try!
Package quantization
This refers to setting up your packages in a manner with reasonable pricing difference between them. If your base shared plan is priced at $10/month, you may want to consider having each package jump at a level of $10/month, i.e. your next plan is priced at $20/month. Why? Because it makes a customer jump to a higher level even though they actually may not need all the resources in the $20/month package. If you had a $15/month package in between, they'd jump to that smaller level, representing a potential loss of revenue to your firm. It is also important that any add-ons you offer are significantly priced as to encourage customers to actually take a big upgrade rather than use small increments of a resource.
But when setting up price jumps, its important they are not excessively large (for example, base package at $10/month with next level at $50/month). While that may indeed be very profitable for you, it would also increase your churn rate and decrease the appeal of your packages because the upgrade path may seem too expensive. So the challenge for web hosting companies is to set package jumps at levels that are the most advantageous to them but are carefully crafted so that clients feel they are reasonable.
A big no-no when using this strategy is offering custom plans that are in-between your package offerings. If a customer is asking for a custom plan, you should consider only offering them such a plan if their requirements are higher than your published plans.
One may think such a strategy would lose you potential customers. If properly done, the loss of customers would be minimal. And the loss of the customers you do indeed lose would be more than well justified with higher revenue and higher average returns per client. Additionally, a customer would always prefer doing a painless upgrade with their current host than doing a painful migration to another host to save some dollars.
Pricing reseller plans HIGHER
This is the simplest strategy you can use to ensure higher revenue per client. By having shared hosting plans starting at $10/month and reseller hosting plans starting at $30/month, your average revenue per client can increase dramatically if you have a good-sized reseller base. Another reason to price higher is that reseller support requirements are generally higher.
Reseller hosting plan pricing strategy
Based on the general tips covered above, pricing the base reseller plans at a higher level than the base shared plan is important. Package quantization and giving a good reason to upgrade are important too.
But another important aspect when talking specifically about reseller hosting is having a linear pricing model and not an exponential one.
By linear, I mean if you are pricing your base reseller plan at $30/month with 5GB of disk space, your $60/month plan should have 10GB of disk space and double the amount of resources of the base $30/month plan. While this strategy isn’t necessary for success, and you’ll find a lot of reseller companies using an exponential pricing model, a linear model for reseller plans is generally more stable and more profitable.
A typical reseller starts off with your base reseller plan and upgrades as he/she grows and adds clients. Typically, your base package is priced competitively to allow a reseller to host a certain number of websites or a certain number of clients. Exponential reseller pricing makes the amount the reseller pays to you per client cheaper every time the reseller upgrades, while the resource usage and support needs of the reseller exponentially increase (because of an increasing and more active client base). It is not uncommon for a reseller on a plan twice the price and resources of the base plan to have three times the support requirement and use three times more resources. In fact, this is a general trend, and often having 1000 $30/month (base plan) resellers is generally much more profitable to having 500 $60/month resellers. This is opposite to the shared hosting model.
But offering a upgrade path to resellers is necessary if they are to see you as a long-term partner. Hence, it becomes essential to ensure sustainable profitability levels as resellers upgrade, and the best and most reasonable way to achieve this is using a linear pricing model.
Combining linear reseller pricing with package quantization (with large price jumps) is the most effective way to ensure high profitability on high reseller plans.
Shared hosting plan pricing strategy
Having a competitive base plan is often important in the budget shared hosting market. But ensuring that your base shared hosting plan doesn’t offer the world is equally important to increase your average revenue per client.
An exponential pricing strategy is often useful in the shared hosting market if your base plan starts off with low resources. By exponential pricing, I mean if your base plan offers 500MB at $10/month, your next plan should offer 1200MB or 1500MB of disk space at $20/month. Hence at each jump, there is a non-proportional and exponential jump in resources.
Exponential pricing allows your higher plans to become more and more attractive to potential customers and increases the number of customers starting off from a higher plan. Unlike reseller hosting, support and resource needs of a shared client do not exponentially increase at every level. This is so because shared clients do not resell their space, meaning the units of resources or support they use are for their own business.
This generally means that a shared hosting customer’s support need may be the same at the base level and the highest plan level. And the actual disk space/bandwidth requirements may not increase as they upgrade, provided you have set domain/database limits (which typically cost a host less to offer).
Hence the increasing profitability at each shared hosting plan level is a huge incentive to use an exponential model. Another reason is that you would want your highest shared plans to be competitive with your lower reseller plans. Often a shared client would move to a reseller plan just to gain extra resources. And typically, a reseller plan with more overhead is more expensive to offer customers. Hence, it is to a host’s advantage to have higher-end shared clients stay on a shared package. Therefore, keeping higher-level shared packages that compete with at least the lower half of your reseller plans is a good strategy.
See also
Web Hosting Wiki article text shared under a Creative Commons License.
