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Why do the majority of hosts fail?
There are thousands of web hosts, with new names appearing every day. I've read somewhere that around 75% of these close within the first year.
I'm looking for the biggest reasons why so many new hosts fail. Is it because of the competition and lack of money? HostGator and similar companies make millions each year so it is certainly a massive industry - but what separates these companies from the others that just shut down, and what are the reasons?
Comments
1) Doing it alone
2) Relying totally on software without any technical skills
3) Lack of guts / funds to continue in loss and expect a turn at some point
4) Lack of marketing skills
5) Lack of knowledge about linux i.e. relying on 3rd parties to manage / setup your servers
Many facts contribute to this the above stated like like 1/4th of a 1/4th drop in the ocean
@BharatB is an expert on hosts closing!
It's not just hosting. Most small businesses fail. Why? Depends on who you ask.
But most of the time it's in industries where the barriers to entry are low so any half hearted dimwit can get started, only to abandon it a year later.
None of them. Money is in 99.9 cases.
If you have money you can cover the steps you provided also the lost.
Because when summer is over, they gotta close shop.
no planning, no funds .
We've bought many failing/failed hosts over the years. The most common issues are lack of funding, lack of infrastructure (renting rackspace, renting servers ie reseller), lack of technical expertise and too high expectations.
Most people don't understand how to build a network, their idea is a $50 switch off Ebay and voila - a network! One giant broadcast domain. Or find a $50 router and wonder why the box falls over when there is more than 100Mbps of traffic. We bought a dedicated server provider about 4 years ago (will remain nameless), it was considered at the time a great choice by many on WHT. It had around 1000 servers in San Jose; I was sent out to work out how to migrate it to our facility and found it was literally a bunch of $50 Cisco switches daisy chained together. This was a miracle it worked but the infrastructure was extremely fragile. One mistake and it would be down and would take hours to restore.
Reselling other people's servers or renting rackspace often from other resellers is a recipe for disaster. These providers often find that someone in the chain screwed up and find themselves offline. Others find that they suddenly get a price hike and their almost profitable deals are completely unprofitable.
Lack of funding, skills, experience and determination. We invested millions of dollars (no typo) before reaching profitability. It takes some serious scale & investment to compete, train/retain staff, and to cut out as many of the middlemen as you can.
Most "hosts" on these boards never even make a living wage for the founder. Lots of hosts make the massive mistake of trying to compete on price instead of quality. When competing on quality, you will need massive investment to grow quickly enough to generate the cash flow needed to maintain quality (new network equipment, spares, good staff, big commits on space/power/bw, etc).
so, don't buy from delimiter, or infact anyone offering here or elsewhere, and expect to profit?
ideally you would own your own network, datacentre, IP allocation, as well as servers. that way you can control the costs.
as a small player you can't own it all. you have to find the right supplier, and then sell to your strengths - low overheads. that means ADDING VALUE, not just reselling with low margin
That is 100% right. Like you we channel millions, in the literal sense of plural million, into building out our facilities. Decent routers, switches, aggregation switches, storage, building management systems, fire suppression, air conditioning, power management and so on cost millions to do right; and that is before you can power up your first server.
Staff are also critical to a successful business. The old expression 'Pay peanuts, get monkeys' applies.
+1 and marketing is an important thing. Many try to compete with bigger hosts or reputable hosts instead of target local people,... and grow slowly but surely.
Not correct. With the exception of a handful of players on here - Delimiter/Yomura, Incero, Online/ColoCrosssing and a few others; the rest on here are just resellers on way or other.
If you look at the supply chain for some of these companies you will see that there are 3-4 intermediaries involved. Each one is a liability and taking a %.
Many people on here PM me and say I want to resell your servers. Its a pointless exercise unless you can value add. So you rent a server from a Delimiter, lets say you get on one of their reseller programmes and get 50% discount, you're buying a server for $15/month and reselling it for $30. Ok so now within that $15 you have to cover support, payment costs, taxes and so on. Is it worth it? Honestly no.
If you take a server and dice it up into VPS (the value add) then you're taking your server and making 10x more of it. That is good business. BUT its not going bring in enough income to leave your day job.
A straight resale is mistake on every level. If you are going to base your business on another supplier's business then you need some formality to it. Otherwise you find the first server is X price, then a month later when you need the next one its twice the price or that promo is not available. Obviously someone who owns their infrastructure can maintain promotions if they want; a reseller is at the mercy of their provider, or their provider's provider and so on.
Almost all the VPS providers who have moved to Yomura's infrastructure have a white labelled solution, they have a formal pricing contract and formal SLA. Yes it costs but it means they can grow their business without having to haggle out the next deal or worry that they are going to suddenly get stuffed because their provider hiked the pricing.
I would say lack of planning, with a solid business plan and capital you can make things happen (+80-100 hrs a week of work
Most probably fail since they think that making money on the internet is so easy.
The biggest reason why so many fail, IMHO, is because it's such an easy "business" to start and get involved with but not so easy for it to be profitable on the required level. To start a hosting business all it takes is a few $$ a month for a reseller account and some billing software so that is the "in" that so many take. A large portion of these people are kids from 10 to 20 years old which also adds to the chaos. Once they realize( usually a few months down the road) what is actually required with respect to capital investment, time and effort in order to make your business profitable to a sustaining level for the owner and any employees, the majority of them quickly abandon their projects or at least abandon their plans to move beyond a reseller.
these "kids" also spoil the market by bringing down the price people are prepared to pay.
Thousands of them stuck with same cheap locations such a OVH or online.net rent everyone already have no need more. Also US location.
>
I completely agree, it's short sightedness. Anytime you start a business, no matter what industry, whether it's easy to enter (hosting) or something immensely complex, the main reason a business will fail is the failure to plan. Too many people jump into the hosting industry thinking it's easy, provision the server and it's done, watch the money rain down. Ha nope. Something will always go wrong, someone will always need help and if you are a one man show, you are doomed because you cannot be available 24/7 to take those awkwardly timed support tickets, one of the fundamental requirements of a hosting company. We see this daily on LET, the provider that is a one man show but cannot answer a ticket in a timely manner, one of the most basic needs of the clients.
Even with an easy to enter industry such as web hosting, you shouldn't enter without a plan, the proper financial capital (essentially to sustain a loss for a year or more), and at least a committed team that is willing to work around the clock to make the clients happy and ensure everything runs like a well oiled machine.
Another subcategory of why these hosts fail so quickly that is part of the failure to plan is the failure to diversify. They think offering something anyone else can is good enough. You need to specialize, focus on a core demographic, usually a niche, and expand from there. You need to stand out from the crowd, offering services for $1/month and a flashy website just doesn't cut it.
Simply put, most of these hosts that fail never had a business plan nor a contingency plan for when things didn't go the way they predicted. Things seldom do in this industry.
Expectation is the main cause of failure.
Too many new entrants come into hosting believing it to be an easy earner. I mean you have the potential of 7bn people, all you need is 50 of them paying $20 per month and you are sustainable, 100 and you are making good money.
But it all too often leads to what I have coined as the GVH effect.
Once upon a time I became a host
I come to market at $20 and nobody buys
I reduce the price to $15 but still nobody buys
I reduce the price to $10 and double the resource, a couple of people buy
I reduce the price to $5 and double the resource and give free stuff and I get my 50 customers in 5 days after trying for 6 months!!
Hold on though, I was expecting to make $1,000 per month with these 50 customers, but I am only now getting $250. They want me to answer support tickets about slow speeds due to abusers at 3am. I only make $50 per month for the 40 hours I put in by the time I pay the server, overages and refunds. Shit, I don't actually make anything, nobody told me about all these chargebacks
But I want to be popular, a player in the hosting market. So I will keep going until I collapse or maybe I will just shut down without warning and run. It's the internet, who's going to find me!
/the end
Look about, in particular at provider offerings here that only do yearly plans where the most expensive is $15.
So that's $1.25 per month, even on a cheap server costing $50 per month. So you need to sell 40 yearly plans just to meet the server cost for one month!. Total plans required to meet the server cost for the year would mean 480 sales just to break even on server costs without including a single other cost (480 ip's!). And yes, they only have 1 server in most cases.
Do the math on a lot of the offers you see about here, it's clear they are not even covering costs and most likely never will. So the question you need to ask yourself is that if you buy, will they bail before your plan expires?
The smart hosts use LET/LEB to get themselves out there but bail before they can't go elsewhere because nobody will ever pay more than $7 for their service unless they are truly outstanding, which most are not.
Anyway, you get the idea
suggestion for new members wanting to post offers - make them read this thread, or at least Lee's post
Monkey see, monkey do.
@Lee
GVHv1 was largely a victim of its own success in a way. I, as well as some other members of my former management staff, were greedy. The thousands of dollars a month (Not $250, more like $2500+) of "profit" from yearlies from when we were really popular on LET went to management team pay and stupid investments rather than mindful reinvestments into our company.
We had hundreds of Xeon E3s with CC and thousands of OVZ VPSes. GVH failed due to poor money management and an incapability to reinvest funds into where they really needed to go. If I could change the past, that money would have went into better nodes, more competent staff, and into the company bank account. That would have led to better customer experiences, significantly reducing the amount of complaints and benefiting everything overall.
@GVH_Eric took over the company from me in Dec. 2014 and tried to improve the quality of the customer experience by reducing abuse on nodes, rearranging things, and overall trying to get things stable. Then he had his hands in my pricing schemes and forced changes to happen. From Dec and on, promo codes started disappearing, product lines were changed, and we tried to clean up the mess. But we had limited resources and not enough staff to get the changes done as quickly as possible, so the debt from not offering dirt cheap plans (and continuing the cycle of depending on yearlies) kept stacking up. By the time we actually tried to change in Dec to be more sustainable and to improve everything, it was too late (in a financial sense)
Knowing that the ROI on turning things around from our previous setup before December (which generated tons of complaints on forums every other day), I couldn't do it anymore (Especially after Eric got arrested in Feb, things started REALLY going downhill). We then decided to sell customer assets to XFuse (who apparently had the resources and the financial backing to continue fixing things in a larger scale than Eric attempted to). At the time we sold the customer assets, debt to ColoCrossing was calculated to be well over $5K.
It was a massive clusterfuck.
Well, lack of basic idea is main issue. Ask your self what makes you different than the others. Can you justify price that you are asking. Do you know how to do this ? And after all are you ready to eat shit X years until you make 1st money ?
@Lee is true !
only $5K. WOW! small change. the difference between success and failure often isn't anything to do with money.
@Aldryic wrote a pretty detailed post a while back that hits on some of the points @lee brought up. It's a good read for everyone and should help calm down some of the freak outs some providers have.
https://vpsboard.com/page/index.html/_/linux-vps-tutorials/how-to-run-a-web-hosting-company-vps-servers
Francisco
I don't know that any percentage thrown out has any basis of fact, but in general it is a highly saturated market.
New hosts fail due to lack of funding and sometimes that could be the only reason. Without funding, there is no marketing, there is no opportunity to reinvest into improving the service etc. All of this then turns into a lack of planning.
I'd agree. $5k in debt is not a lot to have 'hundreds of servers'. That means they must have cut things off very swiftly before 'real' debt could be accumulated.
I think one of the things that a lot of people have overlooked is something I think that a lot of the hosts, smaller especially when there is only one (Maybe two) people running the business, is a running out of motivation. This is often linked with providers running low on funds or just not meeting the targets that they expected they would. But I think that when a provider runs out of motivation, it can make it more difficult for them to even attempt to grow, and that then impacts on customers (And you then have the downward spiral). Just my view on things though.
Zero business sense.