How to start a web hosting business

How to start a web hosting business

Introduction

The evolving web hosting market is churning up new opportunities for entrepreneurs interested in starting their own hosting businesses. But there are no get-rich-quick opportunities. It takes planning and hard work to make web hosting lucrative.

Are you ready to jump start your own hosting company? This step-by-step guide will help you navigate the ins and outs of the field and avoid the pitfalls that can hamper your success.

First, a definition:

Web hosting is the business of providing storage space and easy access for websites. It’s a fiercely competitive field, yet it can be a profitable business—when done right. A hosting business will rent to customers a certain amount of bandwidth and storage space, for a set amount of time. The money you as a business owner make comes from the difference between the costs of operating your servers and customer service (or reseller costs), and the amount you charge your customers.

Ultimately, your decision to start your own hosting business should depend on your motivations, technical know-how and the workload you can handle.

For example, people have many motivations for starting a business. Some want financial freedom, others want a source of passive income and others do it for the challenge of meeting a problem head-on. Your motivations for starting a hosting business must be focused and clear. And you should bear in mind that it’s very difficult to operate a hosting business as a source of passive income, due to the large workload involved in running a service-based business online.

At the bare minimum, extensive knowledge of web design is required to operate a hosting business. You should have working knowledge of HTML, CSS, and PHP – enough to build a visually stunning, SEO-optimized website to take payments and allow for customer logins. For the more ambitious reader looking to operate their own servers, you’ll need sufficient object-oriented programming experience.

Starting a hosting business also requires a significant time commitment. Initially, you will spend many hours designing, testing and marketing your website. You will also spend time on a daily basis maintaining your website, providing customer support and processing payments. You should be willing to spend a couple hours a day working on your business at first. Eventually, if everything goes right, your business will grow to become a full-time job with great pay.

Knowing the market

Examples of niches

Examples of niches you could target:

  • Geographic areas
  • Small-businesses
  • Music content
  • Photography
  • Weddings
  • Non-profit organizations
  • Restaurants

The top ten hosting companies dominate 20,7% of the market

top ten hosting companies51.84% of the world's
websites are hosted by
us-based provider;

Top 10 Largest Most Popular Web Hosting Companies in the World

  Hosting Company Country Total Websites use this company IPs, sites
1 GoDaddy.com USA 339,797
2 Amazon USA 223,324
3 HostGator USA 206,031
4 CloudFlare USA 201,316
5 Hetzner Germany 152,380
6 BlueHost USA 149,882
7 OVH France 143,698
8 RackSpace USA 74,930
9 Confluence Networks Virgin Islands, British 70,118
10 RookMedia.net Switzerland 66,544



Bit of Trivia: The blogging niche has seen consistent growth. Bluehost was and remains very WordPress centric, and a majority of their customer base comes from WordPress users and bloggers (http://www.bluehost.com/wordpress).

Web hosting has traditionally been a wide-ranging and very competitive industry. Niche markets in the industry are few and widespread, and we have found that the vast majority of companies compete on price and customer service.

Some of the largest web hosting companies have revenues in the millions of dollars. You might be familiar with a few of them, such as HostGatorBluehostInMotion. All of these companies have tens of thousands of servers (GoDaddy alone has more than 40,000 servers), dedicated 24/7 support staff and years of business experience. A small startup like your future business will find it extremely difficult to compete with these goliaths.

Next are the huge set of small- to medium-size hosting companies. Here the word small is used with caution, because the average company in this category may have hundreds of servers and dedicated support staff. It is more difficult for these companies to stand out, mainly because of the number of competitors in this category. To stand out as a small-to-medium sized webhost, you usually need something unique, whether it be a name (like “A Small Orange”), cheap prices or over-the-top customer service.

The last category will inevitably be the category you find your future business in. This is the micro/startup hosting company category. As a generalization, companies in this category are usually reseller hosting companies trying to make a small dent in the $16 billion USD domestic web hosting market. Many of these businesses will fail to attract any customers at all and even more will stagnate after a few customers try their services.

Number of companies each country hosts

The rule of thumb is to have a business that offers something unique to your customers, coupled with extensive marketing, so that potential customers know about your name. The perfect example is the niche market. By positioning yourself as being directly associated with a niche, you are able to present yourself as an expert in that field in a way no mass market company ever could. This is incredibly appealing to customers within that niche. You are also able to focus your customer service on that niche’s needs, cutting support costs but increasing quality at the same time.

There are many benefits to choosing a niche market:
1. You can cut costs in things not related to the niche.
2. You can focus your marketing efforts only on customers within the niche.
3. You can sell affiliate products, such as Wordpress plugins and website themes in your niche.
4. You’ll realize benefits not found in a mature market. For example, niche sales grow faster than general hosting sales and there is no need for constant investments in branding and extra features.
5. You have a greater chance of success when competing with relatively few competitors in a niche market.

There are also a few downsides to the niche market, such as a naturally smaller revenue pool and limited room for growth. In general however, in a large and mature industry like web hosting, it’s better to start off in a niche market and focus on providing quality service.

Take a few days to think about your ideal hosting niche and be thorough in your research. Once you’re ready, let’s start!

Steps you need to take to get started

Step 1: Pre-startup research

Pre-startup research

Once you’ve identified your intended niche, it’s time to do some additional research. You’ll need to know the top 5 competitors in your hosting niche, the services they offer and their fee structures. A spreadsheet is recommended for this purpose—you can use the one below as a quick guide.

CompetitorABC Inc. StatsARPU (Average Revenue per unit) ~$100

% customer lost after the money back guarantee ~25%
Services Offered
  • Green Hosting
  • Shared hosting
  • Dedicated servers
  • VPS
Cost for the customer$15/month
Shared
Unlimited bandwidth,
3 domains
Marketing MethodsFacebook, Twitter, has their own blog, advertises on Google, affiliate marketing Estimated cost per acquisitionUp to $350/customer, from Google AdWords estimator

Step 2: Deciding the core of your business

Deciding the core of your business

There are three types of web hosting businesses:
1. Reseller hosting
2. At-home server
3. Datacenter colocation

If you’re a new web hosting entrepreneur, we recommend that you begin with a reseller hosting system. There are many benefits to starting a reseller business, including simplicity and low cost of operation. The technical know-how is basic with a reseller business and becomes significantly more complex with an in-home server or renting a datacenter.

Reseller Hosting

Average price
$19.95/month
Cheapest price
$9.87/month
Most Expensive price
$23.95/month
Average Bandwidth
500 GB/month
Average Storage
50 GB
Most common features
- Unlimited domains
- Free CPanel
- Free Domain Reseller Account
- Free Billing System
- White Label client panel


Bit of Trivia: A number of the big hosting companies started off as reseller web hosts. Hostgator, for example, has never held their own servers. The company started off as a reseller webhost in 2003 and has seen sustained growth and eventual acquisition by Endurance International.

reseller_hosting Cost of entry: Minimum $9.87/month, likely around $30/month plus advertising.

Reseller hosting is a type of web hosting business in which you buy wholesale hosting services from a larger company and “resell” the services to consumers at a higher cost. In this case, the money you make will come from the difference between the two prices.

Reseller hosting can take many forms. For example, you can rent a dedicated server from the hosting company as a reseller or you can re-sell the shared hosting services the company offers by signing up for a reseller account.

Pros and cons of reseller hosting

There are
28 million
small businesses in US
Pros
  • Easy setup
  • Need little technical knowledge
  • Lots of support given by the company that provides reseller services
  • Not very time consuming, the time saved can be put into marketing your business
  • Technical support handled by the reseller company instead of you
Cons
  • Limited options you can offer to your customers
  • Uncompetitive pricing. You cannot offer very low prices and unlimited everything like the big guys, and stay profitable at the same time
  • No control over the back-end. For example, you can’t guarantee there’s going to be no down-time unless the reseller company does so

How to set up a reseller hosting business

543,000
new businesses
started each month48% of small businesses does not have a website
48%
of small businesses
does not have a website

1 Choose a reseller service that meets the needs and norms of your niche. For example, if your niche is WordPress, then your reseller service should have extensive support and software for WordPress installation and maintenance.

2 Buy a reseller hosting package. The package you choose can be as large or small as you like, but keep in mind that you can always expand once you get actual customers.

3 Build your website around the API of the reseller company and integrate either the provided billing system or your own billing system; determine what services you can offer and what services you should offer.
a. For example, many hosts offer shared hosting, VPS hosting and dedicated servers.
b. If you have three different options for one type of service, customers are more likely to choose the middle ground between the low end and the high end–plan to make the most profit from the middle-ground option.

4 Promote your business with Google ads and social media. (see Section 6)

5 Expand your servers whenever necessary. You may never need to handle your own servers for your business, often you can upgrade to a dedicated server reseller package to handle the influx of customers.

At-home server

home server

Cost of entry: A or B are both viable options, depending on need.

A) Around $1000 for a used blade server and chassis, $100/month for maintenance, power and freelance customer support staff, and $100/month for bandwidth. Plus a lot of time and expertise.

B) Around $800 in total for a PC server setup with a 2.5GHz+ dual-core CPU, 1TB hard drive and 4GB RAM.

The second option that a startup hosting business has is the at-home server. This option is for the more technologically savvy business owners who want the freedom of managing their own server(s). Let’s look at the basics of setting up and operating a server at home.

Hardware (Option A):

Hardware

Your home server can take many forms. The simplest setup can be any machine with a 2.5GHz+ dual-core CPU (Intel i3), 1TB hard drive and 4GB RAM–this is to ensure smooth operation of a hundred or so customer websites during peak hours. You can even use your own computer for this purpose! However, depending on the type and age of computer you use, this guide recommends buying or building a new machine. Old computers are unreliable, slower and can get extremely loud during peak CPU load.

Your setup would also need a stable and high-speed Internet connection, power supply and cooling. This guide recommends putting your server in a discreet location with a wired connection (such as a basement), so that the day-to-day operation of your server isn’t disrupted by foot traffic in your home.

Hardware (Option B):

Hardware

Alternatively, if you believe you have a greater need for computational power density in a smaller space, you can set up a blade server. Blades are modular servers stripped down to the basics, ensuring higher density computing with lower power input. Blade servers are assembled with a chassis that can hold anywhere between two to 14 blades. The blades themselves are found inside the chassis, which contains a management unit that allows access to each blade, and network storage connections for each blade.

Each blade is its own server with multiple cores and hard drives, but the setup can have a shared storage system. Unlike a regular computer, the entire chassis needs only one mouse, keyboard, video display and network connection.

There are 3.26 billion
internet users40% of the world populationthat's over 40%
of the world population

The average shared-hosting blade server hosts approximately 2,500 customers. Your at-home server is likely to host fewer customers to begin with. The more you can put on one server, the lower your per-customer cost will be. Naturally, if the server is full, your cost per customer is only around $40/month for the first year. This means, if you charge $3.99/month, you can make an $8 profit per customer for the first year. Your initial costs also will include validating the customer’s credit card and making sure they are guided to the right resources for support when installing WordPress and custom development of a drag-and-drop web builder. Beyond that, you’ll have electricity, HVAC, bandwidth and hardware costs.

The software:

You have a choice between a Unix/Linux-based system and a Windows-based system. Each has its own pros and cons; the differences are mostly technical. However, a Unix/Linux based system does use significantly fewer resources.

It’s worth practicing setting up servers before you launch your business. If you’re confident in your technical knowledge, and want to practice setting up and running a server of your own, try following this guide personal server set-up guide: http://arstechnica.com/gadgets/2012/11/how-to-set-up-a-safe-and-secure-web-server/

The Internet Connection

 

Asia, as a continent,
has the most internet users
It accounts for

48.4%
of global internet users

At-home servers present a unique challenge for the web hosting business owner: the Internet connection. For one, the majority of ISPs or broadband providers do not allow their users to host public websites on their network. We recommend that you do extensive research on your own Internet provider’s terms of service, and only proceed with setting up a server at home if your ISP explicitly allows for the hosting of websites. If they do not, you have the choice of contacting your ISP to work out a special service package for your business’s needs, or to find another ISP that does allow hosting.

in-store salesIn 2015, 64%
of all in-store sales,
or sales to the tune of
$ 2.2 trillion,
were influenced
by the internet.

Your business will be very dependent on the stability, latency and speed of both the upload and download connections provided by the ISP. ADSL (asymmetric digital subscriber line), cable, or fiber services are mostly asymmetric, meaning that the upload speed will be significantly slower than the download speed for most providers. In order to be competitive, your business will need fast upload speeds in order to provide customers with the fastest possible loading speeds.

Another problem with Internet connections is that most services use a dynamic IP addresses, where the IP address changes every time you connect to the network. As a web host, you need one or a set of static IP addresses.

Pros and cons of at-home server hosting

Top 10 Internet Service Providers

    Connection
Type
States
Available
1 comcast Cable, Fiber 40
2 timewarner Cable 29
3 verizon Fiber, DSL 14
4 att Fiber, DSL 21
5 cox Cable 19
6 charter Cable 29
7 suddenlink Cable 16
8 cableone Cable 19
9 centurylink Fiber, DSL 18
10 frontier Cable 28
Pros
  • Absolute control over your setup, hardware and software
  • Freedom in what you can offer
  • Long-term savings compared to being a reseller host
  • Helps you build practical knowledge of the hosting industry and how it works
  • Freedom to expand as much as you want, whenever you want
Cons
  • High upfront cost for hardware
  • Need special package from most ISPs to allow for hosting from your IP address, (dealing with ISPs is a level of pain all on its own)
  • Requires a lot of technical knowledge just to get started
  • High miscellaneous costs of startup compared to reseller hosting
  • Need to provide your own support, Cpanel, and billing system

Steps to setting up an at-home server

1 Contact your ISP and negotiate a package where they agree to unblock the ports required for hosting, and ask for a static IP address instead of the dynamic one they usually provide

2 Research and purchase a server setup, either blade or a simple PC depending on your needs

3 Set it up in your home, making sure that the server is accessible with a steady wired Internet connection. (refer to the installations section of this guide)

4 Research and set up the operating system and required server software

5 Link your server to your already designed website and decide what services you will offer

6 Promote your hosting business with online marketing

Datacenter Colocation

 
Datacenter Colocation
64% of businesses use colocation services
64% of businesses
utilize some form
of colocation services
1 in 7 enterprises will partner
with a colocation service provider by 2016
colocation service provider 2016

Colocation market globally

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