Defining Your Business Model

INTERVIEW BY AARON PHILLIPS
VICE PRESIDENT OF OPERATIONS (CPANEL, INC) AND BUSINESS DEVELOPMENT (WHMCS)

business_model(Ping! Zine Issue 61) – Competition is fierce, and in the web hosting world it’s highly competitive. Every year I see 1000’s of new hosting providers launch products, services, and companies using cPanel® & WHM® software. Having been around the hosting industry for over 10 plus years, I contacted two of the most innovative and business savvy industry experts to ask them a few questions.

Running a hosting company is extremely challenging and a whole book could be written on the subject, but my goal is to provide you with a bit of insight on the business model and key areas that can help you succeed.

Ben Gabler
SENIOR PRODUCT MANAGER OF HOSTING AT GODADDY.COM (WWW.BENGABLER.COM)
With over 10 years of experience in the Hosting Industry ranging from Management to Technical Support, he is very familiar with Linux when it comes to server management and troubleshooting. His most familiar operating system would have to be CentOS.
Ben has been involved in practically every type of Hosting; Shared, Reseller, VPS, and Dedicated, using practically every control panel on the market. He is most comfortable with cPanel & WHM software and believes it is the best possible solution. Ben launched www.hostnine.com in 2006, creating one of the first geo-graphically diverse reseller hosting platforms called Reseller Central. Ben has held leadership positions at HostGator, UK2 and IX Web Hosting.

Ditlev Bredahl
CEO AT ONAPP.COM (WWW.DITLEV.DK)
Ditlev is an Internet and hosting industry veteran with over 15 years of experience leading hosting and related technology companies. Before founding OnApp, Ditlev led UK2 Group’s hosting companies as MD and CEO, spearheadeding the launch of VPS.NET, which now operates one of the world’s top 5 public clouds.
Ditlev has founded numerous successful web hosting brands and, earlier in his career, had a number of roles working for the European Parliament. Though he lives in the UK, he travels frequently to visit clients and speak at events worldwide.

With thousands of hosting providers worldwide, how can someone entering the market standout?
Ben:
One would definitely want to spend some time building the product they wish to offer. Being as there are thousands of hosting providers in the world essentially providing the same product, it is key to offer something unique. This doesn’t necessarily mean being innovative with the hosting itself, but more about what comes with your hosting.

Ditlev:
There is absolutely no room for generalists in the market. There are already 33,000 hosting companies.
You need to find a product you love, and focus on nothing else. Be the best at that thing – like, really the best. Eat, sleep and drink that specific solution. Think of nothing else but how to build the perfect specific product for that specific audience. Fall in love with your business and your clients, and be prepared to sacrifice everything for their affection.
Oh, and don’t outsource anything, ever!

If you were going to launch a new hosting service today, how would you position the hosting product?
Ben:
I would position the hosting as a service behind a product like an Easy Website Builder or a specific application/service/product that can reach SMB’s.
Once you realize what it is that you want to offer, you can begin to focus on who your product appeals to, making it much more possible to grow and stand out.

Ditlev:
The market is so big now that even the smallest segment is plenty big enough. So go deep, not wide. Forget about competitors like 1&1, the GoDaddies and HostGators. You should find a very defined target group and be the best anyone can be at servicing their needs.
Find out what you do best, and here’s a tip: it isn’t your support, your network, your server specs or anything else that’s (a) a commodity, or (b) already ‘owned’ by some other player.
If you think you can launch a business today based on a good network, great support, and fantastic servers; think again. Does that mean you can launch without good support, great network and good servers? Amazon did, but no, I think it would be hard. That’s the entry ticket to the game, but good support/network/servers won’t win any prizes or build a successful business on their own.

What are 4 ideas that new hosting providers can utilize to help them succeed?
Ditlev:
I have plenty of ideas, but they’re of no use to you. Focus on what you know. What are you into; photography, archaeology, dance music, NodeJS?
Whatever you do for fun, make that your business focus. If you like photography, you’ve most likely found the need to host pictures somewhere, and you’ve probably got some ideas for how to make that experience a better one.
Go build the perfect product for your niche, and forget about marketing until you’re at least ready with a beta. Do not go to market with a general hosting product: your CPAs and general cost of marketing will simply be way too high, and most likely killing your business in a few months.
For the first few years you should put your money into product development, not marketing or sales. When you’ve got the best product, your client acquisition cost will be much lower, and by far make up for the time lost while building products. Talk to your bank, talk to your rich uncle, or keep a daytime job if you are unable to fund your lifestyle while building the perfect product.
Trust me, it is so much easier to sell a product that solves a specific problem, especially if it’s a problem that you felt the pain from yourself.

Shared web hosting is very price competitive, what are some add-ons or up-sells you would offer clients and why?
Ben:
Some popular add-ons that seem to sell at a great rate are whois protection, website security, enhanced backups, and the standard dedicated IP/SSL combo. These add-ons can have an uptake average of 30%, turning a $40 customer into a $100 customer.

Ditlev:
It depends on your focus of course, so I can’t offer any specific advice. The basic approach is very simple, and goes back to the deep segmentation that is needed to build a successful hosting business. Look for partners in the same niche as you, sell their stuff, and get them to sell yours. Up-sells and cross-sells should be around 30% of your revenue.

Do you think website builders are a necessary component to offer as a shared hosting provider? What is your favorite website builder?
Ben:
Yes, absolutely. The market is wide open when it comes to people that do not have an existing website. It makes much more sense to market your product to the entire world rather than a niche of existing hosts.

Ditlev:
There are some good builders out there, but honestly, if you’re starting a business today and you feel the need to buy a site builder, you’re already on the wrong foot. You can’t start out as a general supplier – it’s too late. So, unless there is a very specific website builder that caters to the exact segment you’re targeting, and the problems you’re aiming to solve, you should go back and rethink your business plan before launching another me-too site builder-based service.

Is unlimited hosting really necessary to compete, and why?
Ben:
Features such as Space and Bandwidth almost become obsolete these days. Most people that are in need of a website may not even understand what those features truly amount to when it comes to the size of their website. In my point of view, it’s unnecessary to compete depending on your product approach.

Ditlev:
The answer’s no: sorry, but if that’s your game, you’ve already lost.

Do companies wishing to compete really need to make free domain names a part of their offering?
Ben:
This depends on your product catalog. If you’re offering multiple hosting plans it can definitely be used as a differentiator to get someone on the higher package. If you do end up offering a free domain, you will want to make sure you offer whois protection on top of it. Doing so will help rectify the cost of the domain itself.

Ditlev:
It doesn’t matter, all domains have been sold anyway. The new TLDs may re-open this discussion, but most likely not.

Many hosting providers offer free migrations to their service.    Does this help convert potential customers into real customers?
Ben:
Yes, absolutely. If I am at another hosting provider I want to know that you can safely migrate my business to your platform. Since a large percentage of providers in the hosting space are using cPanel® & WHM® software, it’s usually one of the easiest things to do.

Ditlev:
I would do it the other way around, offer customers help if they want to migrate out of your service. It’s all about taking away exit barriers and building trust, which of course helps you win business too.
I would also build affiliate programs with all of the other major hosts, so if a client does leave, you get commission from the new host. Yup, it takes some balls to do that, but it could end up being very good money for you.

How important is the ordering and billing system when it comes to gaining new customers?
Ben:
It’s extremely important. The billing system is crucial to your business when it comes to managing and billing your customers, so invest in a well developed system. Your order flow plays a crucial role in securing a customer. Anything more than 2 steps can be detrimental since Hosting is such an impulse market. You want to capture that customer as quickly as possible.

Ditlev:
You know, people worry about building rich features into these systems. I think they should be featureless. They should be as efficient, boring and un-intrusive as possible.

Once a hosting provider has it all together, how would you go about getting your first 100 customers?
Ben:
I’d start locally. Talk to friends with SMB’s and offer to help get them started. This helps in understanding exactly what a customer needs along the way, along with building trust in your company and portfolio.

Ditlev:
Think close to home. That could be local to a city, country or region. It could also be local to a product segment instead. Those first 100 clients are hugely, disproportionately valuable. Rely on your friends and family. Bribe, cheat, steal and give away whatever you can to get those early adopters, and get them behind your vision.
When you’ve got them, flaunt them again and again, to everyone, everywhere. It’s those 100 initial clients that will make your business. Utilize them any way you can.

What is the most innovative web hosting service you have seen offered?
Ben:
There are a lot of little things done by many different providers. If I had to pick out a complete hosting service, I would say wpengine.com, the WordPress only host; the secure hosting guys at firehost.com; and the Drupal host, Acquia.com. Simple propositions, a really tight focus, and good execution. I do like http://www.nosupportlinuxhosting.com/ as well, though I’ve no idea how well they are doing, but I like the concept.

Are affiliate programs a necessary evil, and should a new hosting provider consider using them?
Ben:
I wouldn’t say it’s necessary but definitely has its benefits. It’s much easier to pay for a sale when you get one versus paying for traf?c that may not even convert. I’ve seen people spend thousands of dollars on Google Adwords without gaining a single sale.
Also keep in mind an affiliate program can be just as successful without offering the crazy high payouts. A lot of people seem to be going with a percentage based payout which seems to be working very well for them.
Another great way to keep your CPA low is by recruiting your customer base and building it out as a refer a friend program. The average website owner will look at a $50 bonus and be extremely happy.

Ditlev:
You should only use affiliate schemes when you understand your KPIs. The most important aspect of an affiliate program is lifetime value. You can get burned very easily. I’ve seen so many startups paying 1-2 years revenue in CPAs without knowing anything about their ROI/ROMI.
You should insist on having the CPA from your affiliate business fully paid by the initial basket. So, if you sell hosting at $100/year, the highest CPA you should tolerate is $100. I know it’s tempting to go higher, expecting that ~60% of your clients will renew, but honestly, in the first few years of business it’s just way too risky, unless you have some really good early indications and plenty of cash to burn.
It’s better to build a product for a very specific niche like human rights lawyers, guitar players, hi-fi equipment shops, etc… and find out who else sells to those guys. If you are into human rights, guitars, or hi-fi, you will know who to talk to.
Build partnerships and a multichannel strategy to hit your niche audience. Bring your partner’s product into your portfolio as well, to help your future clients find everything they need.

 

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