Start a Web Hosting Company

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

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 HostGator, Bluehost, InMotion. 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.

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

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

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

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

How to set up a reseller hosting business

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

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):

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):

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.

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

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.

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

Steps to setting up an at-home server

Datacenter Colocation

Cost of entry: Varies

A colocation center is a large commercial data center that rents equipment, space and bandwidth to users and businesses alike. In the world of web hosting, renting a datacenter means taking advantage of the colocation center’s economies of scale–reducing the costs of uptime, maintaining redundant systems and the costs of operation.

Colocation services are a middle ground between building your private datacenter (in this case an at-home server) and going the reseller route. Renting a data center ensures immediate scalability, near 100-percent uptime, security and professional technical support. It also gives you complete control over the physical server setup, its data and the software installed on the server.

Managed colocation is often referred to as dedicated server rentals. If you’re not quite ready or fully qualified to build, manage and run a colo server, and you don’t have the money for a support staff, then it may make more sense to use a managed server–or even go the route of reseller hosting.

Pros and cons of colocation hosting

Installations

If you chose the reseller route, you can skip this section! The good thing about being a reseller is that you don’t need the technical know-how that’s required if you’re setting up a server.

This section will outline the installation requirements for an at-home or colo server.

Operating system

The operating system is the backbone of your server and there are only two main choices: Windows or Linux.

The biggest benefit of Linux is its freedom and versatility. Linux OSes are free and most of the software you need for hosting is open source. The administration is definitely more difficult for anyone accustomed to Windows, but it’s not that big a leap. Linux servers are much more popular than Windows.

Windows, on the other hand, offers familiarity and ease of use in exchange for the high startup cost associated with software licensing.

Installing operating systems is a relatively straightforward process. Countless guides and examples are available on the Internet. cPanel will provide instructions for installing CentOS, based on Red Hat Enterprise Linux. As an added bonus, installing the cPanel-provided version will also install cPanel and WHM automatically.

Installing Windows is also extremely straightforward, and more information can be found on this Microsoft article: http://windows.microsoft.com/en-ca/windows/installing-reinstalling-windows#1TC=windows-7.

Hosting control panel and automation software

While there are many different types of software for web hosting control panels, this guide will focus on cPanel for Linux and Plesk for Windows. Both software suites are subscription based, payable either monthly or annually.

The Plesk demo can be found here: http://www.plesk.com/#demo

And the cPanel demo can be found here: http://cpanel.com/demo/

cPanel also contains WHM (Web Host Manager), their own integrated software to run and maintain your servers. Each service has a detailed installation guide on their websites.

Billing software

A good, fluid and easy to use billing system is absolutely crucial for the beginning web host. An automated billing system like WHMCS (http://www.whmcs.com) will include account management, domain management and support ticketing features crucial for the success of your hosting business.

WHMCS has support for both Windows and Linux operating systems; the detailed instructions for installation can be found at their product support pages: http://docs.whmcs.com/Getting_Started

What products and services will you offer?

Now that you have determined the nuts and bolts of setting up and operating your new hosting company, it’s time to explore the wide variety of services you can offer. We’ll look at four different service options:

1 Shared hosting
2 Cloud hosting
3 Virtual private server (VPS)
4 Dedicated server

Shared hosting

Shared hosting is the idea of putting many websites onto one server. This remains the most cost efficient and popular hosting option. By putting up to 2,500 websites onto one blade server, the web host is able to distribute the costs of operating that server across all the users. This allows the web host to charge very little, sometimes as low as $0.99/month and still remain profitable. The shared-hosting service will have system administration to distribute the storage space and bandwidth among all the users on one server. Upkeep and daily maintenance are shared, as well.

Shared hosting is the most basic form of hosting, where you, as the webhost, provide and install all the server and end-user software. All the user has to do is to pay a monthly fee and access their cPanel (or Plesk for a Windows server) to upload their website. Often, the shared service will have numerous benefits with the technologically inept user in mind, like auto installers for WordPress, drag-and-drop website builders and basic tech support.

Cloud hosting

Shared hosting is the idea of putting many websites onto one server. This remains the most cost efficient and popular hosting option. By putting up to 2,500 websites onto one blade server, the web host is able to distribute the costs of operating that server across all the users. This allows the web host to charge very little, sometimes as low as $0.99/month and still remain profitable. The shared-hosting service will have system administration to distribute the storage space and bandwidth among all the users on one server. Upkeep and daily maintenance are shared, as well.

Shared hosting is the most basic form of hosting, where you, as the webhost, provide and install all the server and end-user software. All the user has to do is to pay a monthly fee and access their cPanel (or Plesk for a Windows server) to upload their website. Often, the shared service will have numerous benefits with the technologically inept user in mind, like auto installers for WordPress, drag-and-drop website builders and basic tech support.

VPS hosting

A virtual private server is a virtual machine with its own OS installation. This allows the user to control every aspect of the hosting, aside from the hardware itself–much more freedom than shared hosting. For example, your customer can install any software he wants with a VPS hosting package. A VPS is functionally equivalent to a dedicated server, and it’s much easier to create and configure because it’s software based. A VPS is created by partitioning a single server into multiple virtual servers. This makes a VPS significantly cheaper to operate than a dedicated server, and you can pass the savings on to the customer.

VPS can be offered as a managed or unmanaged service. In unmanaged VPS, the customer is given access to the system and then left to their own devices, while a managed VPS will be accessed very much the same way as a shared hosting package–through the control panel.

Dedicated Server

A dedicated server is an entire server rented to one client, for purposes of web hosting. Users and organizations that use dedicated servers have full control over the servers, including choice of operating system, hardware and software.

Much like a VPS, the web host has the option of managing the server instead of allowing the customer to do so. A dedicated server benefits from increased freedom and stability, and is usually used for websites with high volumes of traffic.

Pros and cons comparison:

A quick look at customer support and service

Perhaps one of the most important aspects of hosting are the benefits you’ll gain by providing excellent support and service. In a saturated market, it can be difficult to distinguish your business from the thousands of others on the Internet. Often, the best marketing is word-of-mouth advertising, and that can only come from hundreds of beyond satisfied customers. If your customer service is exceptional, that information will spread. Of course, a history of poor service spreads, too.

Customer service begins the moment the potential customer arrives at your website. Support should be available in the form of a free call or live chat with the click of a button. You should be prepared to spend many hours modifying your website to be user friendly. Your checkout process should be streamlined and secure. Once the customer registers for a hosting package, it’s good to send an email with registration details, payment and setup information, and the setup support email and phone number.

A customer may call two or three times in the first few months of service, and your support staff should be prepared to answer any question they may have.

On the assurance side, most hosting companies offer a 30- to 90-day money-back guarantee–and your business should as well. Be prepared to lose a chunk of customers after the first 30 days; it is common even for the best web host. With both luck and effort on your part, the remaining customers will be loyal to your business for many years to come.