Two dollars is less than a cup of coffee. Less than a fast-food cheeseburger.  And I don’t mean a big quarter-pounder – I mean a McDonald’s cheeseburger, which is about $3.19 as of this writing.  In many places, $2 is barely enough to buy a bottle of water.

And yet, somewhere on the Internet, somebody will happily sell you a virtual private server for $2 a month.  $24/year can often get you a 1GB or a 2GB VPS.  And of course, all the stuff you don’t think about:

• Storage
• Bandwidth
• IPv4 and IPv6
• Power
• Cooling
• All the provider’s software: billing panel and control panel
• Support when you have a problem
• Datacenter hands to replace failed drives, and the failed drives themselves
• DDoS protection
• Someone to handle security incidents
• Etc.

And yet, providers make money.  So where does your $2 actually go?

Of course, there is no single answer. Every provider has different hardware costs, datacenter contracts, bandwidth arrangements, staffing levels, and business models.  But we can do some back-of-the-envelope math.

First, Let’s Build a Cheap VPS Node

Suppose our imaginary hosting company buys a server with:

• 32 CPU cores on a decent server-grade motherboard and enclosure
• 256GB RAM
• 4TB of usable NVMe storage
• Redundant power supplies
• Some form of RAID or redundant storage

Maybe it costs $4,000.  The provider expects to use it for four years.  Ignoring financing and resale value, that works out to:

$4,000 / 48 months = about $83 per month.

Already, that $2 VPS is starting to look a little less magical.  256GB of RAM / 2G B = 128 VPSes, but of course you have to keep some for OS overhead, security tools, and what not.  Let’s say 110 VPSes.  Some of them might be bigger 4GB, 8GB, etc. packages but assume the per-GB revenue is the same.

$83 / 110 = cost of about 75 cents per VPS per month.  So for 110 VPSes, that’s ($2 – $0.75)  = $1.25 VPS profit per month * 110 = $137.50/month profit.

Not bad. But hardware is only the beginning.

Rack Space Isn’t Free

That server has to live somewhere.  A hosting provider might own its datacenter, lease a cage, rent individual rack units, or buy a package that combines power, bandwidth, and rack space.  For our imaginary provider, let’s say the server’s share of rack space, network ports, remote hands, and related infrastructure works out to $100 per month.

That adds more cost:

$100 / 110 = 91 cents per VPS, so now we’re at $1.66.  That drops the profit down to 34 cents/month per VPS.  For 110 VPSes, that’s $37.40/month.

And Then There Is Electricity

Suppose our server averages 300 watts. That is:

0.3 kW x 24 hours x 30 days = 216 kWh per month.  At 12 cents per kWh, the raw electricity alone is about $26 per month.  Datacenter power costs are not necessarily calculated this way, but it gives us a useful approximation.  Spread across 110 customers. that’s $26 / 110 = about 24 cents per VPS.

So our cost so far is at $1.90.  Our $2 VPS has earned the provider a glorious 10 cents!  Or for all 110, $11/month.

Unfortunately, we have not connected it to the Internet yet.

Bandwidth

Bandwidth pricing is one of the stranger parts of hosting economics.  There’s all sorts of variables: transit from multiple carriers, commit levels, burst capacity, DDoS protection, etc., plus things like switches and routers.

Fortunately for low-end hosts, most customers use nowhere near their advertised bandwidth allocation.  A plan might include 5TB per month.  If every customer used that much every month, most low-cost VPS business models would collapse immediately.

Instead, providers rely on averages.  One user might push several TBs, and another with a tiny blog might only use 2GB.

The IP Address Problem

For many cheap VPS providers, IPv4 has become one of the most economically impactful parts of the product. Unless the provider owns a large block acquired years ago, its accounting cost may be relatively low.  If not, it has to lease addresses today.  Even if we assume an IPv4 address effectively costs the provider only 25 cents per month, that is significant on a $2 product.

Now our theoretical $2 VPS costs $2.15.  Congratulations, provider!  You’ve lost 15 cents every time somebody buys your product.

The Payment Processor Wants Some Money Too

Payment processors commonly charge both a percentage of the transaction and a fixed fee.

Imagine a hypothetical payment fee of 30 cents plus 3 percent.  On a $2 payment, that’s 36 cents.  Most providers at this low price point will only offer annual billing, so they pay the fixed fee only once.  On $24, the total cost is $1.02, or 8.5 cents/month.

We’ll round up because it’s a grim world.  So now the cost is $2.24/month.

Then Somebody Opens a Support Ticket

Now we encounter perhaps the most dangerous resource in budget hosting: humans.  Suppose an employee costs the company $25 per hour after wages, payroll taxes, benefits, and overhead.  That works out to about 42 cents per minute.

If a customer paying $2 per month opens a ticket that consumes five minutes of staff time, the ticket costs approximately $2.08.  The company just spent an entire month’s revenue answering one question.  And that is assuming the ticket takes five minutes.

Of course, that $25/hour is highly variable.  If support is based in a developing country, it could be dramatically lower.

Abuse Has a Cost Too

But humans aren’t just handling “how do I reboot my VPS?” questions from honest customers.  They also handle:

• Spammers
• Scanners
• Credential stuffers
• Botnet operators
• Phishing campaigns
• Malware distributors
• People who think “unmetered” means “please allow me to saturate your uplink continuously”

Abuse creates costs because it consumes time.

But Wait, There’s More

• Hardware Failures: What do drives, power supplies, fans, network cards, switches, and RAM sticks have in common?  They fail.  And they need to be replaced.  Indeed, good providers keep redundant hardware at hand for quick replacement, or even failover systems.
• Backups: Technically not required but providers should.
• Software: WHMCS or similar, SolusVM or similar, monitoring, at least some minimal accounting beyond WHMCS, etc.
• Normal business overhead: corporation fees, accounting fees, web design, and the rest.
• Taxes: And don’t forget this one!

So How Can Anyone Sell a VPS for $2?

It ain’t easy.

There are several answers.

• Scale: If all a provider has is a single node, they’re sunk.  They’re losing money on each VPS. But if they have tons of them…perhaps.  They can spread their fixed costs, excess bandwidth, etc. over a wide base.
• Cheap Hardware: Yeah, that’s why you see those old CPUs on your host servers.
• Long Hardware Lifetimes: I said four years above, but of course many providers drive their gear for a lot longer.
• Automation: To the hilt.  Human time is preciously expensive.
• Resource Overcommit: Aka “overselling”.  Some of this is fine.  Not every VPS needs every Hz of a CPU every second.  Of course, you can drive this too far.
• Add-ons.  Maybe the $2 VPS is barely profitable.  But some customers buy extra RAM, extra storage, more IPv4 addresses, backups, etc.
• Idlers: It’s like a gym membership.  If everyone queued for the machines, the gym would go bankrupt.  But since a high percentage never do anything with their membership, they make money.  A certain percentage of every node’s VPSes are going to sit there, idling, and that’s pure profit.

Let’s Try the Math Again

Our first hypothetical calculation was deliberately pessimistic.  Let’s make the economics more favorable.

Suppose:

• Hardware: $60 per month
• Rack and infrastructure allocation: $60
• Power: $25
• Bandwidth and networking: $30
• Software and miscellaneous overhead: $20
• Total node cost: $195 per month.

The provider puts 150 inexpensive VPS plans on the server through a mixture of smaller memory allocations and reasonable overcommitment.

$195 / 150 = $1.30 per VPS.

Now suppose the average customer produces another 30 cents per month in payment fees, support, abuse, and administrative overhead.  Total cost: $1.60.

So that’s a profit of 40 cents per VPS, or $60/node/month.

Or if you get really big, 40 cents multiplied by 10,000 VPSes is $4,000 per month.

raindog308

raindog308 is a longtime community LETizen, technical writer, and self-described techno polymath. With deep roots in the *nix world, he has a passion for systems both modern and vintage, ranging from Unix, Perl, Python, and Golang to shell scripting and mainframe-era operating systems like MVS. He’s equally comfortable with relational database systems, having spent years working with Oracle, PostgreSQL, and MySQL.

As an avid user of LowEndBox providers, raindog308 runs an empire of LEBs, from tiny boxes for VPNs, to mid-sized instances for application hosting, and heavyweight servers for data storage and complex databases. He brings both technical rigor and real-world experience to every piece he writes.

Beyond the command line, raindog308 has a life-long love of German Shepherd Dogs, high-quality knives, target shooting, theology, tabletop RPGs, playing guitar, and hiking in deep, quiet forests.

His goal with every article is to help users, from beginners to seasoned sysadmins, get more value, performance, and enjoyment out of their infrastructure.

You can find him daily in the forums at LowEndTalk under the handle @raindog308.