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Why You Shouldn’t Start a Hosting Provider Anymore

New hosting providers are born every day… but they vary in size and quality.

For one person that could simply be obtaining an OVH server, a WHMCS license, and a LowEndTalk provider account.

For the next hosting startup, that could be purchasing and colocating 15+ servers at a data center.

And then you have guys like FiberState who open up an entire data center.

For the average consumer, it seems like there’s plenty of money to go around…

But the problem is despite plenty of comments about purchases, and hundreds of products sold; the margin on these servers tends to be practically nonexistent.

Speaking of which, a LowEndTalk user named @XSX noticed this and pointed it out in a thread aptly titled:

“Somewhat pessimistic about the vps industry”


The Problem Here Is Commoditization

Here’s how Investopedia defines commoditization:

Commoditization refers to the process of making something into a commodity. More broadly, commodification is taking something that previously was not available in the market and making it so, for instance the commoditization of the food chain has brought many more foods to the market, but has left small producers behind in favor large, low-cost producers.

Commoditization moreover often removes the individual, unique characteristics, and brand identity of the product so that it becomes interchangeable with other products of the same type. Making commodities interchangeable allows competition with a basis of price only and not on different characteristics.

When a financial contract such as a mortgage becomes commoditized, the contract becomes more liquid because it can be bought and sold readily. This liquidity promotes trading in that market because the agreements do not have to be assessed individually and treated uniquely.

In other words:

These hosting providers have no differentiable benefits from each other.

Many of these providers are not only using the same billing software and control panel software, but the same upstream providers.

When you have a product that can’t be differentiated from other products with a strong sales argument being made — the easiest solution rather than fixing their offer is usually to decrease their prices, and that’s what most hosts do.

A race to the bottom of the barrel. Thus, having no profit margin.

So How Do You Succeed in Commoditized Markets?


The only way you can succeed as a self-service hosting provider in 2023 is by doing it on a large scale.

You’ll likely spend tens of thousands of dollars to do this properly if not more.

The first thing you’ll need to do is obtain your own IPv4 space — you need to own & not rent. The added benefit of this is the prices of IPv4 addresses keep rising, and you can hopefully sell it later for a profit.

You can still obtain a small block with application fees and a long wait, but… you’ll be looking at around $10,000 for a /24 outside of that.

Next is spending thousands of dollars on servers, specifically servers that are in demand, like Ryzen CPUs.

Many hosting providers on LowEndTalk have been sold primarily for hardware and IP space if nothing else.

Next, you’ll need to locate a long-term colocation provider to send a bulk amount of servers there. We’re talking 10-15 minimum before the profit margin starts to make sense.

Then, at that point, with sensible pricing, you would start to see with economies of scale; a hosting provider could be lucrative.

It’s important when you’re factoring in the principality of economies of scale that you factor in the very real cost of providing support as well.

It’s frequently disregarded by many hosting providers, and it’s a death sentence.

If you cannot afford to provide customer service, then you need to fix your offer.

Differentiating Your Offer

The first thing is to simply add value.

Providers like BuyVM have added value by adding things like block storage, DirectAdmin, and Blesta.

This creates more of a differentiation and makes people feel more comfortable parting with their money because they feel they’re getting more for it.

OVH, for example, practically pioneered DDoS-protected services.

They differentiated their offer by providing free DDoS-protected services when it wasn’t particularly common, especially back when they launched it.

Differentiation is all about adding your own twist on something that makes you stand out in a sea of lookalikes.

You can also tap into specific use cases.

In the case of BuyVM, they tap into their pro-freedom of speech stance to differentiate themselves.

Other providers might tap into hosting streaming services. It depends.

But you can find one or many specific use cases and tap into those target audiences.

The second part is people buy into a person/business just as much as they do a product.

Someone like Francisco Dias, founder of BuyVM, has a personal brand. Every message they post on Discord, LowEndTalk, or beyond will factor into increasing or decreasing that following.

The more people that buy into Francisco’s thoughts and personality specifically, the more people buying to BuyVM or whatever he’s selling.

What I’m telling you here is often when you cannot differentiate your offer sufficiently, you can certainly differentiate yourself to a specific audience.

If you have an equal product/service to someone else, but that specific person simply likes you more; they will go to your product/service.

Where the Real Money Is At

If it was the late 90s or the early 2000s it’d be different. But it’s 2023.

The real money is not in starting another hosting provider. The market is simply saturated.

What you want to do is take the raw resources you’d be providing as a hosting provider, and build on top of it.

So instead of selling shared hosting to WooCommerce sites to host their eCom stores; you build a better WooCommerce alternative, like Shopify did, and host it on your infrastructure.

Now instead of charging $50 per year for shared hosting, you’re charging $50 per month for a custom solution. You’re no longer a commodity.

Look at the existing gaps in the market, and fill a real specialized need…

Rather than just being another guy who wants to sell servers. We have plenty of those.

Alternatively, consider services over products — especially to start out with. Such as managed hosting.

It’s much easier to scale a business by charging a few clients a thousand plus dollars a month; instead of charging hundreds of people for $10 per month.

Trust me, you don’t want to be the guy dealing with hundreds of customers and have hardly made any money to show for it.

Sir Foxy

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