Loss Leaders Risky Gamble for Small Web Hosts

August 11th, 2007 by admin Leave a reply »

It’s not unusual for the smaller players in an industry to look at what the bigger players are doing for inspiration. By mimicking the larger companies, they hope to drum up more interest, more customers, and more profits. The web hosting industry is no different. But the problem is that some things just don’t scale down well.

Let’s take loss leaders as an example. You’ve probably encountered them in other fields. To take an example from Florida’s busy real estate market, when I moved into an apartment down here, the firm I chose to rent from gave me a discount on my first year’s rent, spread out over all 12 months. When that first year ended, and the rent went up, it was a modest enough increase (and I was happy enough with the service I’d received during the year) that I chose to stay. The hassle it would have been to move was also a consideration, true, but the point is that the company renting me the apartment had done so at a loss to itself in the hope that I would stay on at the full price.

There are a couple of ways loss leaders can work in the web hosting industry. One of them is to sell a service below your own cost in the hope that someone who purchases that service will also purchase your full price products. In some cases, a company may offer something for a very low price or even free, provided the customer buys something else at the full price (for example, a cheap domain name if the customer agrees to buy web hosting from the company).

A web hosting company might hedge its loss leader with limits to avoid losing too much money. In the case of domain names, it might offer the deal to only a certain number of customers, or “for a limited time,” or allow customers to buy only a certain number of domain names. In general, domain names are not the riskiest loss leader for a web hosting company; anyone who purchases a domain name will presumably have a web site in mind, and need web hosting for that site. For many customers, it would make sense to buy a domain name and web hosting from the same company, just for the sake of convenience.

But there are certain things that larger web hosting companies offer as loss leaders which could put a smaller company out of business. The temptation is understandable, given what most companies hope this kind of high stakes gamble will accomplish for them. Let’s take a hard look at this kind of loss leader.

Some web hosting companies use web hosting itself as a loss leader. They will offer inexpensive web hosting in the hope that the customer will appreciate their service enough to sign up for another year at the full price. Or they will offer an inexpensive web hosting account and try at a later time to move the customer into one of their more feature-rich (and expensive) packages.

To give you some examples, Dream Host has offered coupons for deep discounts on hosting service, far more than 50 percent in many cases. For example, when the user enters one code for a particular monthly plan that ordinarily costs $59.90, he or she will pay only $9.90. The same code entered for a yearly plan that ordinarily costs $119.40 will let the user receive the plan for only $22.40. Recalling what I said about large hosting companies, Dream Host recently doubled the number of domain names they hosted in the past year, to 400,000. So using a loss leader may be working for them.

Another company that has used loss leaders effectively is 1

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