As someone who has been in the web hosting industry for years, specifically WordPress hosting, it got me thinking. If people understood the economics of web hosting companies and how they really operate, would their expectations change? Or would they still go after the dirt-cheap WordPress hosting providers?
There are a lot of myths and misconceptions around web hosting and it is really hard to find out the truth. Most of the cheap WordPress hosting companies rarely or never share any behind the scenes information with their customers about how their system works or what’s truly included in the $5 monthly package. But if you take the time and read the policy and all the fine print you will know that there is no such thing as unlimited bandwidth or disk space, simply because it’s not possible.
Today I’ll dive into how web hosting companies operate, why some of them charge insanely cheap prices, and how they actually make their money. Some of the answers might surprise you.
Breaking Down the Web Hosting Industry
Hosting companies are for the most part largely like others, where gross profit determines how many people they can staff for support among other things. Below I’ll break down some of the costs and expenses a typical hosting company has.
Average Cost of Goods Sold (30%)
For most hosting companies, the average cost of goods sold (servers at data centers) is around 30%. That leaves 70% of each dollar they bring in to pay staff and everything else.
Marketing Expenses (Estimate 10%)
If the company is still trying to grow (and hopefully it is) then another 10% or so will go towards marketing expenses. After all, the cost to acquire a customer in hosting is actually one of the highest out there.
If you go down the pay-per-click (PPC) route, bidding on a keyword like “web hosting” can cost up to $20 per click with Google Ads. 😲 This can vary base how many impressions shares and what you’re willing to bid to appear at the top of the page, and for how long. If you’re a VC funded company perhaps you don’t care, but if you’re a startup or bootstrap company, this requires you get creative.
Trying to rank organically with SEO for the term “web hosting” nowadays could take years, due to all the competition. We are definitely fans of the organic approach along with content marketing, but it’s a long-term play, and requires consistency and patience.
You also would need to be prepared to shell out thousands of dollars to create amazing evergreen content that will compete in this niche. A well written technical article that is at least 2,500 words can easily cost $1,500. Trying to outsource for cheap content to places like iWriter simply won’t work. You’ll need to spend time finding and hiring freelance writers who are experts at their craft. This can take months, sometimes years.
So marketing and COGS (servers, infrastructure) alone mean that only 60% of each dollar a hosting company brings in is available to pay salaries and all other expenses.
Breaking Down the Numbers
Let’s assume you decided to go with cheap WordPress hosting and you’re paying them $10 per month ($120 per year). You’ve been told by their marketing copy that they’re amazing, they have 24/7 support, phone support, and you’re expecting the experience to be like most other companies you deal with. You call GEICO, Anthem, AT&T, or Verizon and they’re not amazing but they do fix things eventually in your battle with them.
The difference is that you’re not paying them a meager $10 per month, and their support agents don’t cost them nearly as much, since resolving an issue with your cell phone bill can be solved by someone making $40K per year, and doesn’t require a software engineer.
Let’s look at the numbers briefly. If you’re paying the host $10 per month ($120 per year), and a good system administrator costs $100,000 per year including benefits, how many customers do they need just to cover that one employee?
The answer might surprise you. It’s not 833, since 833 x $120 = ~ $100K. That would assume that the company doesn’t have any cost of goods sold or marketing, but remember, the hosting company in this example has a COGS of 30%, a marketing budget of 10%, and therefore only 60 cents of every dollar they bring in is available to pay staff.
Using the above assumptions, the real answer can be found with some simple math.
$100,000 = X * 120 * 0.6
$100,000 = 72X
1,389 = X
By solving for X above, we find that it’s equal to nearly 1400 customers. So for every 1,400 customers at $10 per month, a hosting company can afford to hire a system administrator who actually knows what they’re doing. Or think of it like this, if 1,389 customers pay $10/mo each ($120 per year), that’s $166,680 in annual revenue and after the 30% COGS (servers) and 10% marketing, the company is left with $100K to cover a salary including benefits.
But how can one system administrator, the type that can fix any crazy hosting problem that arises, handle nearly 1,400 customers’ technical issues? The answer is they can’t.
This isn’t even accounting for the fact that a real business has other costs to use their gross profit minus marketing for, things like:
- Paying the founders or C levels
- Rent and staff
- Bandwidth costs and hosting infrastructure (premium tier network)
- Complex analytics setup to handle, receive and process logs (Elastic)
- Transactional email services
- CDN integrations
- Support and ticket systems such as Intercom
- Uptime and performance monitoring tools such as New Relic
We’re using this model because the math is easiest and simplest in these terms, with very few assumptions made.
When you move to $20 per month, the math falls a little more into your favor, but it still isn’t great. It would take roughly 700 customers to cover that same system administrator at that price point. Even at $50 per month, we’re still not looking that great with a ratio of 1 system administrator for every 278 customers. As you can see, until you get into the $100+ per month range, the economics aren’t even close to being in your favor of having a solid ratio. You don’t want to see the math on a $5 per month host. 😳
Why and How Cheap WordPress Hosting Exists
So if the economics aren’t in the customer’s favor when charging $10 per month, why do so many hosting companies do it? The answer is twofold.
One is that they try to make a lot of money on upselling and hidden fees. On things like website migrations, SSL certificates, domain registrations, WHOIS privacy, ad revenue from parked domains, dedicated IP addresses, fake SEO help, website badges, etc. But those don’t always happen, as the people using these services are typically trying to save money and that’s why they’ve chosen them to begin with.
The second is what we call in the hosting industry “churn and burn.” Wait, that doesn’t sound good, what does that mean? It’s when you have a model where you know you’re charging too little with a bait-and-switch strategy. You know as a result your customer service is going to be terrible, you know people are going to be upset, you know you’re going to lose X customers per quarter, and you’ve designed your business model around trying to replace those X customers.
How does that actually play out? It’s pretty simple in hosting. You offer unlimited everything (except CPU or something hosts call “workers“), and then you throttle those clients/sites that use a lot of bandwidth. You eventually end up suspending them due to resource usage and the performance of these successful sites tank.
The client then leaves unhappy, and the host is happy because they can replace them with a site that gets little to no traffic. It’s business models like this that give the hosting industry a bad reputation.
Stop Thinking in Terms of Paying the Absolute Minimum
So when you’re thinking about shopping for hosting, stop thinking in terms of paying the absolute minimum, and start thinking about what you’re really buying. Support and access to people with extensive knowledge about how WordPress works and more importantly, how to troubleshoot it. You’re buying into a team that will be there to help you along your journey.
Kinsta was founded for this very reason and it’s why we’ve been able to grow so fast. There are individuals, who we call “host hoppers” that have been bouncing around hosting providers for years, trying to find one that breaks out of the horrible “church and burn” or “upselling” business practices.
In 2018, Kinsta’s client base grew by over 262% and our churn rate is under 4%. Our clients see the massive value that we provide and are willing to pay for it. They can then focus on growing their business, instead of worrying about downtime, 500 errors, or banging their heads against a wall trying to determine which WordPress plugin is causing performance issues.
Certainly, not everyone can afford hundreds per month for hosting, but on the flip side, you should also set your expectations accordingly. If you’re spending more on coffee per month than you are on hosting, you’re in for a world of hurt down the road.
If you do decide to go for cheap WordPress hosting, you should expect your site to go down from time to time (since at $10 per month, you’re most likely sharing a server with hundreds of other users). Also, expect that most issues won’t be resolved all that quickly. It’s just how the numbers work out.
We would love to hear your thoughts regarding cheap WordPress hosting or perhaps an experience you’ve had. Let us know below in the comments!