by Adam Bogobowicz, Senior Director of Product Marketing for Service Providers, Parallels
One can learn plenty from good advice but nothing is a better teacher than a respectable failure. I was talking about it with my colleagues, Michael Fountain (firstname.lastname@example.org) and Alex Goncharov (email@example.com) who are 10+ year veterans of the hosting industry, and we decided to compile a list of reasons for why good (small) hosting companies fail with some tips on how to avoid it with your own business. We know that this list is far from comprehensive, so if there is a lesson that you would like to share with fellow hosters please comment on the blog on this site or send us e-mail. And of course if you lived through one of these disaster scenarios yourself, please share it with the world.
They gave it away for free in the hope of making it up in volume
There are a few well-funded hosting companies, still in business, which tried this strategy. Some of them do get lucky and if you think about Facebook - very lucky! But if you are starting out and are funded with your savings, credit card and your folks’ money, you would be surprised how quickly these funds evaporate if you give your services away for free. On the other hand, if you just got funded $40M by venture capital to give away your services, enjoy it, but plan to sell your business before the cash runs out.
Quick Tip: If you are interested in how to make Freemium model work please read my previous related blog at http://blogs.parallels.com/serviceprovider/2013/2/6/now-you-can-have-your-website-and-eat-it-too.html
They paid more to acquire a customer (ads &/or affiliate commissions) than the customer’s Life Time Value
This is a less over-the-top case than the one above and is driven by focusing on wrong measures for the business or just ignoring the financials of the business. I have seen an extreme case of this miscalculation with a company that was willing to pay 10 times Life Time Customer Value to acquire new customers. It was done in the spirit of hoping to make up the difference in the future, but with even most basic financial calculation it quickly appeared to be as problematic as a Madoff-style pyramid scheme.
Quick Tip: Some providers can pay a lot more for customers' clicks because they upsell customers with value-add services (Internet connectivity, e-commerce packages, web design, system administration services etc.) This is why, for example, cost-per-click for hosting related keywords can go as high as $25 per click. If, however, your conversion rate is only 10%, your per customer acquisition cost will be $250, which is too high for the majority of hosting companies. Investing in lower frequency, local, niche keywords and focusing on Search Engine Optimization could help to resolve this issue.
For more information on Customer Life Time Value concept you can read this blog http://blogs.parallels.com/serviceprovider/2013/3/11/understanding-hosting-marketing-measures.html
Their customer on-boarding process took too long
Customers today are used to instant gratification when they make a purchase online. They expect the next screen they see to be the one that holds the information telling them what they just purchased. If you take 24 hours to process an order, you may think that’s reasonable, but it’s not. Automation is your friend. Use it. Also, don’t make your customers tell you their life story. Stop asking for a fax number! When is the last time you used a fax machine to process an order? The more things you ask for on your order form, the more time your customers spend thinking about if they really want your service or not. Don’t make them think that hard.
Quick Tip: Asking customers to provide simple contact information (Name, Phone, Email) in the beginning of purchase process and immediately posting it to your CRM is a very good idea. You can call every customer who did not complete the purchase in minutes and help them to finish the purchase. Also customers are willing to provide more information once they have paid for your order.
They got bad a support reputation
I personally know many hosters who put a phone number on their site and then don’t answer the phone. Do not get a bad support reputation - it will kill you. People talk and when they do, they like to acknowledge other people’s mistakes. So, don’t put a Twitter handle on your site if you are not setup to respond to customer tweets within 30 minutes! Set expectations early and set expectations often. If you mess up and it becomes public, then resolve it publically. Your customers are watching.
Quick Tip: Use virtual phone system. You will be surprised how affordable their fees are. For example http://mightycall.com is less than $10/month.
Fraud got their merchant account shut down
Let’s face facts…if you sell services online, you will be the victim of fraud sooner rather than later. Automation is great, but it must be done in a way that lowers your risk to fraudulent transactions. Not implementing any fraud prevention measures is a guaranteed way to get your merchant account or credit card process account terminated due to too many fraudulent transactions that result in charge backs. And this is not a rare scenario. Anybody who has been in this industry a few years knows a business that faced this problem.
Quick Tip: One of the ways to deal with this problem is to use a hosting automation system that comes with large number of Fraud Screening tools, flexible manual approval rules and support for PREAUTH, also well known as “Authorization Hold” credit card processing. With Preauth processing your hosting automation captures the funds and waits for you to approve it manually after looking at and considering all the information from Fraud Screening tools.
They didn’t know how to reboot a server without a control panel
Hosting is a business with minimum technical skill requirement. This problem (not having technical chops to run a hosting business) is a fairly recent phenomenon because as hosting technology gets simpler, many new hosters come into this industry without a deeper understanding of the underlying hosting technology. We have seen over the last two years quite a few startup hosting companies without Linux or Windows admin skills that got themselves in serious trouble when technical issues outside of the panel happen to their business… and problems do happen… just ask a hoster.
Quick Tip: Consider buying and using hosting infrastructure and automation products that come with unlimited support, such as Parallels Plesk Automation or make sure your support contract is 24x7, valid and active. If you cannot afford to hire a good system administrator right now, grow your own – gradually train and certify your support engineers, so they eventually will become very good system administrators with some practice. Many Software Vendors provide technical training for free or this can be negotiated during purchase. When Alex was managing his hosting business he managed to get MCSE training for all his support engineers sponsored by Microsoft for free. Did you know that you can have your engineers trained to manage Parallels Business Automation Standard for free?
The server was in a closet on a Comcast cable pipe
Ok, this one is just silly but you would not believe how common. I have seen desktop PC in the kitchen playing the role of a datacenter. I can understand this when hosting is done in a developing country where leasing a box is not an option, but if you choose to run your own servers instead of leasing from one of many infrastructure providers in US or Europe, you are wasting your money and asking for a disaster.
They thought that Excel was a wonderful billing automation solution
You would be amazed to see how many hosters are using Excel on their desktops to bill their customers… and when the hard drive fails they go out of business. Excel was OK for a small hosting business to keep track of customers, hosting plans, billing cycles, IPs, servers, when you had your first 10 customers, but eventually when your enterprise starts to grow, you sure need to move to a proper hosting automation and billing solution.
Quick Tip: Automate your hosting business. Get hosting automation that provides full range of traditional hosting services right out of the box: domain registration, shared hosting (Linux/Windows), VPS hosting (Linux/Windows), Hypervisor-based VMs, dedicated servers, SSL certificates. Reconsider your .xls billing strategy and take a look at http://www.parallels.com/products/pba-standard/