Why It's Harder Than Ever To Start A VPS Business


A VPS hosting business or a webhosting business used to be a good way for technologically smart entrepreneurs to make a good living. If managed correctly, a VPS hosting business would lead to a steady, consistent income. Those who sign up for VPS hosting tend to stick with the company they signed up with for years to come.

Another great thing about running a hosting business, is that if everything is up and running as expected, you can focus on other aspects of the business, such as marketing. A properly running server will not need much manual intervention.

Making money through VPS hosting is no longer such a viable and easy way to create an income. If you are considering starting a VPS business, or any sort of online hosting business, read on to see why you might be too late to the game.

You Cannot Target The Low End VPS Market

The easiest entry point for a VPS business used to be the low-end VPS market. The low end market is full of hobbyists, personal users and students. These customers do not need super powerful machines and do not want to spend a huge amount of money.

In the past an entrepreneur would be able to buy a few servers, split the resources of these servers up into little VPS instances, and then sell those VPS instances. The way they would attract customers was through having the cheapest prices.

These entrepreneurs knew that the fastest way to reach the low-end market is through price. This is what the low-end customers care about the most. They need a minimum amount of VPS resources, and then after that minimum is met they just want the cheapest VPS available.

A low-end webhosting customer wants a VPS powerful enough to run Apache or Nginx and whatever else they need to server their website. Beyond that, they don't really care how much RAM a VPS host is offering. As long as it can run their website in a decent manner, they are going to look at the price of the VPS.

Today, there's just so many low-end VPS offerings that it's impossible to compete on price alone. A simple Google search or forum search will result in hundreds of new VPS hosting companies all trying to out bid one another. There's just too much competition on the low-end market.

Folks like RamNode were able to build up a low-end following and create a successful hosting business before the low-end market was fully saturated.

You Don't Have Name Recognition

What about the customers who are not so price sensitive? Of course there are customers whose main priority is not price, but the level or service. Though you might think you can compete by offering top notch support and service, you are wrong. You might be the absolute best at helping out customers. Your staff might have the most technical knowledge. But even if this is true, you are lacking one important thing; name recognition.

Customers are very hesitant to trust a host who they are unfamiliar with. If you are new to the market, it's going to take a lot of time to gain the trust of customers. There have been too many VPS hosts that shut down their business after two years, leaving their customers stranded.

Recommendations are key in the VPS hosting business. This is true of many business sectors. If you search the web for VPS providers there are a few names that you will consistently come across. Linode, Digital Ocean and Vultr are consistently going to be recommended.

They have the name recognition and the reputation. As a new entry into the VPS hosting business, you will be unknown and untrusted. You will have to offer a customer something that these well known hosts are lacking.

Hard To Offer More

Economies of scale exist within the VPS market. Economies of scale is the idea that a bigger firm can add more capacity at a cheaper price. Someone like Linode can offer more bandwidth simply because they have a lot of customers. They are able to justify buying a 10G uplink, while a new VPS host may only be able to buy a 1G uplink.

similarly, these companies are able to buy servers in bulk, cutting their costs and being able to move these cost-saving methods down to their customers.

Not only that, but in the last year, many of the major VPS hosts have doubled the amount of RAM on their VPS plans. A small VPS operation is not going to be able to compete with these offerings while still making a profit. The only option is to operate at a loss while hoping to scale your own business.

A Move Away From The VPS

While the VPS market remains strong, there is a trend for certain customers to purchase VPS alternatives. Some customers are finding that webhosting or cloud services offer what they need.

These VPS alternatives offer less-tech savvy customers a way to host their infrastructure without having to hire or learn system administration. As automated hosting management progresses, manual VPS management will be less sought after.

Of course it is possible to make money by creating a hosting business. The trick if to differentiate yourself from the competition. Price or reputation is not a way to compete in the current market. Try to offer something that other VPS hosts are lacking.

Years ago, when Digital Ocean was still attempting to gain a foothold in the VPS market, they began to offer SSD harddrives on all their VPS instances. They began to advertise that they were the first "all SSD" VPS provider. This differentiated them from other providers of the time, who did not use SSD drives for the cheaper plans.

Today, almost all VPS plans come with an SSD drive. The competition was able to catch up to Digital Ocean and offer the same features. But by the time they did so, Digital Ocean already built up a customer base and a name recognition that still exists today.