Slow & steady wins the race..

Slow & steady wins the race .. or so we’re told when children. After 18 years of having Aesops’ tortoise & the hare pounded into our skulls as children we’re unleashed into the business world where the slow are supposedly “devoured & crushed”, “eaten by bigger fish” & left behind while the industry races forward.

In a sense, it’s true but there is a lot more to business than simply being the fastest. In web hosting for example, there are a great deal of companies tweaked purely for sales performance. Their entire sites, teams & communications are tweaked entirely to increase sales, conversions and growth rate. Marketshare and penetration plays a large role in company valuation, thus a lot of companies (most likely with the intention of selling out later) are booking sales faster than they can keep up.

In essence, drowning in their own wake. High affiliate payouts, low prices & insane resource offerings…

The Underlying Problem: Idiots at the Helm The underlying problem in the web hosting industry (Not with us, mind you. Although I am utmost certain I’m an idiot) is that nerds simply have zero marketing expertise. They needed sales, growth & expansion but had no skills to market themselves properly so they began to have others do it on their behalf.

Thus arrived affiliate programs. Affiliate programs would put the ‘marketing’ in the hands of those who knew what to do with it. The only way to lure people in to sell on your behalf was to offer them some incentive. First came prizes, free hosting & groping. When the affiliates got a bit greedy they started asking for more – cold hard cash. The web hosting providers gave in & started offering ‘competitive’ affiliate programs with $20, $25.. $50 & even higher ‘payouts’ for sales leads. With payouts as high as $100 per sale when your hosting package for the year is only $50 you have a slight problem: You’re losing money!

And that’s where it all went downhill…

The Price Wars: The End of Common Cents Earlier this millennium, a number of companies began what we now know to be ‘price wars’ within the web hosting industry. A random (A company to remain unnamed) provider began to offer lengthier (1-2 year) package terms with higher discounts to lure in new clients. The gimmick at the time was to show the low, low prices in their advertisements – e.g. ‘Hosting from $4!’

The thought of being able to purchase a hosting package at a highly discounted rate ($7 a month or lower) at the time was very alluring to consumers. At the time average pricing of web hosting was hovering around $10 a month & when these $3-4 offers began to flood the market… consumers poured in.

A great deal of companies, uncertain of their own ability to keep up followed suit. They of course wanted to partake in the sales as well – growth is almost always a good sign! Soon enough more companies began to dive into the feeding frenzy.

The problem is the majority of companies involved simply didn’t have a large enough clientbase to cover their growing affiliate fees, overhead & additional marketing expenditures to persist without getting massive amounts of sales so they continued to drop pricing until they could no further. Pricing for web hosting began to hover around $3.95* a month (With 800 year purchase, $3,000 cancellation fee & zero support…) rather than the rates of ‘old’, just a few months earlier prices & resources were hovering at $15 a month for most packages. What a sudden change!

With such massive affiliate schemes in place (paying out as much as $100 per sale) the hosting companies involved had to keep sales coming in quickly.. or they would perish. Prices were as low as they could go but companies had to ensure sales continued due to their overhead costs, affiliate payouts… the resource wars began.

Web hosting prices had already hit “rock bottom”. There simply was no further down these companies could go (Although some still try to go even lower) without bankrupting themselves, they had to find another way to compete. Remember, they’re not trying to compete based on support quality, uptime or any other ‘norm’ we would gauge providers on. Rather they’re competing solely on the rate of growth of their companies.

Ignoring the pleas from their technical support teams, chief technology officers & technical management…

The Resource Wars: The Beginning of the End With web hosting being such a high-tech offering, the consumers involved generally only have a few options to compare web hosting providers. In most cases their first instinct is to gauge a company based on pricing. They shop around looking for a price that is ‘smack dab in the middle’ (unless they have a strict budget) & will choose a hosting provider that lies in that pricing range. Consumers generally won’t go too high or too low because they see these offers as potential rip-offs. Human nature, I suppose.

When the bulk of web hosting providers had dropped their prices to obscenely low rates the providers ran out of options to compete on. With a large percentage of their revenue immediately being dispersed out to affiliates, overhead & marketing they needed a new plan of attack and fast.

Resources became the new ‘price’ in web hosting. Resources being offered suddenly began shooting up from 10 gigabytes to 100 & now hovering in the terabytes range just to stay competitive. Again, remember competition to a number of these other companies isn’t about being the top quality provider – their bottom line is ‘sales, sales, sales’. If they’re not selling, growing or expanding at the waistline they cannot survive with the affiliate payout overhead they’re drowning themselves in.

audible sigh

The problem with insane resource offerings is that they’re simply not feasible to offer to ‘everyone’. While you may be able to afford to offer it to a few clients at a time you have to impose strict limits to ensure that most users can’t use it all. Fraud, at the bare minimum is what most web hosting companies are pushing these days.

Even worse, due to the massive affiliate payouts is that the ‘budget’ providers have such a marketing reach that they’re considered ‘standard’ by the majority of consumers. With payouts as high as $250 per lead it is hard for a marketing firm (or anyone) to disregard the payouts and refer based on quality alone. The result is that 3.5 terabytes of space & transfer can be had for $2 a month – or at least according to a google search it can.

In reality though it isn’t a feasible offering and it couldn’t include actual support, uptime & any sort of performance at those prices let alone resource allocations. Consumers expect to receive what they’re told they have though - so they flock like sheep to each of these companies. Sadly, the situation that the entire web hosting industry has dug itself into isn’t something we can easily escape.

On the brighter side, large budget providers are actually handling all of the marketing for top quality web hosting providers out there. We haven’t advertised anywhere (Minus a few forum posts here & there, a couple of sales to reward signups and thank existing clients..) & don’t need to: Clients find us because they’ve been bounced around from budget company to budget company looking for something half-decent.

It’s not a pretty situation but at least we get to pick up the pieces one client at a time. I’m reminded of another of Aesops’ fables about the goose & the golden egg. The owner of a goose that laid one golden egg a day wanted to get rich quick. He got greedy & decided he would cut the goose open and just pull out all of the eggs. Inside he found nothing & his precious goose was lost.

Thorough growth is best, this isn’t a race despite what those may tell you.

The End Result: Buyer & Buyout Beware The end result of all of the price wars, resource wars & insane monthly affiliate dues is going to be a lot of buyouts. The large providers in the industry have set themselves up to be ‘worthy’ to acquire. The numbers ‘look good’ on paper: Hundreds of thousands of clients, $xxx millions in revenue - how can it not look pretty for acquisition!

The problem of course is that the companies looking to be purchased simply haven’t been keeping their house clean so to speak. In order for them to continue growth they’ll either have to overhaul their entire backend & concentrate on offering higher quality support, phone support, prompt effective communication & stability.

Otherwise the only way they’ll continue to get sales is by offering high affiliate payouts. There’s a great deal of ‘massive’ companies running these sort of ships: I can’t say I agree with it, I’ve always been taught that slow & steady wins the race. Why anyone even got involved in the affiliate, price & resource wars I don’t know – anyone can grow, but it’s growing with a loyal clientbase that really matters.

And to get that you need high quality support, stability & a team behind you with ethics. Nothing more, nothing less.

Slow & Steady!

“Better be wise by the misfortunes of others than by your own.” - Aesop