Here is a question for those running web hosting companies today: “Are life-time hosting plans feasible?” Do they present a valid business model? Is it possible to run life-time plans, i.e. your users pay once and once-only for a hosting plan that runs as long as either the user or the hosting company shall live.

It actually sprung out from this discussion thread at Whirlpool forums, where many Australian Internet users hang out. OP asked “any reason why I shouldn’t go with life-time hosting?” and used one small US-based hosting company as an example, where for USD$120 out-right you can get a life-time hosting plan with 6,000MB of disk space and unlimited bandwidth.

Let us not discuss how unlimited bandwidth is feasible — it is obviously guarded by heavily overselling and a very strict ToS. However I just want to focus on this “life-time” hosting plan concept. In that discussion thread on Whirlpool forums, the said host has been grilled because it offered “life-time” hosting plan, and representatives from different Australian hosting companies jumped in to say how unsustainable it is.

There seem to be only two people who defended the life-time hosting concept — Adam from Jumba and yours truly. Well, Adam has been in the web hosting industry for a while and I respect his way of running Jumba (although I no longer host with them). I myself have never worked in a hosting company, let along running one. However over the last 12 months I think I have seen how this industry worked, especially amongst the massive oversold US-based shared hosting. Thus I can only conclude that there is certainly a possibility to run sustainable life-time hosting plans.

Instead of replying on that discussion thread and gets flamed back by other Australian hosts trying to protect the industry there, I shall post my thoughts here instead.

It Is All About Raising The Capital

I am a software engineer, however being a breadwinner of my one wife and 2 kids, I think I understand what it means to be sustainable. It simply means being able to bring in enough incomes to cover the expenses, although income does not necessarily need to be recurring, nor are the expenses.

Therefore I do not think it is justifiable to say that life-time hosting is not sustainable because there is no direct recurring payments from your hosting customers. After all, grow your business at the size of your profit (income – expense) is so pre-industrial revolution and pre-our capitalist society!! To kick start an enterprise, you need capital — to buy servers, bandwidth, etc. You can either borrow it from the banks, look around for venture capital funding, or get it straight from your customers!

And I see getting a lump sum of money from customers for a long term contract in the hosting industry is all about raising the capital. Once you get the capital, there are many ways to use that money to make a business sustainable, by either reducing the recurring expense, creating new recurring income, or creating opportunities to raise more funding.

Many Hosting Companies Are Already Doing It

When I surveyed the web hosting companies, many are already practising this little trick to get more funding up-front.

Why is there set up fees for shared hosting if paying on monthly basis? DreamHost — $49.95. Lunarpages — $30. Surely it does not cost that much to push a button on the software to sign up new clients, assuming everything is already automated (judging by their size, I’ll be very surprised if they aren’t).

Why is 12 month or 24 month plan so much cheaper comparing to paying on monthly basis? BlueHost‘s $6.95 plan only applies if you pre-pay 24 months ($166.80). Just one month please? No such option. How about 3 months in advance? $9.95/month + $30 setup — much more than the advertised price.

All these are set up in a way to lure the customers to pre-pay for 12 or 24 months when they see how much they can save. So instead of getting 10 bucks a month from them, you can get $100-$200 up front — enough to rent an entire dedicated server for a month! When you multiple that by 100, you can get enough cash to buy a few low-end boxes to form your own cluster!

There is nothing wrong with how it works either. When you think about it, not just web hosting companies, but pre-payment discount exists in many other industries, so companies will have enough capital to get started, grow and expand.

How Do You Define “Life-Time”?

Another interesting thing to consider is, how do you define “life-time” when you are offering such hosting plans? When people heard about the life-time plans, they immediately react in the way that hosting company is going to serve that customers’ site until the second coming of Christ.

In reality, “life-time” can be much shorter than that, and with good management and planning, hosting company’s life time might out-last its customers’.

Customer might die, and he/she will cease to be a customer. Lots of people die everyday by ageing or from disasters, and they leave their websites behind. Not that you should advertise “life time plan only available to those 80 years or older” 🙂

People lost interests in making a website. What is the average age of a website? A lot of them don’t even last 2-3 years. People might also sell those sites on the market, or simply forget to renew the domain.

People need a better hosting package. 5 years from now, even a 6GB disk space package would be nothing. People will either see something bigger and leave, or they got fed up with your draconian terms of services and move on.

With that in mind, “life-time” hosting is nothing more than just putting the life-time of the plan on the overselling metrics, together with often oversold bandwidth and disk spaces. A hosting company can promise you the lot (forever hosting!), but it also understood that only a very small percentage of customers might use it.

Some Example Scenarios

I have shown a simple example in the Whirlpool discussion on how life-time hosting might work. Of course it is just some simple mathematics plus lots of assumptions. Take our Hosting Entrepreneur working part-time in his basement for example,

Income: $120 life-time hosting plan

Expense: $150 per month dedicated server + software license

Assuming there is no other expense especially expensive HR, as our Hosting Entrepreneur also happens to know a bit of Linux and only needs to sleep 4 hours a day.

1. Recurring Income from Investing the Initial Capital

Good thing about having lots of cash on hand is that you can put them on investments that actually yield better than your hosting business. I am conservative so I will just take monthly interests from those on-line banks. Currently in Australia, INGDirect yields 6% p.a. interest. However at the moment it is also easy to get 12% p.a. on a diversified portfolio, or 20+% p.a. on just the index fund. Oops, I am not supposed to provide financial adviser, am I?

In order to cover $150/month dedicated server expense, I will need $30,000 in the bank — which I can raise from 250 new signups to my hosting plan. What happen if I get more than 250 sign ups? I can either invest on a bigger server, or just make it as profit! Totally self-sustaining business model!

Now the question is, whether a $150/month dedicated server can support 250 users. I guess that is where the fine lines in terms of services come from 🙂

Obviously it is a bit unrealistic — where can I find 250 customers right from the beginning? Let us look at another example then.

2. Recurring Income from New Signups

To offset the $150/month expense on a dedicated server, all I need is 2 new sign ups per month to my $120 life-time hosting plan. I will also get $90/month to spare on other stuff — like a bit of advertising, which you probably need to constantly get 2 new sign ups each month. You first few customers will be good evangelists as well, as they experienced great performance when they had the whole server to themselves.

2 new signups a month can’t be too hard, can it?

5 years down the track, you will only have 120 customers on that server, assuming they all like to keep their website up for 5 years (unlikely). Moreover, it is likely you won’t be on the same server. In 5 years, for $150/month you will get a monster in today’s standard, which enables you to host even more clients on that box.

I know there are many holes in these two example, but I am just trying to show that it is possible to make lifetime hosting plans sustainable. However, I would like to emphasis that being sustainable is probably not the focus in today’s enterprise. Rather, those who want up-front payments usually care more about raising the capital, and then use the fund raised to rapidly increase market share.

Real Life Cases

Did I say that it might be difficult finding 250 customers right from the beginning? How long does it take for a start-up hosting company to find 250 new signups to its life-time plan?

Not sure about 250, but with 200 — Dean and Jason from TextDrive (now part of Joyent) did in less than 80 hours! Back in May 2004, Dean Allan of TextPattern wanted to set up a hosting company to host users of his open source CMS product. So he teamed up with Jason Hoffman, and created TextDrive. In order to raise the initial capital, hosting plan VC200 was born — 1GB of web space for life for $199!

All 200 accounts sold out in 3 days, raised enough capital for TextDrive to create one of the most developer-focused web hosting company today.

So, someone has done it before, and they are still around 3 years later. I am not saying anyone can be TextDrive — Dean certainly has his charisma and had hard-laboured over the years on TextPattern. I am just saying that life-time hosting plans are indeed possible.

So, The Verdict is…

So, what is the verdict? Am I going to sign up a life-time hosting plan for $120?

No way. You can smell the dodgyness miles away by looking at some of those life-time hosting web pages. However I will not go with them not because they offer life-time hosting, but they are just intrinsically dodgy! You would not go with a hosting company that promises unlimited bandwidth but has a ToS with a 2 inch thick string attached, would you?

However, I am writing this article to show that the big players — those big oversellers with hundred thousands of domains hosted — out there have all the mathematics worked out. I think for them the game is not just about recurring revenue, but a continuous growth — and these up-front payments can really make those big storage/big bandwidth plans possible. Moreover a large capital can further fund more marketing, a good affiliation network, etc that might bring in even more customers.

No wonder they are so much hated by smaller hosts in forums like WebHostingTalk and Whirlpool.