When you look at the current state of Web hosting you can’t help, but question the pricing schemes. Seriously some of these hosting solutions are out of control. The big question though is who is to blame for the price wars? On one hand we have the Web hosts. They are the one setting the prices therefore they must be the ones to blame, right? Unfortunately this problem is far more complicated. But first let?s look at the problem and its effects.

Pricing wars happen in all industries. The correct term is loss leading. Loss leading is defined as selling your product or service at a loss in order to attract a large customer base. Through this loss you take up a sizeable market share. Once you have market share you begin to move your customers up the chain. A few examples:

Verizon has had a history of undercutting the leaders such as AT&T (now Cingular) and Sprint. Verizon’s network of customers is now one of the largest in the industry. When they hit their customer goal, Verizon began to increase prices very slowly, but added plenty of add-ons such as Internet access, business packages, increased text messaging, etc. The average customer might have started with a basic package. After a year of use they find they really like the support and quality of the network so they look into getting business add-ons such as Blackberry, Push-to-Talk, Internet Access, etc. The customer who started receiving the package at a loss is now paying back Verizon. The payback is very small, but if the customer is a loyal one they will stick around long enough for Verizon to make a profit off of them.

Walmart is another loss leader. But as a retailer they do their business differently. They are not the ones taking the loss its the venders who sell through them that take the big hits. When a company like Levi finds that 70% of their profits come through Walmart shoppers they will do anything they can to continue that relationship. Walmart milks this by telling Levi to drop prices on their pants and since Levi doesn’t want to leave Walmart they find alternative ways of reducing costs such as closing all of their domestic factories and moving them all over seas.

In order to receive a profit from a customer gained through taking a loss, the Host MUST provide good enough service to keep the customer and not only keep them, but to gain their loyalty. Therefore, major hits are taken by the Host to give the customer high quality support and a speedy network with excellent uptime. The customer in turn ends up rewarding the Host by telling their friends, going on forums and telling the readers there, and eventually either the Host raises prices OR they offer higher end plans for just a little bit extra and begin to move the loyal customer up the list of services until they become profitable for the Host. Its a very long process and though rewarding to the Host over the course of several years the loss in profits at the beginning of the relationship is very tough. Not to mention, one miss step by the Host, excessive downtime, bad support, etc. will end up in making a hostile customer who will not only take their business away, but will inform all that the Host is evil and does not deserve any business. Its a very slippery slope for the Host.

The Hosts who participate and understand the basic principles also understand what is required by them to make it successful. It is a gamble, but there are ways to decrease risk. Now the problems that stem from this. Customers believe these prices are the standard instead of being served to them at a major loss.

Because of the new customer perception other Hosts interested in competing in these markets need to reduce prices to gain customers. In order to turn this new price point into a profit point (which it clearly is not and never should be considered a place for profit), Hosts who do not understand the concepts loss leading reduce overhead costs.

To save on overhead costs, customer accounts are stuffed onto servers, support times are slower, network speeds are reduced; basically gross degradation of service. The competitors who made the old loss leading price point a new standard now force the previous loss leaders to reduce price again in order to meet their customer base goals.

The new reduced price points become the new standard for plan pricing, forcing many Hosts out of business. Those who continue to try to make a profit at those prices degrade their services again in order to compete and gain market share. Increased overhead costs due to inflation and the global economy (wages, price of electricity, price of technology, software costs, etc) reduce the amount of leeway a Host can use to cut costs and therefore the service becomes reduced even further.

Anyone remember when “Budget Hosting” meant just under $15? I do. That was a bigger to-do when it first came out. Hosting for $14.95! It was considered unbelievable, but consumers bought into it and several companies saw explosive growth. Burlee was a good example of this. Extremely huge gains in customer base. Then the next Budget hosting average price was $9.95 a few years later. Last year, Budget hosting hit around $6.95. Today it is not odd to see plans going for $20 a year or $2.95 a month. Anyone remember Rackshack (the original name for Ev1 servers)? At a time when Dedicated Servers would set you back $200 easy a month, Rackshack sold Dedicated Solutions for $80 a month. They cut the costs as far as they could, but entered the Dedicated Server market as a loss leader hoping to garner a solid reputation. Today Ev1 Servers (bought out along with The Planet and now both have been put together under The Planet name) is a well respected host and offer the low cost servers, but now also include a wide solution of higher end models. I can almost guarantee a good portion of those on the higher end servers were loyal customers from cheap dedicated server days.

Personally I don’t blame the loss leaders. I don’t blame those who know that by setting lower prices they will be taking huge losses. And even though they are taken huge losses still try to provide their customers with quality in order to turn those customers into “evangelists” (those who sing the praises of your company) and/or move them up the chain of services to the point of profitability. To me this is a legitimate business move. I really don’t blame the customers either. Even though its the ignorance of the customer that forces the increased price drops. The customer expects the lower prices cause that is really all they know. If a person was told an apple was a banana their whole life chances are they will continue to call the apple a banana. I do not blame the customer for that instead I blame all of these Host Finders who give nothing more than a top 10 list of Hosts who have either paid them money for the spots or are giving the Host Finders a sales commission.

The other day we had a reader agree with our selection for a Host that fits their needs because he found that Host listed on several Top 10 sites and believed the Top 10 sites to be giving genuine information. After reading that in his reply I nearly cried. Now who do I blame? I blame the Hosts who believe the loss leaders are making money off of their customers at the ludicrously low pricing points. I blame them because they are the ones who lower the quality of Hosting and force other Hosts to drive their prices down. By making a profit at an extremely low price what you are able to do is hold that price indefinitely forcing a standard. Loss leaders on the other hand hold the low price for a stretch of time and then slowly raise the low prices up back to the standard.

Some might say well Pandora’s Box has been opened. We can no longer raise prices to a normal setting because the customer expects lower prices. That?s a bunch of bull. Case in point, coffee. You know it costs me about 7 cents to make a cup of coffee. And yet its more than acceptable to pay 99 cents for a cup of coffee at a gas station or paying $4 for a cup of coffee at a cafe. If you give the customer a good reason to pay more they will pay more. Whether they expect the world for $3.95 or not is not the issue. If you can put the common sense of the subject in plain words chances are you will get customers. You might even get a different clientele, people like myself perhaps.

Niche markets should be the new focus for Web Hosts. Finding a good niche and building a business off of that niche gives Hosts the ability to serve up an excellent service to their customers without having to undercut at a loss. E-Commerce, SMBs (Small and Mid-Sized Business), Vblogging, Enterprise Hosting and more have become the new fighting grounds for Hosts. These areas are well noted to have higher prices because of the services they provide.

The Budget Host industry might be suffering from major pricing issues, but good quality hosting can still be found in other markets that provide a viable pricing for customers and a decent profit for the Host.