Profit margin represents a correlation between the revenue you generate and the expenses you incur. Everyone aims to reach a high margin, however, many fail on half way. In this article, we’ll analyze the main mistakes while getting high margin and the key points that are considered as a lifeblood of cloud hosting business based on the experience of service providers worldwide. The problems you face while running your business are most likely the same within hosting community, so we compiled the best practices of your competitors to help you increase the margins.
What is the Margin
Almost everyone who runs a business was thinking how to make much more money and at the same time spend less – this is exactly what we are going to talk about.
Margin is the difference between product or service price and its cost of production. Basically, there are two main actions that can influence the margin:
- Increasing the product price and sales
- Decreasing the production cost
Problems Poisoning Our Businesses
There is a set of problems that creates obstacles for building a highly marginal business:
- Low quality of product or support
- Inadequate price (too high or too low)
- Wrong target audience
- Lack of automation
In this article, we are going to focus more on solutions than problems but you can get deeper insights of the mentioned issues from the presentation here.
Secret Elixir Solution
The first step is to admit that you have a problem. Find out what hidden barriers block your company from getting high revenue: prepare an internal business analysis and discuss with your team how to change this situation for the better.
Define Where You Are
Сustomers make a choice and pay us money based on the value of our services and products. Value depends on price and quality: it can be the quality of a product or customer services.
We highlighted customer service in red, as hosting service providers have total influence on it compared to other attributes of value and can change the situation drastically. Since price depends on the market situation very much, you have limited boundaries. Also, the majority of hosting providers offer services based on the 3rd party solution, so you can’t change it significantly unless you have a strong R&D team. And the quality of end customer services can be used as a leverage for increasing the value of your products and, as a result, the margin itself.
Value quadrant can be a helpful tool to understand the company position on the market.
- Selling low-quality product for a low price means offering commodity value to end customers
- The situation can be even worse if you sell low-quality products for a high price
- Better variant for customers would be if you sell high-quality products for a low price, however, it does not maximize your margin/profit
- The most preferable case is to offer a combination of high quality and unique decent solution for fairly high price, as customers are ready to pay more for such products
Reach Paying Customers
Deciding on your target audience appears to be a rather obvious task, but many hosting providers ignore it for different reasons. According to 20/80 rule, 20% of customers brings 80% of revenue. From our observation, about 10% of customers provides 50% of revenue. So it’s much more profitable to target small/specific group of customers than expanding your target audience as wide as possible.
Build Your Fair Price Policy
When we defined our target customers, it’s high time to figure out what kind of pricing we can offer and what margin can be expected. There are 3 types of pricing formation:
- Competition based
- Cost based
- Value based
Each type has its own advantages and disadvantages, but in case you want to maximize the profit, consider the value-based pricing as the most appropriate variant.
There are 4 major steps for defining value-based price:
The main idea is to maximize the price without causing too big churn of potential customers.
Focus on Your Strong Points
Defining your strong point will differentiate your product from dozens of other solutions. Take into consideration such main vectors in hosting industry as technology, support, expertise, and infrastructure.
- Technology unique in your market
Unique solutions give more space for a high margin business: do not forget about commodity which remains to be the core problem of low profit.
It’s not easy to change the more or less working business while selling commodity product for a long time. But be creative, as there always exist several options, that can make your product different.
For example, instead of common VPS, offer Elastic VPS with a possibility of auto scaling and pay as you use charging system. Scaling and clustering are very hard tasks for many customers who buy VPS, that is why solving this problem will add a significant value to your offerings, being crucial decision-point for end customers.
Docker adoption is growing, and there are still many undiscovered opportunities for hosting providers. We believe that containers turn to be a massive shift in the cloud industry (as it already happened with IaaS in the past). So do not miss this wave and the opportunity to monetize Container-as-a-Service (CaaS) in your local market. Of course, it may become a commodity sometime in the future as well, but these days containers unleash boundless possibilities for a high margin business.
Focus on a specific niche. Some providers already do this for well-known applications like Magento or WordPress. But there are lots of other apps and stacks that are still not that covered with managed services, so analyze the needs of your local market and offer your expertise together with the high performance of your hosting.
- Support services of high quality
High quality support is a “must have” for a high margin business in hosting industry, otherwise, customers will not stay for a long time with you. If you are not able to provide a high quality support services for everyone, then at least set the right expectations to you potential customers.
You can define support tiers (as the sample in the table below). In such a way, end customers will have a right perception of the value they get for the different price.
Be sure that the information about the level of support services spread out quickly via social media and forums. And your hard work on improving communication with customers will pay back to you, as positive or negative online reviews make a big impact on end customers decision. Due to BrightLocal research, 84% of people trust online reviews as much as a personal recommendation and 74% of consumers say that positive reviews make them trust a local business more.
- Expertise in a specific area
You can monetize your expertise by providing extra services based on the experience of your team.
The vast majority of software development companies place a great emphasis on the process of continuous integration and rapid delivery of new versions of their product. And when supplying enterprise-level projects, such DevOps processes need to be automated as much as possible. These tasks can be not that trivial for developers and also can move their focus from the core technology they develop. So many of them will consider it more beneficial to pay you for making it fast and with high quality than spending human and time resources of the in-house team.
Another significant approach is to help your customers with complex architecture design.
Also, think about managing VPC or multi-cloud. These days customers do not like to be locked-in at one cloud provider, and, at the same time, they are struggling with the complexity of different infrastructure management. But YOU know how to manage the infrastructure, as it’s a core expertise for a majority of hosting service providers.
Customers are interested in migration from VMs to containers to be more efficient but a decomposition of legacy application can be a real blocker for them and this is where you can help if having the needed expertise. At the same time, if you are going to offer your hosting services on top of containers, this will increase infrastructure utilization and decrease TCO.
- Infrastructure reliability and high performance
Be sure to think about your efficiency, about reliable and highly available underlying infrastructure where customers run their applications and services.
For a high margin business, it’s better to invest into a smaller but better and highly performed hardware. Later, after you earn some money from this small infrastructure, you will be able to reinvest the margin into the infrastructure expansion.
To differentiate you can offer several regions in different locations for bigger customers that are looking for highly reliable datacenters across continents.
Empower your infrastructure to decrease TCO and satisfy the customers:
- Backup by default
- Live migration for maintenance without downtimes
- Containers for high density
- Hibernation of inactive applications
- Automation of updates, monitoring, and troubleshooting
- Software-Defined Solutions
Shift your mindset from quantity to quality.
And always evolve! Everything becomes a commodity if it gets traction from the market. Smart competitors do not sleep. Do not relax for a long time even if your business brings you a high margin at the moment. Get more details in the presentation.
Interested to find out more? Contact us and grow your business with Jelastic.