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What is overselling?

Author: Wojjie     Posted: 2004-07-12     Viewed: 5,566

Introduction:

Overselling is a common business practice and can make your company much more competitive in the market if done wisely. Otherwise, the market may become over saturated if abused in a large scale, and may lead to your business going under.

Logic behind it:

A very popular example of overselling is with telephone companies. Telephone companiees have more clients than their network can support at a given time, and if everyone of those clients were to use their telephones at the same time it would cause havoc. The phone companies oversell the usage of their network knowing that during the peak times it will still be running efficently.

With hosting companies, a similar practice is used. For instance, it may cost $1 to transfer 1GB of data, therefore you would assume that a package that offers 10GB of data transfer would cost ($10 + other expenses) per month. But how many clients would actually use their package limit? Normally there is a charge for any amount you go over, and this price tends to be quite expensive. This charge usually deters these clients from getting too close to their limit. From this, the price of a hosting package can be based on the average usage instead of how much is sold.

Overselling abuse:

Frequently there are companies that arise and offer hosting packages that abuse the overselling concept. These companies may try to grab a potential client's attention by offering cheaper packages by either overselling heavily, or not calculating all expenses into the price of the package. With this, their service may lack, or they may end up going under quickly, but before this happens, the market may get saturated to some degree.

The average person looking for web hosting may not fully understand the cost and effort needed to run a hosting company. This person may end up baseing their purchase decision by looking at what other companies have to offer. Now this person may go to company A, and sees they offer incrediably cheap prices. Being a smart consumer, he knows that this may be too good to be true, and continues on with his search. If this consumer starts comming across other companies with similar prices, he will start to assume this is the trend, and may sign up.

The companies that have stable business models and offer superior service may start to hurt from the lack of new business that has been taken from them by these new 'cheap' companies. Now, this company may decide to reduce their costs and profit margins to compete, may wait it out till the other companies go under, may start to target a different breed of consumers, or will close up shop and change directions completely. In most cases, the average quality of service provided decreases.

Summer time trends:

Summer is one of the most enjoyable seasons in the year for some. For people in the hosting industry, it tends to be slightly dreaded. Summer time is also the time of the year that students have a break from school and may start to take up various different hobbies, like starting up a new business. So during the summer time, there is a lot of 'grand opening' deals in the hosting industry. With the cost of leasing dedicated servers being low, and the ease of getting a PayPal account, starting up a hosting company can be easy, and requires little planning. With little planning, a business may start up with an impractical business plan without knowing it (ie. overselling). Now with the sudden rush of students getting off school at the same time, and the ease of starting a hosting company, we end up getting the effect described above of an over saturated market full of oversellers.

What makes up the price:

In the price of every hosting package, there is the price for support, server resources needed, data transfer, hard drive space, and company reputation.

Support The price included for support may be determined from the average time needed to support one client per month. For instance, if every client has 1 problem a month, and it requires an average time of 15 mins of your time, then you should include those 15mins into the price of the package. So if you charge $20/hr for support, and 15 mins is required on average, then $5/month should be allocated for support.
Server Resources The amount of cpu power available should also play a part in the price. Some companies put a limit on the amount of cpu a client's website may use, since they want to be able to put X number of websites on their server. (Putting more websites on a machine than it can handle is called 'overstacking')
Reputation Reputation is worth a considerable amount. With a good reputation, a client has an easier time trusting a company than a company he or she has never heard of before.

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