Industry Analyst & Strategist

What Agencies Need to Know About Hosting

I’ve often thought about the ramifications of being a WordPress hosting customer, that is, I’m paying a host for the ability to have people on the internet access my site. More recently, the boom in NFTs has made me rethink of what an asset on the internet is. What would happen if we did put together a philosophical puzzle where we merged the ideas and created the customer asset?

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The current value of a hosting customer is spliced and diced in spreadsheets all the time, which terms that have come from the mobile phone carrier space, and many of the same business practices. Did you know that every time you sign up with a host, or change hosts, there is a specific value called CAC (customer acquisition cost) that applies to a specific host. The lower the CAC, the better, but you may be surprised that CAC can run easily into the $100s of dollars. How is CAC calculated? Neil Patel, Customer Acquisition Cost: The One Metric That Can Determine Your Company’s Fate: “Basically, the CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent.” This can get very expensive, very quickly, for example it is not uncommon to see Google ad-words costs at anywhere from $25 to $45 CPC for terms in the WordPress hosting space. That’s just a click! The host still has to get you to convert, which certainly involves much more on the marketing side of the equation, and we are assuming that all hosts are equal in services which the provide (which we know is definitely not the case).

How does a host make money with such costs? Hosting companies have another factor which is evaluated, Total or Customer Lifetime Value (TLV/CLV). This is an average of how long a customer stays with a host (in months), multiplied by the average revenue per user (ARPU).This is where you, the customer, become profit to the hosting company. This one is easier to to understand. With the CAC figured out, let’s assume $100, and subtract it from CLV. So if the CLV is greater than CAC, the host makes a profit. Bingo! Easy! Right?

The trick with CLV is how long is the runway? If the host’s CAC is $100 and monthly revenue per customer is $2, the host will need 50 months to break even. That’s not a winning proposition given that churn in the industry occurs at a much quicker pace – meaning most customers don’t stay with a single host for over four years. Hosts make up for this shortfall in upselling services, and increasing prices. But! They are still feverishly driving acquisitions at the top of the funnel hoping that new customers outweigh churned customers. So there are always great deals for new customers (hello Comcast, AT&T, T-Mobile, Verizon, etc.) but not much of an incentive to stay. So now as a customer, you’ve become an asset with a limited life. The closer you get to break even for a host, the more likely you are less important, and certainly after turning into pure profit, the deals and inducements to stay on a given host will decrease.

Again, my version of the hosting relationship assumes all hosts are equal – which they are most definitely not. What would happen if customers realized that they are much much more of an asset rather than just the revenue they bring. Looking at it from the host financial perspective it makes sense (using some transitive property voodoo). Hosts pay for infrastructure, equipment, networking, and more physical assets. As a customer you are the primary user of these assets – therefore becoming a bundled asset in your own right.

Back to the NFT thinking from earlier – what would happen if customers, more likely agencies – were willing to be traded as the assets (commodities) they are? Could an agency with 10 customers bid itself out to hosting companies based on the amount of spend they have? Could an agency get a signing bonus for switch teams?

I think this is the right time for agencies to evaluate the opportunities presented by utilizing a co-op model to negotiate the best pricing and services. The agency cooperative is something that agencies should be looking to build and that hosting companies work to build into their communities. I could see the economy evolve such that even hosting companies would look to buy and sell from each other such agreements. This would the uncertainty in many of the the business numbers and simultaneously empower the new generation of customer.

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