Loss Leaders Risky Gamble for Small Web Hosts - Why Loss Leaders are Risky

I’ve hinted at some of the reasons why loss leaders are risky for a small web hosting company, particularly the kind of loss leaders that larger web hosts can afford to offer. Let’s take a closer look at some of the problems a small web host may experience when it tries to emulate the big boys in this area.

What will happen if you offer a year of free web hosting as a loss leader and experience the kind of growth in your customer base that you only dream about? Well, that dream can turn into a nightmare pretty quickly. More customers means more customer support calls, and if you don’t have the staff to respond, your disgruntled customers will complain – loudly, and to anyone who will listen, not just your staff. DreamHost may have fallen prey to that very problem, if the web site dreamhost-sucks.com is any indication. In that case, your loss leader will seriously backfire, attracting the kind of attention you don’t want.

Also, as noted above, you may not really want the kind of customers that would be attracted by loss leaders. Branaman has observed that loss leaders “attract the wrong type of audience.” You don’t want to have a “base of customers that are not loyal to the services or interested in additional services, therefore making the overall business unprofitable.”

Looking at the web hosting industry as a whole, loss leaders as a marketing strategy may be doing more harm than good. While they force web hosts to increase their efficiency, they also create expectations of unnaturally low prices in web hosting customers, commoditizing the market. It may not be too harmful to offer domain names as loss leaders, but before you offer free web hosting as a loss leader, take a close look at your business and figure out whether the customers you gain (and the income you lose) will be worth it.