Continuing on the theme of No Limit Hosting, this installment of the BOB Blog will focus on the practice of overselling.

Put simply and most generally, overselling occurs when a vendor sells more than it can deliver. The most common non-hosting example can be found in airline ticketing. Most airlines will sell more tickets than seats on a plane. They do this knowing that a certain number of passengers will not report for their flight. More often than not, this arrangement works out well for everyone. Passengers that report for boarding get on their flight and the airline avoids the cost of flying an empty seat around the country or world (thus keeping ticket prices low).

The application to web hosting is straightforward. Rather than seats on a plane, overselling in the web hosting industry typically involves storage and bandwidth. Consider the simplified example of a host with only one server. Let’s say our host has contracted for a server with 400GB of disk space and 1TB (1,000GB) of monthly data transfer. Let’s also say this host has determined that plans must be priced at $10 per month and include 10GB of storage and 50GB transfer to be competitive in the market. Finally, to keep grammatical awkwardness to a minimum, let’s assume our host’s name is Bob (imagine that).

Given this scenario, Bob will “sell out” of bandwidth after 20 customers well before “selling out” of storage at 40. The monthly revenue from a server with 20 customers paying $10 each will be $200. Compare this to the $300 monthly payment on the server (not to mention Bob’s time) and the need for creative marketing and operations become clear.

After losing several hundred dollars on his hosting endeavor, Bob decides to take a closer look at the limiting factor - bandwidth. He audits the 20 accounts on the server and finds his “smallest” customer using about 50MB of monthly transfer and his “largest” customer using just under 5GB. He also finds the total monthly transfer for the past several months to be less than 10GB. This leaves over 90GB of transfer unused. Seeing that this waste is analogous to a plane flying with empty seats, Bob decides to accept another 20 customers, and in doing so joins virtually all other web hosts in overselling.

And Bob won’t stop there. A server like Bob’s in today’s shared hosting environment will typically accommodate 100 to 200 customers. To stay competitive in the hosting arms race, Bob may also increase limits on storage and transfer to unbelievable, even unlimited, levels. After all, will increasing storage and transfer limits change the way customers use their accounts? In most cases the answer is no. As Brent Oxley, CEO of Hostgator, observes:

We have many customers who are going hysterical from being so happy about the plan increases. These are the same customers with whom the majority were using less then 1% of the old plan. It’s like going into an all you can eat buffet and being told you can eat more. Source: Is Hostgator “selling out”? on Gator Crossing, the Official Hostgator Blog

The downside to overselling is obvious. If, in fact, every one of Bob’s customer tried to use their full 10GB of storage and 50GB of transfer, it simply wouldn’t be there. It’s the same as if everyone with a ticket tried to board a plane. There aren’t enough seats to accommodate everyone with a ticket. These conditions can be thought of as “stock outs”. The key to successful overselling is to reduce the odds of a stock out to a statistical impossibility. Web hosts and airlines accomplish this by carefully studying customer behavior and allowing enough margin to accommodate all reasonable outcomes.

We’ve gotten good mileage from the airline example, but web hosting differs from airline ticketing in at least two important ways. First, Bob has near-perfect visibility of customer behavior on his server. He can easily see if customers begin behaving in ways that jeopardize available resources and might lead to a stock out. For airlines to enjoy this same level of visibility, they would need to know the exact location, direction, and speed of every single ticket holder prior to departure! They would then know how many customers were going to report for boarding. This is obviously not the case.

Second, Bob can easily add storage and/or bandwidth to his server contract if customer behavior warrants it. He may pay a premium to do so, but additional resources can be deployed. Airlines do not enjoy this flexibility. Seats cannot be added to a plane on short notice the way storage and bandwidth can be added to a server.

Though much maligned by webmasters in blogs and forums, overselling in the web hosting industry is not necessarily a bad thing. One might object to it on philosophical grounds, but done properly, overselling is not an immediate risk to consumers. Like the airline example, all parties generally get what they need out of the arrangement. Webmasters, big and small alike, get their sites hosted for a low price and the host avoids the waste of unused resources (which helps keep prices low). Unlike the airline example, web hosting enjoys near-perfect customer visibility and the opportunity to add resources should the odds of a stock out get to be too high.

So the important question to keep in mind as you compare hosts is not whether a particular host oversells, but how they manage it. The five BOB hosts (1&1, Hostgator, Hostmonster, IX Web Hosting and midPhase) have proven they can manage overselling well, but smaller, less experienced hosts and resellers might not have the required expertise and resources. Don’t be afraid to ask a prospective host how they manage overselling and how they will guarantee that your account gets the resources it needs. In our experience, there’s only one answer bad enough to break the deal. If a host offering hundreds of gigabytes of storage and terabytes of transfer claims not to oversell, look elsewhere.