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Regarding VPS costs
Hardware and colocation costs keep rising, but VPS prices seem to be getting cheaper every year. How are providers still making this profitable?
For example, a decent modern server can easily cost around $15,000, and a rack often runs $1,200–$1,600 per month depending on the location and bandwidth.
At the same time, many VPS plans are selling for only $1.8–$5 per month.
With power, bandwidth, hardware depreciation, support, and network costs, it’s hard for me to see where the margins come from.
In my case, the service is basically sustained by a small number of “super users” who pay more or use larger plans. Aside from that, I can’t really see where the profit would come from.
Curious how other providers structure their business to stay profitable in the current market.
Comments
It depends on the host node. There are lot of providers running Dual Xeon E5 or Epyc, you can fit a lot of vpses on one.
Besides what is mentioned above, a lot of the cheap VPS plans are on older hardware. While some of the CPUs are still "supported" from the manufacturer, there are some that reached their EOL not too long ago.
Small VPSes discourage running heavy workloads. Four people with a 1c1g plan are less likely to all run an 80% load than one person with a 4c4g plan. This is also one reason why many providers don't allow merging VPS resources.
I think you come from the "wrong" side.
First simple basic rule: IF a provider buys new hardware, they overcrowd it even more than usual (or they ask a price far north of $50/yr, or they lose money).
Usually though providers, at least in LE segment, purchase 2nd hand at 20% (or even less) of new price.
Second simple basic rule: most users (even here on LET) don't really know what their use case actually needs and tend to buy more than actually is needed, often even way more. Plus many buy cheap promos and basically idle them.
This leads to providers having ample "compression" potential because most users actually use but a small portion of "their" resources.
Third simple rule: Lies. And then again lies , uhm, pardon me, "marketing". Example: 10 Gb/s ethernet. Well, actually shared by dozens (or even hundreds) of VMs on the node.
But most users only see "10 Gb/s" and click "buy".
All in all I have seen many VPS with vCore boiling down to 4 (or even more) "vCores" per HWT; if it's "only" 2 one is quite lucky.
besides all the tricks the LET vps providers do, it is often still better/more economical than what the big tech hyperscalers offer. You don't need to have a Phd to understand their productfolio and their complex dashboards.
Now, one provider did increase prices a few years ago, DigitalOcean. I think it was a 20% increase across the board, or around that. Vultr has stayed steady.
I think there's been a real race to the bottom on prices and I'm not sure how providers do it. I think, though, your $15k figure is way high. I assume most providers are paying a bit more for larger hosts, like 256GB of memory, and they have fewer of them. I see servers like that for rent for about $300/month. Now you'd need to have IPs with that, so you might end up around $350 a month. On a full host, maybe 230GB worth of VPSs, I guess a bottom dollar VPS host might charge $2/GB and make $160/month. As for the initial purchase, maybe it's financed?
I'm not familiar with new hardware costs, but have been piecing together my nodes. Mine are used, but end up, I think, somewhere in the $400-600 range. When full, I can earn $150 a month. Are they full? Nope! Still losing money.
In my market I charge higher prices than most here. Slow Servers has had slow adoption, but SporeStack has done really well, I think because it's fast and easy, despite being expensive. I think once Slow Servers is automated (and offers IPv4,) it'll pick up some. I know I'm never going to be that compelling to people who typically price their servers under $40 per year.
I do find that companies with rock bottom prices often tend to close up, sell out, or, they're always out of stock. And if you have a server on a good one, that's great! Nice to get more for your money, or the same for less.
Ok, one more thought. I used OpenBSD for Slow Servers. If I had used Xen I would've been comfortable doubling the VPS count on a host (not memory, obviously) offering smaller plans (128MB, 256MB, and 512MB.) But OpenBSD's scheduling just isn't up for it -- it's too easy to have poor performance. With Xen you can do really nice weighting. At a previous job, I remember 256MB servers doing crypto mining with minimal impact, but bursting quite effectively. Except that nowadays, people are asking for 2GB or 4GB for $20-30 a year! Outrageous! Good for them, though.
I agree with you. It's important to understand that a "reliable" supplier doesn't just manage the equipment; they also maintain contact with regulatory authorities, which is a significant financial investment.
By 2026, the market will change—users will increasingly prioritize companies that have official certifications and adhere to industry standards. Reliability and compliance are now premiums, justifying a higher price compared to competitors seeking to lower prices.
The hosting giants (Hetzner/OVH) leverage insane economies of scale on their hardware. Their main goal is simple: maximize density and fill those racks to the last unit.
However, you get what you pay for. If you've tried Hetzner’s entry-level shared tiers, you know they can be sluggish under load. It’s a trade-off: if your use case doesn't require high performance, it’s a win-win for both the provider and your wallet.
What I find mind-blowing are the providers selling VPS for €7–€12 per year. How do they even keep the lights on? Is the margin literally zero, or is it just a pure loss-leader strategy?