Expert Blog: Reselling Services – A Major Strategy Pitfall for Hosting Providers

Kelvion New Plate Heat Exchanger

Dvir Ben-AroyaAuthor: Dvir Ben-Aroya, CEO & Co-founder, Spike

Hosting providers like GoDaddy, 1&1 Ionos, and even Wix and Squarespace, started out offering a single service to business owners. Most of them initially developed parts, or even all of their service technology in house, which resulted in a range of unique and differentiated services. But they quickly realized they could be more than just a domain name registrar or web hosting company. Then they began offering a range of digital services to help businesses operate and promote their companies online.

This was a sensible move, as there are more than 24.8 million small businesses in the United States alone. The services being offered include things like domain hosting, website creation and hosting, as well as email hosting, among other services.

But to scale quickly and to meet this rapid demand for digital services, many hosting service providers adopted a reseller model for the additional services in their portfolio. Rather than building their own technology and hosting it in their own data centers, they partnered with third party companies that provided the services. They partnered with tech giants like Google and Microsoft to resell these services and offer ‘collaboration’ and ‘commutation’ solutions through G Suite and Office 365 for example.

In most circumstances, this would seem like a great strategic move. However, when it comes to team collaboration and communication solutions, such as email, this really is a big mistake.

Problems With the Reseller Model

Firstly, all of these hosting service providers adopted the same strategy. Instead of differentiating their portfolios themselves, they all teamed up with the giants of the industry to provide identical offerings for business owners. As we all know, low differentiation means low margins for these service providers.

Secondly, the precious data about how their clients are using email, cloud storage and calendars goes to the likes of Microsoft and Google. That means the hosting service providers don’t even have access to this important information about user activity and behavior. With

this useful data, hosting service providers could better understand who their small business clients are and then tailor and personalize their services to them. Google, for example, can now use the data to offer their own services or competitors’ services to these customers across Google search or ads.

Finally, the third (and most impactful) problem is customer loyalty. When it comes to these services the customer will almost always stay loyal to the apps they use and not to the service provider that offers them – in order to stay productive. Switching can be hugely disruptive to employees’ work.

Let’s say a business owner uses G Suite tools that they purchased via Squarespace and builds a company’s email processes around Gmail. If Squarespace decides to no longer use Google as its preferred partner for email and switches to Microsoft, the business owner suddenly has to learn a whole new set of apps and adapt their processes accordingly. Given they’ll have already put a ton of time and energy around building their email processes this would be an almighty pain. They may very well switch to a G Suite subscription bought directly through Google instead.

Why This Model Doesn’t Help Small Businesses

The GoDaddys and HostGators of this world rely on resold services to help maintain customer loyalty. These businesses want their customers to come back year-over-year for their services, but by outsourcing these offerings they’re willingly handing customer loyalty over to these tech giants. Bottom line – outsourcing tactics in this case means hosting service providers lose their users to Google and Microsoft in the long run.

Instead of truly being the one-stop solution they’re aiming to be, hosting service providers transform themselves into brokers, or the middlemen between their users and the tech giants of the industry.

On top of it all, these tools create closed communication silos. For example, if a company uses Office 365 tools bought through GoDaddy and sets up Teams for internal communication and collaboration, then everyone in that company has to be trained and engaged to use these tools. Moreover, anyone outside of the company that wants to integrate or collaborate, has to get these apps and services as well. Big companies can demand this from their suppliers and freelancers, but small companies are stuck with using multiple tools to communicate within the different communication silos that are used by their (typically larger) customers.

Instead of fostering increased efficiency and productivity, employees are bogged down by more tools and apps than they can handle.

Creating a competitive advantage

The obvious question is why don’t these service providers build their own communication and collaboration apps and services? A simple answer is that they don’t need to, because their current business is healthy enough in terms of revenue and they don’t see the strategic implications yet. But the undifferentiated nature of these offerings leaves them at risk.

When online publisher Vox Media first launched, its homegrown content management system won praise from employees and rivals alike, and even acted as a tool to help attract new staff. The company now sells its software to other publishers, differentiating its offering from the tough market that is online publishing. Service providers building software would similarly have a differentiator and potentially an additional line of business for the future. Creating proprietary and differentiated technology can be a major competitive advantage!

How to Reclaim User Loyalty

The simpler solution would be to partner with small, innovative companies, instead of the tech giants. This is a good way to achieve a more equitable, balanced partnership between both parties, where they can work closely to provide a top-quality service to customers. It’s not like there aren’t great quality companies out there who provide services that match up to what the biggest names offer. Take Zoho’s suite of productivity apps for example.

Working with companies other than the tech giants can lead to a more distinct offering too. There are a number of companies that offer fresh approaches to productivity, such as my own company Spike, which turns email into a real-time conversation.

It’s time for business service providers to break away from these risky resale partnerships with Google and Microsoft, their similar offerings and closed communication silos. Doing so will be better for both the hosting service providers and their customers alike. It will shake up the market while enabling us to get rid of all the negatives effects that come with monopolies.

Author Bio

Dvir Ben-Aroya is co-founder and CEO of Spike and has over 20 years of executive experience leading technology and Internet companies. As an entrepreneur, he is passionate about creating SaaS businesses and nurturing them throughout their entire lifecycle. When he’s not talking about how to improve modern communication, you can find him surfing with friends or running after his three boys.

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