By Jeffrey M. Kaplan

February 17, 2006 -- (WEB HOST INDUSTRY REVIEW) -- I expect the hosting industry will continue to experience escalating demand in 2006, fuelled by the desire of a growing proportion of enterprise decision-makers to offload whatever portion of their information technology and application requirements can be handled better or more cheaply by an external service provider.

While industry growth is good news, competition within the hosting industry will intensify as more players enter the market.

Unfortunately, nearly every hosting player will be forced to contend with potential price wars to acquire and hold onto customers. Take a look at any hosting directory and you'll find a long list of hosting companies offering similarly attractive services and solutions.

This commoditization is already creating price competition that will push many players into bankruptcy or force them to consolidate via mergers and acquisitions during 2006.

I would recommend that hosting companies follow a series of steps during the coming year in order to overcome these competitive pressures and better position themselves to succeed in the market.

Stop being a commodity business

The first step to escaping the commodity market trap is to identify what makes your hosting services different. Is it the composition of your service portfolio, the strength of your service delivery infrastructure, or the quality of your customer support, alliances or business processes that sets you apart? Identifying and maximizing your unique differentiating qualities is the foundation for avoiding price competition in a commodity marketplace.

Develop value-added services

Adding new layers of value to a common set of services is imperative in a commodity market. Bringing innovative thinking to the way services are packaged is critical to creating differentiated solutions. In many cases, looking outside your own industry for proven ideas in other sectors can be the best method for developing differentiated services.

Target specific industries

Vertical market specialization is one of the best ways to differentiate a commodity service and build a loyal base of customers. Building and successfully delivering an industry-specific solution requires an intimate knowledge of the target market's unique requirements. Vertical market oriented companies must work hard to establish a strong reputation within the target industry by joining their trade associations, exhibiting at their tradeshows and publishing in their trade publications.

Focus on customer support

When everyone's services look alike, the company with the best customer support will generally win. In today's market, customer support is defined not only by the way a company reacts to problems, but how it prevents problems from arising and communicates the quality of its services on a continuous basis. For many hosting companies this means providing portals and user interfaces which enable customers to easily see the quality of service they are receiving.

Sell value rather than price

Regardless of how well differentiated your company and services may be, unless your sales team is convinced and trained to promote your company's unique value they will cave in on price. Therefore, building a strong sales team that sells value rather than price is critical to success.

Let your customers do the selling

The best sales team any company can have is its customers. If you have satisfied customers, promote them and encourage them to promote your company's services.

Build an ecosystem

Few hosting companies will succeed working alone. Instead, the winners in the hosting business will be those companies that have the strongest relationships with their hardware and software vendors, as well as with VARs, consultants and even other hosting companies that can serve as channels to market. All of these players represent referral sources, and they can also be useful resources for new ideas and services.

Streamline your operations

Minimizing your cost of operations is the best buffer against price competition. The best method for reducing operating costs is automating IT and business processes. This means acquiring more automated technology management and back-office administration systems.

Promote your key differentiators

Developing unique differentiators only gets you halfway out of the commodity trap. Unless you effectively communicate these differentiators to your target audiences, you cannot rise above the noise of the market. Develop and execute a strategic marketing program that effectively conveys your capabilities to the right audience of potential buyers, partners and industry influencers.

To some hosting execs, these steps seem like Business 101, but an alarming number of Web hosting companies have yet to learn these fundamental business lessons, and are suffering the consequences.

Kaplan is managing director of THINKstrategies (thinkstrategies.com), an IT strategy consultancy in Wellesley, Mass. He can be reached at jkaplan@thinkstrategies.com.