ServerVault was confronting with couples of significant issues when expanding their hosting businesses. First, they would need to hire more full-time employees with highly experiences in skills to fulfill the needs of the expansion. However, it was very hard to find the proper employees within the narrow job markets. Secondly, the expansion means cost much. With the unexpected drops of the MASDAQ index, the new investors began to become conservative and willing to invest if they see the bright future of the products. So, the investors need to know the forecast of companies’ earnings in the next 12 months and how ServerVault could produce money for them.
As the descriptions of the forecast, the expenditures for each new facility was approximately $5 million to $6 million, and therefore ServerVault had to raise enough capitals of $20 million to $24 million to build the forecasting four facilities in upcoming 12 months. Furthermore, the prospective investors would use the “burn rate” to measure the cash spent in each month (Reference 1). By the “burn rate”, the potential investors might want to know when ServerVault’s earnings exceeded expenditures and to produce positive cash flows.
However, ServerVault’s “burn rate” was not optimistic since they have negative cash flows in the first half year of 2000. ServerVault spent too much in marketing expense and bandwidth resulted in the increased cash spent. In addition, ServerVault did not find the proper way to increase the services revenues which were considered the major earning method of the managed hosting services. To sum up, the major challenge for ServerVault was to figure out the way to control the operation costs and produce the positive cash flows to the prospective investors and let them consider it is a good investment to ServerVault.
As a new entrant of the hosting industry, ServerVault had to confront with lots of competitors and the pressure of the environment. For example, they did not have the cost advantage as other giant hosting companies so that it was difficult to become the cost leader in the market. The fixed costs for the hosting companies are quite high and thus prevent the new entrants coming in. Also, ServerVault was not the product differentiator because there were only three kind of hosting services in the market, which were shares, co-location and managed, and each companies would have their focuses depend on their goals. Therefore, ServerVault’s accessible goal was to become market niche in the industry. Based on the descriptions of the research, ServerVault’s aim was to provide the “reliable, secure, and wicked fast” managed hosting services to the specific customers and especially the most prominent part of “secure”.
In order to highlight the secure part, the firm offered the seven layers to protect the hosting. The potential customers who meet up with the above requirements include the financial institutions, e-commerce companies, and other internet-reliant companies. In order to accomplish the strategy, ServerVault should contribute most of its capitals in enhancing the security protection of hosting facilities. Furthermore, more professional technicians should be hired to provide the technical supports for the customers due to the lots of value added services available for managed hosting services. In addition, for the most crucial parts of the business, to increase the profit is the biggest challenge.
Due to the large fixed costs for the hosting companies, to increase the profit margin could help the companies operate continuously in the market. For example, ServerVault could increase the monthly hosting fees for servers with respect to their target customers who primarily concerned about the security and less in money spent. With respect to the increasing professional technicians in dealing with more technical problems, the value-added services could be higher. In conclusion, ServerVault would become successful market niche if they have the strategy with specific plans as discussed above.
Burn rate. (n.d.). Retrieved from http://www.investopedia.com/terms/b/burnrate.asp