Overselling - what the buyer (you) should know about it
Overselling basically means to sell beyond the means of delivery. However, that's a little bit oversimplified. Maybe an example will help you get a clearer picture.
A web hosting company might have a server with a 80 GB hard drive and 700 GB bandwidth. The company starts to sell plans with 1GB space and 10GB transfer quota. After selling 70 plans the bandwidth allocated for those 70 clients reaches the limit of 700GB. However, the web hosting company notices that each month only 275-300 GB of bandwidth are "consumed" by the clients hosted on that server.
It decides then to sell more accounts - over the 700 GB limit of bandwidth. After selling another 10 plans and hosting those websites on that same server, the allocated space totals 80 GB. However, the company notices that only about 40 GB of space were used by the customers over the last 6 months. The bandwidth consumption increased as expected at about 325-350 GB per month. So it seems there would be no problem to host another 10 or even 20 customers on that server.
Since the cost for the server is constant, every added plan could be easily seen as pure profit. Anyway you look at it, they were able to get more money from that same server. The only problem would be if all or most of their customers would all of a sudden consume all the bandwidth and the space that they were allocated. The server would not have the space (solution: add another hard drive) and the company would have to pay at a higher-than-usual rate for the bandwidth consumed over the 700 GB that were initially allocated by their provider.
If by now you start to see this overselling practice as unfair, I have to point you to another real life example: telecommunications companies. They have millions of customers, but if all (or just too many) of their customers would decide to use the phone at the same time, they would not be able to give them all the service they have paid for. I don't know about you, but where I live, the New Year's Eve is a time when the lines get very busy. So busy in fact that it becomes very hard if not impossible to get the tone. You're basically cut off.
Overselling however, keeps prices at low rates. If there would be no overselling, few of us would have phones and those who would have, would pay some hefty fees to use them.
Even the bandwidth providers oversell. My point so far is that overselling is not necessarily a good thing, but it's not necessarily bad either. The only problem is that is has to be done right, with careful planning. Tough regulations govern some of the industries where overselling is the de facto rule, but that's not the case with hosts. Some think this is a good thing, some don't.
For now though, let's deal with the facts. One of them is that you'll rarely see web hosting companies willingly admitting on their website that they oversell. The reason is that overselling in the web hosting business has been abused in the past and is still abused of by many companies.
There are people (even in the web hosting business) who see overselling as bad as "unlimited bandwidth" or even worse. These are often the ones who do not oversell bandwidth and they feel very strongly that they're right about this matter. Unfortunately they often forget that they are overselling too.
Yes, they are overselling because their upstream oversells. If the upstream oversells, their own bandwidth quota is oversold, so if they were given the right to use 700 GB of bandwidth, the upstream in fact estimated that they would use let's say 600 GB. So, if that hosting company promises a total of 700GB, the service is in fact oversold.
Now the bad part of overselling is that it's being abused by hosts that don't know what they're doing. Often the host assumes that it's bandwidth and space that it sells. That kind of host thinks that as long as it provides bandwidth and space (and from time to time support ) everything will be OK. But that's not all it sells! If that's the plan, the host, and sometimes the customer, risk to lose everything because a server is more than space and bandwidth.
When the host plans how many websites to host on a server, the first limit is the processing power of the processor (combined with memory usage, maximum transfer speed etc.). What I'm saying is that although on paper a server might be able to host 300 websites and push 1000 GB, in reality that's not always possible. If the websites are all busy forums or otherwise use databases and scripts (SSI, PHP, PERL, ASP etc.) the computing power of the machine might be exceeded long before reaching the bandwidth limit. In fact, this might happen even if the company was not overselling bandwidth.
This is why very often the host will close accounts before they reach their bandwidth limit. Not because of bandwidth consumption, but because of overuse of other resources.
Overselling should be done only when it's possible. It is often a server by server thing, depending on the processor (computing power) and the actual websites that are hosted.
Because the vast majority of web hosting companies do not state that they are overselling (nor how much) you have to figure this out on your own. The few hosts that mention the word overselling are usually the ones that are not overselling. They are very proud of it and they've realized that they could use this policy to their advantage, in their marketing efforts. Remember though that they are in fact full-selling resources that are oversold by their upstream, and that overselling server resources (computing capacity) isn't an exact science in a shared hosting environment. It is arguable that all hosts are overselling server resources to a certain degree.
My opinion is that overselling is OK if it's being done carefully and based on experience, real, meaningful statistical data. So I would not rule out companies that are overselling as long as they do it right. Searching for "non-overselling" web hosting companies would also make it very hard to find a host.
Because most of the costs are mirrored in the price/data transfer ratio, by calculating it, we can roughly estimate how much overselling is in place. Luckily, bandwidth can only be so cheap, and that helps the approximations.
From what I've read, I would say that over-overselling seems to be starting in the $0.50-$0.33 per GB of data transfer range. However, there's no set rule. Some hosts have managed to be successful and provide good service with lower price/bandwidth ratios, and have done so for years.
Another telltale sign of high overselling levels in shared hosting is the bandwidth/space ratio. It is widely known in the industry that space should not be oversold (as customers tend to actually use it), but I'm sure it is oversold as well to some degrees. However, it is known that overselling space is a much riskier business. When you seriously oversell bandwidth, but you don't do the same with the space, the bandwidth/space ratio grows. That's why you'll often see ratios as high as 60/1, maybe even higher. My estimate is that very serious bandwidth overselling starts somewhere in the 20/1-30/1 range. That's just my personal opinion though, so take it as that and nothing more.
In addition to the overall reputation of a host and its history, it can be good idea to go back and ask some customers for some inside information such as average server load, highest server load etc.
Whatever you do, try to stay under your plan's bandwidth limit. It's always good to play it safe. And if you have a script based website, ask the host about resources limitations and account suspensions/terminations for resources abuse. That said, I hope this article will help you in making a good hosting decision. Good luck!