When a web host sells more space, bandwidth or CPU cycles than they have at their disposal.
Overselling is a term used in the web hosting industry. Overselling basically means to sell beyond the means of delivery. It keeps hosting prices at low rates. And it is also widely abused as many companies go too far with it to keep prices lower than the competition.
An example: the $45.95 Reseller Plan 1 comes with 10,000 MB of space and a whopping 150 Gig of bandwidth. As a 123 reseller you are now able to create domain hosting accounts with very high or even UNLIMITED space and bandwidth allocations — e.g., you could create 100 hosting plans with 500 MB space and 10 GB bandwidth each. Experience shows that 95% of customers do not even use 25 MB, yet many customers want a lot of space and bandwidth. Just look at your own existing plans. Therefore, rather than filling up only 10% of the space and bandwidth you bought you will now be able to utilize your account to maybe 90% and make a much larger profit. Even if you don't resell hosting accounts, you still have the advantage of being able to set all your domain accounts to "unlimited" and thus do not need to worry about joggling around with the allocated space/bandwidth
Why do hosts oversell?
I think for making a lot of money and meeting the needs of their users."
Overselling keeps prices at low rates.
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 that do not oversell at all and they feel very strongly that they're right about this matter. Unfortunately, they forget that they are overselling too
What is an advantage of overselling?
The advantage of overselling for the host is that they make more money off each server than they otherwise normally would be able to. The advantage for the client is that this extra revenue is usually transferred on (at least in theory) by cheaper hosting packages with more features.