Thanks for the specifics. It's been really hard for me to sort out whether to go with a VPS, or something like heroku. Heroku is appealing but seems to get expensive quickly. VPS has a bit higher learning curve for me, but might be worthwhile. Am I correct in understanding your hosting cost to be about $40/ month until you gain a significant number of users?
Good luck, and I hope you end up with a scaling problem to solve.
I was really close to going with Heroku, I decided not to as I wanted full customisation options and I've been hosting rails apps for a long time and know what I'm doing.
If you're inexperienced in server administration, go with Heroku I'd say. It's a great service and works really well and if you do get a load of traffic, it's really easy to scale up. There's a guide here to using unicorn to get 4X the performance out of it:
You're correct in saying $40 per month for hosting until I gain more users. If someone would sign up to my "pro" plan I'd be breaking even :)
However I don't think that even if it does take off it will be as profitable as it sounds. It seems customer acquisition is going to be my biggest problem and so I'll probably end up spending lots on adwords and other promotional avenues.
Good luck, and I hope you end up with a scaling problem to solve.