I guess there is a good reason, but I don\'t understand why sometimes we put for example 5 instances having the same webapplications on the same physical server.
Has it
Suppose you have a average configuration host and installed single instance of the web/app server. Now your application becomes more popular and number of hits increases 2 fold. What you do now ?
Add one more physical server of same configuration and instal the application and load balance these two hosts.
This is not end of life for your application. Your application will keep on becoming more popular and hence the need to scale it up. What's going to be your strategy ?
Which option will you go far ?
You will do cost analysis, which will involve factors like- actual hardware cost, Cost of managing these servers (power cost, space occupied in data center) etc.
Apparently, it comes that the decision is not very easy. And in most cases it's more cost effective to have a more powerful machine.