Wouldn't that use even more CPU ? Unless you need to "sandbox" each user for security measures, I'm not sure why you would want to do that. Anyways, you would probably get more educated answers on http://serverfault.com/.

I can only think of two reasons that this would be desireable: Security Reasons or Resource Throttling.

The security reasons are clear (if one client system is compromised, it doens't neccessarily open up access to the data of other clients) however, that risk can also be mitigated through different security measures (e.g. database segregation, data encryption, etc).

The resource throttling reason is an interesting one I just considered, though. If your web application is resource intensive, then it may make sense to offer resources as part of your pricing teir (e.g. tier one gets 500MB of dedicated RAM and 1% CPU time, but tier 2 get's 1GB of RAM and 5% CPU time). I don't think the above limitations make sense for most situations, but I don't know what you're building so I tossed it out.

Hands-down, though, you're going to be talking about a lot of development overhead to automate the building and configuration of your VM environments, and it complicates the development of your administrations tools by a significant factor.

And yes - I second olalonde's thoughts - check out http://serverfault.com/

Another reason to do it besides resources and security is stability.

If one server crashes or runs out of memory, the rest survives. So the web server can go down without losing email, or the email server might be blasted with spam but your web site remains.

Another reason is backup.