What you build should be scalable, whether you are on one server or a thousand. I'm a huge VM fan, mainly because of the complexity of some systems we use. If you solve your app for a few VMs somewhere, it becomes trivial (mostly) to scale. Then you can do backups easily, share snapshots of complex systems, allocate hardware resources virtually, etc.

Not sure about Xen, though. I've been using VMWare for a bit and I'm a happy customer.I would be interested in hearing how the various VM tools compare.