Here’s how to measure Web site ROI
“Jump on the e-commerce bandwagon or die” is a growing trend in the business community. As a result, an ever-growing number of businesses have no idea how to measure their on-line success.
Businesses continue to try to measure their e-commerce ventures with the traditional sales model of “Return On Investment” (ROI). A successful project is usually one with an ROI of greater than 15 per cent (figure varies from industry to industry).
The dollars-earned portion of the ROI model may include a cushion of estimated dollars to account for non-measurable savings. Unfortunately, most businesses don’t allocate a sufficient amount to this figure when evaluating the success or failure of their e-commerce project.
The resulting financial dissatisfaction prevents sufficient funds and resources from being allocated to future and on-going development, and the e-commerce effort begins to stagnate. This is especially noticeable in the front-end portion of e-commerce, better known as the corporate Web site.
As the site stagnates, on-line credibility wanes, the site’s earning potential declines and thereby triggers a downward spiral.
Ultimately, those who hold the purse strings want to know one thing: “With a low or negative ROI, can e-commerce/the Web actually be profitable?” The simple answer is that it depends on how the revenues and savings generated from a Web site are captured and valued.
Corporations will typically assign a zero value to the revenue generated by the non-commerce portion of a site. Simply put, “We don’t sell anything there, so how can we have revenue?” For the commerce portion, “We sold $X on the Web.” In both scenarios, corporations are excluding a basic revenue source: Customer education and service.
Recent studies show between 50 and 75 per cent of people using the Web do so to gather product information before making major purchases. Without on-line information, the product might not be purchased at the retail level, resulting in lower sales. A value needs to be assigned to the Web site ROI model to account for this uncaptured factor. Imagine how many automobiles the big manufactures sell on the Web. The safe guess is zero. Yet how many consumers are visiting Web sites for feature comparisons and making choices before visiting a local dealer.
The savings a site generates are enormous, yet the vast majority of these are taken for granted and ignored in the ROI equation.
Major sources of savings include reduced customer support costs, lower marketing costs and improved consumer relations. The key to exposing and capturing these savings is to calculate the cost to handle each of the above services manually and then calculate the cost of the Web version. The difference between the two is savings. Once the savings per transaction are calculated, multiply it by the number of people using the Web-based service.
While this methodology appears simple, capturing all costs associated with the traditional service can be difficult. For example, what is the cost of handling a customer inquiry? Using traditional methods, you might require a toll free number, an operator to handle the call, someone to supervise the operator and printed manuals to look up information. Or perhaps the query arrives by mail. In this case, a mailroom is needed to sort and process the letter, someone must review the problem, draft an answer and reply.
Calculating the actual cost of the same service on the Web is also difficult, but not impossible. The toughest task is to calculate the number of user sessions for a given Web service. (There are several tools available to help with this.) Then, the basic formula is: Web costs per service = total Web costs multiplied by the total user sessions per Web service/total user sessions.
Savings for a specific service delivered over the Web is now: Savings = (cost per traditional service minus cost per Web service) multiplied by total Web services delivered.
Now add the total soft savings and the revised revenue figures together, recalculate the ROI and be prepared for a pleasant surprise.
K’necht is president of K’nechtology Inc., a Toronto-based technology consulting company specializing in intranet and Internet technologies. He can be reached at [email protected].