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Web Site ROI

by Faulkner Staff

Copyright 2020, Faulkner Information
Services. All Rights Reserved.

Docid: 00017814

Publication Date: 2010

Report Type: TUTORIAL

Preview

Return on investment (ROI) is
calculated by dividing total benefits by total costs. However,
pinpointing benefits and costs is not always a straightforward proposition.
Measuring ROI for Web site projects is difficult because many of the
costs and benefits are intangible and may affect a business’
brick-and-mortar performance at least as much as they affect e-commerce
operations. This Tutorial examines the
various factors influencing Web site ROI, and provides methods
that can be used to evaluate the investment.

Report Contents:

• Executive Summary
• Description
• Current View
• Outlook
• Recommendations
• References
• Web Links

Executive Summary

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Return on investment (ROI) is a common metric for
determining the effectiveness of business projects. When it comes to Web sites and e-commerce,
however, the calculation – and even the determination of elements to be included in the
calculation – is not necessarily straightforward. 

In order to get a handle on Web site ROI, many companies are now using
a balanced scorecard approach, which uses continuous feedback
from multiple parties within and outside of an organization to assess
a change’s impact on four key areas: financial performance; customer knowledge;
internal business processes; and learning and growth.

As Web technologies, such as social and rich media and blogging, see more business
use, organizations will struggle to find ways to measure their impact. To determine ROI for any Web site project, take the following steps:

• Seek customer involvement
• Calculate ROI continuously
• Use rigorous project management techniques
• Identify a limited and carefully-chosen set of metrics
• Consider Web analysis software
• Divide large projects into manageable sub-projects

Description

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report]

Some consider ROI to be a comparison between the amount that is
invested, the return on that investment, and how much is gained on the
investment. Mathematically speaking, ROI (sometimes
called "Simple ROI") is represented by the following formula:

• ROI = Benefit / Cost

Another method of calculation is to deduct the cost of an investment
from the potential increase in sales, then to divide the net gain by the
amount of the investment. If the result is greater than one (the total benefits exceed the total
costs), the investment yields a positive return. If the result is less
than one (the total costs exceed the total benefits), the investment
yields a negative return. 

While the both formulas are simple, the process
of identifying and measuring e-costs and e-benefits can hardly be
considered so, as e- commerce tends to change the way a company does business. Calculating, or, more correctly, estimating the return on investment
for Web projects involves the consideration of factors both objective
and subjective. While a normal tendency to rely, if not actually favor,
those measures that yield “hard numbers" often prevails, many readily-obtainable
metrics such as the number of Web site visits or banner click-throughs
are not normally relevant to e-commerce success. Conversely, the impact
of a particular Web project on supply chain efficiency, while difficult
to measure, is enormously important in assessing ROI. A simple ROI formula
also cannot measure some important benefits that a Web site can provide,
such as reinforcing the corporate brand, driving off-line sales, and
improving demand forecasting. Some companies, including Target.com and
Sears, view their Web sites as a marketing and operating expense rather
than a sales channel.

As one might surmise, the selection of ROI metrics differs from company
to company, even project to project. Similarly, the rigor applied to
ROI analysis differs according to the level of investment, plus the
style of the analyst crunching the numbers. The only constant, particularly
for Web projects, is the need to involve the whole organization in the
identification – and quantification – of relevant costs and benefits.
Remember, Web projects are, by their nature, company projects and not IT
projects.

Cross-Channel ROI

When viewed
as a marketing expense, Web site ROI is easier to track. Customers can
be given discount codes, clicks can be tracked, and gateway pages can
be utilized. However, in calculating the return on
investment for a commercial Web project, it is important to observe that
improvements in one sales channel – in this case, the Internet – can be
reflected in other channels such as retail or catalog sales.

For example, the Home Shopping Network has discovered that customers
who buy both online and via television spend 26 percent more than those
who shop through a single channel. The office supplier Staples has determined
that a three-channel shopper (retail, catalog, and Web) spends 4.5 times
as much as a retail-only buyer.

While a shopper’s initial introduction to a “click-and-mortar” company
may come via the Internet, that shopper may not and probably will not
limit future purchases to the online environment. In other words, the
development of a Web sales vehicle may promote collateral activity in
retail and other channels. Correspondingly, a new retail initiative
may prompt a rise in Web sales.

The bottom line is that in evaluating an e-commerce project, it is
critical to assess the effects on all sales channels, not just the Internet.
How to capture that data is the challenge. While a new customer may
provide ‘how did you hear about us’ data, a repeat customer who saw
an item on a Web site but purchased it at a brick-and-mortar location,
for instance, is not likely to identify the Web site as the source that
drove the sale. Running promotions or marketing programs on the Web
site
several times over a specific course of time and then measuring sales
activity to see if spikes coincide with the Web site promotions may be
an effective method for some organizations.

Web Metrics

In evaluating a Web project, traditional measures are often inadequate.
Along with the tangible benefits, such as the opening of new markets,
there are a number of intangibles, such as improved customer service
or enhanced supply chain efficiency. E-projects may also include “hidden”
costs pertaining to planning, procurement, project management, and operations.

One metric from which many companies can benefit is conversion
rate. "Conversion" refers to the number of Web site visitors
that make a purchase and are thus "converted" into customers.
To increase conversion, the first step is to create goals. A goal may
be a sale, a request for a sales call, a request for information, or
some other measurable contact. The next step is to get the first click.
That is achieved through information architecture that offers different
entry points for different markets; a clothing retailer’s Web site might
provide navigation based, for instance, on women’s, men’s, and children’s
clothing, and it may also provide navigation based on type of apparel
(tops, jeans, shoes, etc.). Next, provide a call to action on each page
in the form of Buy Now, Add to Wish List, Request a Call, or other activities
that draw a browser into the buying process. Then, be sure that the
conversion path is simple by only asking for essential information and
making the purchasing process as simple as possible overall. Try to
perform sub-metrics on this step to see if visitors are clicking away
at a certain point, and if they are, then refine the conversion path
and continue to measure performance. Measurements should be performed
continuously.

Return on Competitor’s Investment

While “managing by the numbers” has an obvious appeal, sometimes return
on investment can serve as a “misleading” indicator of Web success.
A common complaint: “This project is going to cost $3 million … more
than the budget will allow."

When viewed from a narrow company perspective, that judgment might
seem correct. But consider what might happen if a competitor pursued
the same or similar project. What if the firm wound up losing three
percent of its market share, or what if major business partners deserted
it? What if its reputation as a progressive, technologically-advanced
company were tarnished? Sometimes the numbers, as the cliché dictates,
"do not tell the whole story." No company has the luxury of
operating in isolation. One critical criterion is evaluating a project,
especially a Web project, is what is the company’s return on a
competitor’s
investment?

Cost Avoidance

Positive return on investment is not always
measured in increased revenues. Sometimes, it results from decreased costs. If a Web site reduces the number of people phoning a call center, that will result in
significant savings. IBM has claimed to save $2 billion a year in call center
costs thanks to its online support Web site. For a smaller business, even a well
done Frequently Asked Questions (FAQ) page can offer the assistance customers
would otherwise phone in for. It is important to realize, however, that creating
a good FAQ requires significant effort. If it is simply thrown together, the
customer’s issue will likely not be resolved, and the page will become a
liability.

Understanding the cost of a phone call, an email, and a help page request,
and determining the number of phone calls that are deferred or eliminated by the
help pages or by online real-time chat or chatbots will provide useful inputs into ROI calculations.

There are other applications that can also result in lower costs elsewhere.
For example, if annual reports or product catalogs are provided in PDF format
for download (or in an interactive form online) instead of being printed and
mailed, there can be significant savings.

Security and Privacy

Virtually every e-project is exposed to a variety of risks, including
denial-of-service attacks, program-compromising computer viruses,
and the theft and misuse of corporate and personal information (including
customer data). While most IT departments have installed
safeguards such as anti-virus software, the financial
incentive to criminal elements to steal customer data is large
enough that they continually develop new methods to bypass
those safeguards.

As a consequence, any truly comprehensive ROI calculation includes
consideration of Web security, plus the probable business impact resulting
from possible security breaches affecting customers or business partners.
This concern has been heightened by the introduction of e-marketplaces,
which link hundreds, sometimes thousands, of manufacturers, suppliers,
distributors, retailers, and customers into gigantic electronic supply
chains.

In this environment, the cost of developing a Web project includes
not only enterprise security, but inter-enterprise security.

Business Continuity

Along with greater-than-normal security, Web applications – particularly
customer-facing Web applications – require a high level of fault tolerance,
plus a rapid recovery capability in the event of a disaster or other
large-scale operational disruption. One of the costs of doing Web business
is providing for business continuity – a factor that must be represented
in any ROI equation. Any failure of service can damage customer confidence
in a business.

Current
View

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of this report]

Many firms embrace a Balanced Scorecard approach to calculating
e-ROI. Developed nearly 30 years ago by Robert Kaplan and David
Norton, the Balanced Scorecard model¹ is based on Newton’s Third Law of Motion:
for every action, there is an equal and opposite reaction. The model
helps companies determine what impact a potential change will have on
the rest of the organization, viewing the change from four perspectives:

• Financial performance
• Customer knowledge
• Internal business processes
• Learning and growth

As Kaplan and Norton explain:

[T]he emergence of the Information Era in the last decades of the
twentieth century made obsolete many of the fundamental assumptions of
Industrial Age competition. The Balanced Scorecard retains traditional
financial measures. But financial measures tell the story of past events, an
adequate story for Industrial Age companies for which investments in
long-term capabilities and customer relationships were not critical for
success. These financial measures are inadequate, however, for guiding and
evaluating the journey that Information Age companies must make to create
future value through investment in customers, suppliers, employees,
processes, technology, and innovation.

The Balanced Scorecard technique provides for continuous, real-time
feedback from all parts of the organization, perfect for Web projects
where changes often occur at Internet speed. This iterative approach not only permits greater precision in ROI calculations
but, more importantly, permits developers to refine project plans to
accommodate changing business and organizational dynamics. The Balanced
Scorecard thus becomes an adjunct to an ongoing planning process, adding
value even as it is used to compute value. As for specific metrics, the Balanced Scorecard methodology suggests
a “one from column A, one from column B” approach, with measures reflecting
financial performance, customer knowledge or awareness, business process
improvement, and organizational learning and growth.

Financial Performance: Benefits and Costs. Various factors contribute to the development of ROI, including the following:

• Percentage of Visitors
  who are Potential Prospects (Reach)

• Number of New Prospects
  (Acquisition)

• Number of New Prospects
  who become New Customers (Conversion)

• Number of New Prospects
  who initiate – and then suspend – a purchase process prior to
  completion (Abandonment)

• Number of New Customers
  who become Return Customers (Retention)

• Number of New Customers
  who become Former Customers (Attrition)

• Amount of New Customer
  Revenue

• Projected "Lifetime
  Value" of New Customers (as predicted from demographic data)

• Development Costs
  (design, development, implementation, and testing)

• Maintenance Costs
  (ongoing site maintenance and customer support)

• Incremental
  Infrastructure Costs (servers, routers, telecommunications
  facilities, etc.)

• Incremental Information
  Security and Business Continuity Costs

• Sales and Marketing Costs

• Transaction Volume

• Transaction Time

• Transaction Costs
  (transactions per employee, etc.)

• Revenue Per Transaction

• Inventory Costs

• Product or Service
  Delivery Time (Turnaround)

• Percentage of Customers
  Conducting Business Electronically

• Percentage of Customers
  Conducting Electronic Business Exclusively

• Percentage of Existing
  Customers Who Become E-Only Customers

There are also some value-added benefits resulting from, or coincident
with, an e-project initiative.

Customer Knowledge. Customer information that contributes to
the generation of e-ROI includes:

• Acquisition of New
  Customer (or New Prospect) Personal Information (e-mail addresses)

• Acquisition of New
  Customer (or New Prospect) Opinion Data (from online surveys and
  other vehicles)

  • Overall product or
    service quality

  • Quality of user
    interface

  • Price/performance
    rating

  • Competitive analysis
    (with other vendor offerings)

  • Customer service
    response

  • Recommendations for
    functional enhancement

• Business Intelligence (as
  revealed through the systematic capture and analysis of customer and
  market data)

• New Market Awareness
  (particularly international markets)

The growing concern over consumer protection may limit the amount
and quality of customer knowledge collected as companies
comply with a broader range
of privacy regulations. For example, a study conducted by the Progress &
Freedom Foundation found that the top 100 Web sites gather approximately
half as much data about visitors through third-party advertisers than
they did just a few years ago.

The General Data Protection Regulation (GDPR), which affects every organization that has customers or employees in the
European Union, further limits data retention and increases safeguards, and
imposes significant penalties on non-compliant organizations. Since the Web is,
by definition, world-wide, any organization with an online presence needs to
understand these regulations.

Internal Business Processes. Business processes contributing
to the development and calculation of ROI include:

• Reengineered Business
  Processes

• Automated Business
  Processes

• Streamlined Supply
  Chains

• Just-In-Time (JIT)
  Manufacturing and Distribution

• Improved Inventory
  Control

• More Versatile and
  Robust IT Infrastructure

• Enhanced Customer
  Support

• Reduced Personnel
  Requirements

Learning and Growth. While many items may be difficult to quantify
(in pure financial terms), they must be considered in any return on
investment calculation, either before-the-fact (as a meaningful predictor
of project value) or after-the-fact (as a comprehensive indicator of
project worth). These include:

• Acquisition of New or
  Improved Business Skills (programming, Web site design, management)

• Cultivation of a
  Business Environment that Encourages Expansion and Fosters
  Innovation

As an alternative or, in some cases, an extension to the Balanced Scorecard
approach, a number of firms are employing a budgeting technique known
as real options to compute e-ROI. Real options not only considers
immediate benefits, like cost savings, but takes into account future
benefits, like the ability to sell more products to a wider audience
or, as with some prominent dot-com start-ups, the ability to expand
by virtue of a high market capitalization.

Outlook

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The trend in Web design is toward greater
use of rich media, blogs, and other technologies
including social media, as
well as embracing a "mobile first" mentality in design. Sites
that do not use these features risk being at a disadvantage
compared to their competitors, but it is important to incorporate these technologies
carefully and with an eye toward ROI. Developing approaches for creating
hard ROI numbers regarding the impact of such new features will be
difficult, but it will be important into the future.

It is important to remember that improving or creating a Web site is
not a one-time cost for improving sales; it is an important investment in
your business. It is important to make a good first impression, and you
only get one chance to do that. Since the goal is to improve the site’s
ROI, focus on adding features and information that truly enhance it,
rather than just adding glitz, and to expanding the platforms to include
mobile devices.

The key to developing ROI techniques for
new Web technologies will be to tie those techniques to a Web site’s
goals. For instance, if a retail site adds a blogging feature, it would
need to tune its statistical application to measure trends such as how
often people go directly from a blog to a purchase and whether visitors
who use the blog purchase more merchandise than do non-bloggers.

The difficult aspect of measuring the impact
of new technologies is that they often do not increase business; they
simply keep a company on pace with its competitors. Statistics such
as how long visitors stay on a particular site provide a crude estimate
of people’s opinion of the site’s content and ease of navigation. Ultimately,
however, organizations will sometimes need to add new features
simply to stay in tune with the competition, even when there is not
a clearly identifiable ROI attached to making these enhancements.
Conversely, they sometimes need to resist the temptation to
add trendy features just for the sake of appearing up-to-date;
these new features should enhance the customer experience, not
just provide a flashy interface.

Retailers are seeking ways to analyze customer behavior across sales
channels. Does the Web site drive business to the bricks-and-mortar
stores? Do online customers also buy through the print catalog? Perhaps
a customer shopped online for an item, but then decided to drive to
the local store to actually purchase it. Perhaps a customer tested an
item in the store but then decided later to purchase online during a
sale. Currently, no software is available to
make such
difficult measurements. Data mining customer buying patterns can provide
estimates, but not exact data. Increasingly,
companies are employing analytics to extract insights from this data.

Social Networking Impact

Social networking sites,
such as Facebook, LinkedIn, and Twitter, are having a
profound effect on enterprise Web sites. According to analyst Simon
Mainwaring, "In the not too distant
future, static [enterprise] Web sites will be replaced by their social
equivalents."³ In the enterprise environment, Web site ROI
will be measured by the level of interactivity between an enterprise site
and the social networking sites through which the enterprise hopes to
create new – and cultivate existing – customers.

Recommendations

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According to Enrique De
Argaez, Webmaster of a site called Internet World Stats, content and
navigation optimization in site design are key to Web site ROI. He
outlines the steps in designing a site that inspires visitors to take
action below:

• Set Goals
• Get First Click
• Call One’s Audience to Action
• Simplify Conversion Steps
• 
  Seek Customer Involvement
• 
  Calculate Continuous-Basis ROI
• 
  Use Established
  Project Management Techniques 
• 
  Select the Metrics That Matter
• 
  Seek Assistance Analyzing Web
  Data
• 
  Create Mini-Project for Maximum
  ROI

Table 1 looks at the concept of
metrics selection.

 

References

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• ¹Kaplan, Robert and David Norton. "The Balanced
  Scorecard – Measures that Drive Performance."
  Harvard
  Business Review
  . January-February 1992.
• ²Mainwaring, Simon. "The Death of Corporate Web Sites: Top 10 Ways They
  Will Change."
  SimonMainwaring.com
  . January 11, 2010.
• ³De Argaez, Enrique. "Increase
  the ROI of Your Web Site."
  Internet World Stats.
  Accessed
  October 2020.

Web Links

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• Brilliance Business Solutions Calculator: http://yourwebsiteroi.com/
• Demandmetric ROI Calculator:
  https://www.demandmetric.com/content/website-roi-calculator
• Evolt: https://www.evolt.org/
• Google: Maximizing Web Site Return on Investment:
  
  https://services.google.com/fh/files/misc/gsa-google-maximizingwebsiteroi.pdf
• How to Measure ROI:
  https://myinternetmarketingpartner.com/how-to-measure-roi-for-your-website/
• Internet World Stats: https://www.internetworldstats.com/
• Standish Group: https://www.standishgroup.com/
• Web Site Optimization ROI Calculator:
  
  https://www.clickz.com/static/Website-optimization-roi-calculator
• Web Site ROI Calculator:
  
  https://www.smashingmagazine.com/2011/06/free-website-roi-calculator-google-spreadsheet/
• WSI: https://www.wsimarketing.com/