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ROI Calculations

Calculating ROI for Web Projects

Increasingly, companies are looking for measurable results from their web project investments. The value is present in these projects, but quantifying that value to the holders of the purse strings in your organization is not easy.

Return on Investment (ROI) is emerging as the metric of choice for valuing Internet project "Bang for the buck" because it is relatively easy to understand and calculate. This article focuses on identifying the sources of investment and return for your project. You can also use this information as a basis for calculating other financial metrics such as Net Present Value (NPV) or Internal Rate of Return (IRR) if your organization uses such a metric in its budgeting process.

What is ROI?

Return on Investment is the ratio of the profit (or return) from your web site, divided by the cost of the site, multiplied by 100 to express as a percentage. ROI is calculated over a defined period. For example, if the one year ROI for your web site is 100%, then you have completely recovered your investment in the site in the first year. The actual calculation for ROI is trivial, but figuring out your return and your investment may not be so easy.

Sources of Return

Return comes from two places increased revenue and decreased costs.

For sites that are not directly selling goods and services, revenue benefits are indirect. Are your customers using your site to get information about your product before buying? Does the site build your brand and drive sales in the process? These indirect returns are difficult to measure accurately, but you can get a good idea of the magnitude of the payoffs by surveying your customers and web site visitors.

E-commerce sites generate revenues directly by selling your product on-line. The addition of the web as a sales channel for your business can not only increase revenues, but can also reduce the cost of processing those transactions significantly.

Cost savings are often easier to see and quantify. Common sources of savings are:

Reduced customer calls for product information, technical support, and order or shipping status inquiries
Reduced costs from manufacturing and distributing printed materials internally and to customers
Savings from process improvements, such as automated credit card processing, UPS shipping integration, or work flow improvements.
Labor cost savings because online sales typically occur with little or no involvement of sales reps.
Savings due to lower incidence of errors during order entry

The bottom line is that you need to examine how your business and your customers are using your site to find the ways it is generating revenues for your company.

Sources of Investment

The cost of creating and implementing your site is the first source of investment to consider when performing an ROI calculation. In addition to the cost of the web development, remember to include in your investment calculation the cost of employees' time spent in design meetings and creating content for your site.

It is important, also, not to forget the ongoing costs of running the site. Ongoing costs come from a number of sources hosting costs, support costs, and the cost of updating and maintaining the content available on the site. However, these costs should be considered expenses of running the site and should be deducted from the return from the site rather than being included in the investment figure. Be realistic about the costs associated with your web site. Most people will underestimate these costs to make their project look more attractive than it actually is.

Two Other Considerations

Many companies go through all of the considerations that I've discussed to this point and still wind up with an ROI number that is horribly flawed. To generate a reasonably accurate number, you will need to factor two more driving considerations into your calculations.

The first consideration is cannibalization of business from your existing sales channels. A dollar of revenue generated through your web site may not be new revenue. If the revenue comes from a customer that would have ordered by another means instead, then you are only gaining the cost savings of handling the order via the web, not the full profit on the sale. Capturing this information often requires complex data mining in order to track the migration of your customer base between your offline and online sales channels.

The second consideration is that not all visits to your site for tracking order status or technical support inquiries will actually save a phone call. In a 1997 study by Dell Computer that looked at the service efficiency of their web site, fully 25% of technical service visits to their web site were attributed to ease of accessing this information through the web and would not have generated a technical service call. A further 73% of visitors eventually did call the company after researching their problem through the web. In the end, only 2% of technical service visits actually saved Dell from receiving a phone call.

While the percentages for your site will almost certainly be different from Dell's, this example serves to highlight the types of questions that you need to be asking yourself, and your customers, to get an accurate picture of the payback on your web investment.

Final Comments

Getting an accurate ROI for your web projects can be a very trying process. Therefore, it is important to try to wean as much value from the calculation process as possible. This is an excellent opportunity to examine how your customers use your site and to discover what your site is doing well, as well as what areas need improvement. This process is also an opportunity to identify high value-add enhancements for your site. If you find that your site is not adding the value that you had expected from some revised process or feature of the site, then consider what changes could be made to get better value from the site. In this way, ROI assessment can be a productive part of the iterative improvement process of your web site.

Most importantly, you cannot properly assess the financial benefits of your site in an informational vacuum. Only by examining how the site is used, tracking the migration of offline customers to online sales channels, and regularly getting feedback from your web site visitors can you get a complete picture of the payback from your investment.