August 30, 2001, 12:00 AM

How tighter cross-channel integration will redefine the measure of web site ROI

Measuring the success of a web site is no longer a matter of mere sales; today it’s a matter of what else a site does for a retail operation.

As the e-retail marketplace evolves, so does the thinking on which metrics define a successful web site. Traffic and page views provide data on upward or downward trends, and they’re still critical to ad-driven sites. But as the retail environment became tougher and tougher, retailers concluded that traffic doesn’t necessarily mean sales. And so sales and, even more so, profits-traditional measures of success in the offline world-became the goal for retail sites.

But many analysts and retailers now are starting to argue that maybe web-site sales and profits aren’t the only keys to success -at least for multi-channel merchants whose operations extend beyond the web. A growing number of industry analysts say it’s time for multi-channel retailers to take a broader view of web site metrics and incorporate, on the one hand, hard measures, such as the web’s ability to save costs, and on the other, less tangible measures, such as branding opportunities, in determining web site ROI.

Some retailers, too, believe it’s time to step back and take the wide view, as shown in recent research by PricewaterhouseCoopers, Columbus, Ohio. Though three-quarters of retailers responding to a survey said their web sites weren’t profitable, 87% said profitability is still a strategic necessity or that they expected to achieve an “acceptable ROI” on their site in the future.

But what’s an acceptable ROI, and what’s the best way to measure it? Retailers’ attempts to answer these questions are bending the traditional definition of return on investment. “If you look at the web site purely in terms of how much money it’s making through sales, it’s going to be a very difficult cost to try to rationalize, because it may never become profitable,” says Heather Dougherty, an analyst with researchers Jupiter Media Metrix, New York. “It may be much more effective at driving sales through the offline channel.” In fact, Jupiter predicts the web will influence some $498 billion in offline sales within five years, while online transactions will reach only about $130 billion.

Cutting costs

In addition to marketing opportunities, the web can trim overhead costs. Catalogers already have figured out there’s a real economic incentive to migrate customers online. Customers’ use of the web cuts paper, printing and mailing costs and allows merchants to sell the same merchandise as in their catalogs at a higher margin. Lands’ End Inc., for instance, reported at the recent eTail 2001 Conference in New York that it runs its e-commerce operation with a staff of 18-that for an operation that accounts for nearly 20% of Lands’ End’s sales. Lands’ End employs, depending on the season, as many as 10,000.

The web also can automate some customer support functions online to cut labor costs. And it can improve demand forecasting to reduce supply chain management costs. For instance, because it doesn’t need to overstock merchandise simply to make shelves look appealingly full as a bricks-and-mortar store does, the virtual warehouse of a web merchant can carry far less inventory than a store and turn it over faster, points out Ken Cassar, an analyst with Jupiter. Barnes & Noble.com, for example, turns its inventory 9.2 times per year while Barnes & Noble’s brick and mortar stores do so about only 2.7 times.

More multi-channel sellers will begin to view their web sites less as strictly a profit center and more as an operating and marketing expense. Some already do. Target.com, for example, views every web site visit as another chance for its customers to int?ract with its brand, whether or not a sale results, says Mary Brett Whitfield, director of the E-Retail Intelligence System at PricewaterhouseCoopers. And the same is true for Sears, Roebuck and Co. (see story, page 37).ÒA growing number of retailers realize that there are other things you can do with a web site in terms of communication, marketing and advertising,” she says. “But retail is a very heavily managed numbers business. The straight P&L of the e-commerce operation is going to be difficult to capture on a balance sheet.”

As e-retail progresses from its earlier days, adds Geoff Wissman, a principal consultant with Pricewaterhouse-Coopers, the importance of the top line to site owners is being replaced by the importance of gross margins and contribution to margins. “But trying to appropriately assign cost factors to different portions of your organization can get messy very quickly, especially if you’re sharing assets through your supply chain,” Wissman says. “There just isn’t any obvious metric that captures a web site’s impact on the profitability of the whole organization.”

Varying measures

The answer to retailers’ dilemma in determining a web site’s real value is most likely not one metric, but several; such as cost savings the web operation brings to other channels, for example, or improving productivity in cross-channel customer support, in addition to bringing in sales. And the metrics will vary among retailers depending on their goals, their situation, and the experience they’ve had in e-commerce.

Some of the new metrics will be easier to capture than others. “If you look at the web site as a marketing expense, there are aspects of online marketing that are easier to measure than other forms of marketing or advertising, because you can trace people’s behavior with things like customer loyalty programs or coded promotions,” says Whitfield. “There will be more ways emerging to measure the marketing value that a web site provides that are much more quantitative than in other kinds of marketing or advertising.”

Seeking alignment

Quantifying web site ROI from a broader perspective will require two things: data that can be compared across channels and among departments, as well as analytic technology that connects data points into meaningful information. As to the first, “A lot of retailers already have a ton of data on their web sites through traffic patterns and log files,” Dougherty says. “Catalogers are probably the most advanced among the retailers because they understand direct marketing and have a lot of metrics in place already. But even so, it’s still going to be difficult to start mapping up not only the catalog to the stores but the web site to the stores.”

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