When Shutterfly Inc. CEO Jeffrey Housenbold drills his senior managers on the details of a new e-commerce technology project, his most pressing question isn’t when the new initiative will pay for itself.
Instead, what Housenbold really wants to know is if the project will produce a big enough return on investment to help Shutterfly, an online social expression and publishing company, grow its base of more than 2.5 million customers. Equally important to Housenbold is how Shutterfly, which increased its spending on e-commerce hardware, software and services by about 50% to $28.6 million in 2007 from $19 million in 2006, can use new technology to gain market share against bigger competitors such as Snapfish, the online photo products and services retail site owned by Hewlett-Packard Co.
“We can’t afford to make big mistakes with our new technology initiatives so we take a pretty long view on the factors that impact the return on investment we expect,” says Housenbold. “We look at the total cost of ownership.”
When Shutterfly, which spent 15% of its 2007 web sales of $186.7 million on new e-commerce technology, made the decision several years ago to launch a free service that gave customers unlimited storage of their photos, Housenbold looked beyond the big upfront investment needed to build the program. To project a reasonable return, Housenbold and other Shutterfly managers looked at the specific costs of launching free storage, including the cost of new servers and how much additional storage capacity Shutterfly would need to house a vast number of images, which to date totals more than 2.5 billion.
In the end what made Housenbold green-light the project was an ROI analysis showing that Shutterfly had a significant opportunity to gain new customers and sell them more value-added services such as additional print orders and custom framing.
Today Shutterfly, No. 76 in the Internet Retailer Top 500 Guide, credits its free storage program with helping the company process about 7 million orders in 2007, an increase of 38% over 5.1 million orders in 2006. “Our operating history allows us to forecast the storage investment required to keep our customers happy and differentiate ourselves in the marketplace, which leads to increasing revenue and positive ROI,” Housenbold says. “We re-evaluate the ROI of our storage investments each year and our storage costs have been below 5% of revenue for a number of years now.”