Buyers Guide 2009 Overview: Unearthing the real ROI
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With its new system, Bidz.com has cut the time it takes to process and ship an order and reduced the number of full-time programmers needed to build an application from nine to about two. “We built the new system to keep pace with the business, which is growing exponentially,” says Kuperman. “With an older legacy system, we needed a two-month time frame to scope out a project, write the business requirements and code, and then go through the implementation and testing. Now our implementation time is much faster and we have plenty of spare capacity to process even more transactions.”
Where to start
Most online retailers begin their return on investment analysis with a financial projection. The analysis usually projects the cost of implementing and maintaining a new application over 24 months. But a good ROI analysis should also look at the cost and payback for at least three years, says Anand.
The analysis should also take into account other variables such as by how much a new piece of hardware or software will boost employee productivity, reduce the time it takes to process and fulfill orders, increase web site traffic and sales and improve inventory management. “Online retailers have the capacity to measure all types of data and when it’s compiled that information is a more precise indicator of what the ROI over the long run will be,” says Anand. “A thorough ROI analysis needs to measure what the impact of any new technology is on customer activation, retention and acquisition.”
VistaPrint, a web retailer that provides business cards, brochures and other customized print products to consumers and small businesses, uses its software engineers as internal consultants to build a multi-faceted ROI analysis. VistaPrint, which increased its spending on e-commerce technology by 74% in 2007 to $27.2 million from $15.6 million in 2006, analyzes a wide range of metrics and business procedures during an ROI evaluation.
The company, which spent almost 11% of its total 2007 revenue of $255.9 million on new hardware, software programming and web development, begins the ROI process by estimating a new initiative’s upfront and ongoing operating expenses. VistaPrint also analyzes the expected short- and long-term financial benefits, strategic advantages and risk factors.
“We measure ROI from a series of vantage points,” says VistaPrint president, North America, Wendy Cebula. “What we analyze the most is how we can leverage our existing technology to take advantage of a new business opportunity.”
One recent ROI analysis revealed that VistaPrint had an opportunity to leverage its proprietary web-based product design and editing tools to create other customized services for its base of more than 13 million customers. After completing a comprehensive costs and benefits analysis, VistaPrint in April launched a program to design and host web sites for smaller companies. With monthly packages that can range from $9.98 to $14.97, the VistaPrint program lets customers upload images to their customized web site, edit text and move around various site elements.
Plans are also underway to add new features, possibly including order processing. VistaPrint’s move into new value-added services is beginning to pay dividends. In the same quarter VistaPrint launched its design and hosting service, the company also signed up more than 1.2 million new customers and increased the average number of daily orders by 51% to about 33,000.
“We don’t look at investment and ROI in traditional ways,” Cebula says. “Our technology investments are paying dividends because our ROI process is pretty rigorous and we leverage the platform we have to generate new business when it makes sense.”
Forecasting a long range return on an expensive e-commerce technology project can be complicated, but Drugstore.com makes the process easier by working with standardized electronic work sheets and business procedures. The online retailer, which spent $18.2 million on technology and content initiatives in 2007, requires managers working on ROI analysis to create a timeline that details the upfront costs for a project, when the new initiative will break even and a revenue projection for three years.
Marketing and information technology managers also analyze web site traffic patterns, customer comments and transactional data to round out the planning process. When Drugstore.com was conducting due diligence and preparing an ROI analysis prior to the re-launch of Beauty.com, a companion site that carries health and beauty products from more 200 brands, marketing managers discovered that customers would pay a premium for higher end products if they had better tools to personalize their selection.
Pulling in new brands
Other manufacturers also would sell their products on Beauty.com if their brands were featured more prominently. As a result of its detailed analysis, Drugstore.com rebuilt Beauty.com with new features such as product zoom, streamlined checkout and shade matching tools that enable a product search by category, price, ingredient, or trend.
Since relaunching the site in September, sales on Beauty.com have risen by 40%, though Drugstore.com doesn’t break out specific figures. The revamped Beauty.com also features products from about 50 new major brand manufacturers such as Frédéric Fekkai, NARS and others. “We looked at more than the financials, we used the business case process to really study how we could make this redesign stand out,” says Drugstore.com vice president and chief finance officer Tracy Wright. “Our ROI goals were to attract more prestige brands which would attract new customers and provide a more personalized shopping experience.”
A thorough ROI evaluation can be time consuming. Drugstore.com spent three months conducting the ROI process for rebuilding Beauty.com and Shutterfly can take as long as six months to evaluate the payback of a major new web site feature or function. But in the long run, a more detailed ROI study also helps Shutterfly avoid costly project overruns and other pitfalls. “It’s in our DNA to do things the right way and that includes a thorough analysis of any new technology,” says Housenbold. “In our space we compete against companies that are owned by corporations that are much bigger than Shutterfly. Maybe they are able to make some mistakes and misjudgments, but we can’t afford to.”