By Mark Brohan
When Shutterfly Inc. CEO Jeffrey Housenbold drills his senior managers over the details of a new e-commerce technology project, his most pressing question isn’t when the new initiative will pay for itself. 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 2.4 million customers.
Equally important to Housenbold is how Shutterfly, which increased its spending on e-commerce hardware, software and services by 49.7% to $28.6 million in 2007 from $19.1 million in 2006, can use new technology to gain market share against bigger competitors such as Snapfish, the online photo products and services site owned by Hewlett-Packard Co. “We take a pretty long view on the factors that impact the return on investment we expect from any new technology,” says Housenbold. “We look at the total cost of ownership.”
Many online retailers still judge payback on e-commerce technology on the cost of buying a new application or service from an outside third-party. Once they conduct their due diligence, set a budget and make a final decision, they focus primarily on the time it will take to recoup their initial investment. But with the cost of building and running an e-commerce site becoming ever greater and the process more complex, a growing number of online retailers, including Shutterfly, Bidz.com Inc., Drugstore.com Inc., VistaPrint Ltd. and others, are looking at their return on investment in new Internet technology in a broader context.
Efficiency & productivity
Before making final decisions, they project gains in efficiency and productivity. They also are looking at specific marketing and merchandising objectives, such as the impact on sustaining longer term customer relationships. “More retailers should take the blinders off and look at the ROI of any new technology initiative in a broader context than just dollars and cents,” says Kasey Lobaugh, principal, multi-channel retail practice lead at Deloitte Consulting LLP. “Financial projections are important, but analyzing ROI from multiple perspectives gives the merchant a better sense of the potential upside of a big project and the risk.”
Shutterfly will take several months to prepare and analyze multiple ROI-related metrics before committing to a new technology project. When Shutterfly, which spent 15% of its 2007 web sales of $186.7 million on new e-commerce technology, decided 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, Shutterfly management 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 give the green light was an ROI analysis that showed 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 credits its free storage program with helping the company process about 7 million orders in 2007, an increase of 37% over 5.1 million in 2006. “Our operating history allows us to forecast the storage investment we need to keep customers happy and differentiate ourselves in the market and that leads to increasing revenue and positive ROI,” Housenbold says. “We re-evaluate the ROI of our storage investments annually and those costs have been below 5% of our revenue for a number of years now.”
With the price tag of a third-party e-commerce platform with multiple modules averaging about $400,000 and a single application costing as much as $100,000, most online retailers require a very short return on their investment in e-commerce technology. A 2007 survey of 220 merchants by Aberdeen Group, a Boston technology research firm, found that 25% expect the money they spend on a new e-commerce application such as site search or rich media to begin paying for itself in as soon as six weeks. “Online retailers expect their technology solutions to flex, bend and meet their complex needs and become profitable in very short order,” says Aberdeen senior research analyst Sahir Anand. “Very few retailers are willing to wait more than six months to realize a return on their online tools.”
Building for 10 years
But even if they expect an investment in new e-commerce technology to pay off quickly, retailers can implement their initiatives sooner and more efficiently if they look at ROI from a broader perspective. After conducting a rigorous due diligence and developing an internal implementation plan, online jeweler and auctioneer Bidz.com Inc. is reaping the rewards of a $1 million overhaul of its e-commerce platform.
After months of precise planning and ROI analysis, Bidz.com in December replaced an older legacy e-commerce system with a more robust in-house version that runs on a Java 2 Enterprise Edition platform with Oracle and Microsoft SQL database software. With its older Linux system, any new applications had to be manually coded, tested and implemented. Developing a new feature or function for the Bidz.com web site usually took 30 days to two months.
But with its new platform, Bidz.com can now design and implement a new application in as soon as one week. “We weren’t paying licensing fees for running on open source software, but our old legacy system just couldn’t handle any bigger processing loads,” says Bidz.com chief technology officer Leon Kuperman. “Our ROI process helped us to really think through and implement a new platform we can use for the next 10 years.”
Bidz.com, which posted web sales of $187.1 million in 2007, needed a new e-commerce platform to keep pace with its growing business. In the past year, the number of orders processed each day on Bidz.com has grown to 4,443, an 18% increase from 3,757 in 2006. The company also recently launched Buyz.com, another jewelry web site that includes advanced features and functions such as a diamond search and ring customization.
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.
Big dividends
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.”
mark@verticalwebmedia.com
