How tighter cross-channel integration will redefine the measure of web site ROI
By Mary Wagner
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.”
When data are aligned in comparable formats, retailers will need analytic software that automatically integrates transactional and behavioral data seamlessly across channels. Technology vendors will work on new analytic products to bridge the gap, potentially in partnership with CRM providers, says Dougherty. A number of technology vendors offer solutions that integrate transactional data across channels. Coremetrics Inc., San Francisco, for instance, has developed software that provides a complete profile of customers’ online behavior, beyond transactions. On request, it can format specified data sets pulled from online activity for comparison with retailers’ existing analytics for catalog and store data.
Analysts such as Wissman speculate that further development of new cross-channel analytics could be driven from the retailer side, with resource-rich do-it-yourselfers like Wal-Mart leading the charge.
The web is a new ball game and so, to some degree, are the metrics that best define a retail web site’s real value. As best practices emerge, they may differ markedly from the ROI that has traditionally applied. “At the end of the day retailers have to justify the expenditures on their web sites. They have to have a way to compare the options at their disposal,” Wissman says. “I find it hard to believe we’ll ever get completely away from an ROI perspective, but we’re going to have to get a little less strict and systematic in terms of how we apply those numbers.” l
mary@verticalwebmedia.com
Conversion rates still important
Retailers are measuring the success of their online endeavors by more than just sales these days, it’s true. But conversion rates are still important. And retailers have adopted a number of techniques that improve conversion rates. Among the tactics that consultants/researchers Compete Inc. of San Francisco, which obtains data from clickstream analysis of 8 million Internet users, has observed in its review of web sites:
— Retailers are bundling products and services: “When they display a Palm Pilot, for instance, they are also displaying a case for it and a USB cable,” says Marc Engel, director of analytics for Compete. “They’re making it easier for people to buy things together.”
— Retailers are more closely analyzing where shoppers bail from their sites and where they go next. “They are looking at where customers are leaving and trying to determine if maybe the price point is wrong or if customers can’t find what they’re looking for,” Engel says. “They want to know if the customer is going to another site and completing the transaction.”
— They are analyzing their search contents. Much attention has been paid, rightly so, to the importance of returning correct responses to searches. But success of a site can also be helped by knowing what shoppers are searching for, Engel says. “Searches are a leading indicator of demand,” he says. “Knowing what customers are searching for can help you with your product mix and predict what products you’ll need to stock.”
