Online sales climbed 24% year over year, while Best Buy’s overall sales were flat.
Retailers are taking a long-term view when assessing whether a technology investment will create a payback
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.