Measuring a Web Project's Financial Value Director of Engineering & Internet Technologies or Alan Knecht

Agenda Why do we need to measure it? Why do we need to measure it? What should we measure? What should we measure? What are ROI and ROE What are ROI and ROE How to calculate ROI of web projects How to calculate ROI of web projects Types of returns Types of returns What are soft savings? What are soft savings? How do we measure savings? How do we measure savings? Examples Examples

Why do we need to measure? To ensure available funding for web site enhancements To ensure available funding for web site enhancements To justify the ordering of new equipment and software To justify the ordering of new equipment and software To verify that what was promised is what was delivered To verify that what was promised is what was delivered To get future investment for new web projects To get future investment for new web projects

What should we measure? Need to measure more then just the number of visitors and page views Need to measure more then just the number of visitors and page views Collect, calculate and display information in financial terms Collect, calculate and display information in financial terms These are the numbers senior management understands These are the numbers senior management understands Correlate investment in Internet technology to the corporate profit/loss statement Correlate investment in Internet technology to the corporate profit/loss statement These measurements are ROE and ROI These measurements are ROE and ROI

What are ROE and ROI? ROE ROE –Return On Equity –long term overall result ROI ROI –Return On Investment –the short term, result of a specific investment

What is ROE? ROE ROE –Measures the overall financial return generated by a total net worth –For example: »A corporation has a total of $1 Million tied up in its web site (hardware, software and labour). »What does it have to show for it?

What is ROI? ROI ROI –Measures the financial return generated by a specific investment. –For example: »A corporation invests $500,000 on its I-commerce portion of the web site »What was the return last year? What did it earn for the company What did it earn for the company

The Difference Between ROE & ROI? ROE looks at total value of a project ROE looks at total value of a project –i.e. it is worth $X and is generating $Y ROI looks at a specific portion of a project against its expected life ROI looks at a specific portion of a project against its expected life –i.e. it costs $X and earned $Y

Which is more important ROE or ROI? In my opinion - ROI is the most important measure for web development. In my opinion - ROI is the most important measure for web development. Why? Why? –Development cycle is shorter –Life cycle of a particular technology is extremely short. –No real equity associated with a web site except for the hardware used to run it

Types of returns A return is something that generates value A return is something that generates value Examples: Examples: –profits from web based store –revenues from fee based subscriptions –ad revenues –hard savings –soft savings

What are Hard Savings? Reduced costs for: Reduced costs for: –Marketing »smaller brochures with web site reference »smaller ads - (i.e. For more information see www…) –Lower Customer Service Costs »Reduced demand on toll-free number »Reduced staffing –Reduced development time

What are Soft Savings? Customer education Customer education Improved customer service Improved customer service Consistent Information Consistent Information –information is always current –everyone gets same answer Lower advertising & promotion costs Lower advertising & promotion costs

Soft Savings Example Automobile Industry Automobile Industry –Spends millions on web sites each year, but doesnt sell cars on the web –So is the ROI negative? –Benefits to Automobile manufactures: » customers do pre-screening of information, »feature comparisons, »doesnt waste sales staffs time or brochures etc. »easier sell when they come to the showroom

Can We Measure & Capture Hard & Soft Savings? In most cases YES! In most cases YES! However measuring soft savings can be: However measuring soft savings can be: – difficult – time consuming When it comes to web sites, the soft savings can make the difference from a good ROI and bad ROI. When it comes to web sites, the soft savings can make the difference from a good ROI and bad ROI.

Savings & ROI If a web site doesnt have any revenue then ROI= $Savings - $Costs/$Investment X 100 If a web site doesnt have any revenue then ROI= $Savings - $Costs/$Investment X 100 If savings are not measured ROI is negative If savings are not measured ROI is negative

How to Measure Direct Savings Example: Annual Customer Support Call Example: Annual Customer Support Call –Web Cost vs. Traditional Telephone Support Hard Savings = $A-$B*Total Number of FAQ Visitors

How to Measure Direct Savings Example: Customer Inquiry Example: Customer Inquiry –Web Cost vs. Traditional Office Costs Hard Savings = $A-$B*Total Number of FAQ Visitors

Sample Savings Calculation Example: Inquiry -Web Cost vs. Traditional Office Costs Example: Inquiry -Web Cost vs. Traditional Office Costs Hard Savings\ inquiry = $7.70-$5.51=$2.19

Sample Savings Calculation (continued) For every inquiry there is a savings of $2.19 For every inquiry there is a savings of $2.19 But what are savings if the same question could have been answered by a FAQ on a web site? But what are savings if the same question could have been answered by a FAQ on a web site? Need to know time spent on managing FAQ section, web server costs and number of people using the FAQ section. Need to know time spent on managing FAQ section, web server costs and number of people using the FAQ section.

How To Measure Soft Savings No concrete way to capture these savings No concrete way to capture these savings Best to estimate or to get senior management to apply a value Best to estimate or to get senior management to apply a value –What is a 1 day response vs. a 2 day response to a customer worth? –What would 24/7 phone support cost?

The Real ROI

What is a Realistic ROI? Acceptable ROI varies between industries Acceptable ROI varies between industries Look at life of the technology Look at life of the technology –In Canada technology written-off over 3 years If expected life is 3 years - need ROI of 33% just to break even If expected life is 3 years - need ROI of 33% just to break even Should look at a ROI of 7-10% higher then break even level Should look at a ROI of 7-10% higher then break even level

Other Issues What happens if we dont calculate ROI What happens if we dont calculate ROI –make bad recommendations or decisions –web development seen as an corporate expense and not valuable part of the company –cant justify new software, equipment etc. What is it worth to a company to capture all savings What is it worth to a company to capture all savings –Ask senior management

Conclusion We can measure a web site in financial terms We can measure a web site in financial terms Need management's feedback on what return they want Need management's feedback on what return they want Must implement tools to track & measure volumes & cost of delivering services both traditionally and through the Internet Must implement tools to track & measure volumes & cost of delivering services both traditionally and through the Internet

Alan Knecht Knechtology Inc. or BrandEra.Com Questions?