Return on Investment (ROI) Metrics For E-Commerce Services
RETURN ON INVESTMENT (ROI) METRICS FOR E-COMMERCE SERVICES
ROI is an estimate of the return—net profit or financial gain—on an investment. ROI metrics, or measurements, are generally utilized to gauge the profitability of a project or investment. Many businesses, information technology managers, and Web site managers use ROI analysis to determine whether a project, investment, or purchase will yield a suitable return. As companies adopt e-commerce strategies, new metrics have evolved that can help managers measure the success of their Web-based businesses.
Traditionally, companies have measured ROI using general and well-known methods of financial analysis. A 2001 Internet Week article states that ROI "measures the up-front capital outlay and its associated costs—overhead, taxes—against the revenue it generates. A respectable ROI calculation then factors in how much the return is being eroded over time by inflation or the cost of borrowing the money for the investment. ROI calculations yield a ratio or percentage, usually on an annual basis, such as 'the investment will return 10 percent annually for four years."'
While using this traditional method of ROI calculation, most companies have also adopted new methods of measurement as a result of adding e-commerce services to business plans. These new measurements tie in with conventional ROI analysis but focus heavily on Web site traffic and online consumer behavior. While measuring the success of an online business venture can be tricky, use of new e-commerce-related metrics—often called e-metrics—is necessary to remain successful among your competitors and to determine the ROI of your e-commerce efforts.
Many companies believe that customer retention is key to securing profits. As such, many use consumer data generated from their Web sites to improve customer retention and loyalty and, in turn, ROI. There are 10 standard customer-related e-metrics that you can use as part of your ROI analysis, including reach, acquisition, conversion, retention, loyalty, duration, abandonment, attrition, churn, and recency.
The reach metric refers to the percentage of potential buyers that you are reaching. For example, if there are 500 total potential buyers for your product or service and you place an online ad that 100 potential buyers will see, your total reach is twenty percent. Acquisition is related to gaining customer activity or participation on your site. Conversion is then turning that acquired customer into a buyer. Retention focuses on keeping customers and encouraging future purchases, while loyalty is measured by the number of pages a customer views, the frequency with which a customer views your site, or the length of his or her visit to your site.
The duration metric refers to the total time spent on a site divided by the number of visits. Abandonment is measured by how often a customer leaves a Web shopping cart before completing a purchase. Attrition is the percentage of customers who stop buying from your site and go elsewhere to make their purchases. A churn rate, or change in customer base, is determined by dividing attrition by the total number of customers. Recency refers to how recently a customer has visited your site or made a purchase.
After these metrics are calculated, they can be used in ROI analysis to determine the success or failure of e-commerce activities. Say, for example, that you want to determine the per-customer costs related to an online advertising campaign. Your acquisition cost would be equal to the total advertising and promotional costs divided by the number of click-throughs, or visits, to your site. To figure out your cost per conversion, you would divide your total advertising and promotional costs by the number sales completed. Once these metrics are determined, you can figure out the ROI of your advertising promotion.
If you choose to perform ROI analysis yourself, there are many software products on the market, including CIOView Corp.'s ROInow software package, that allow you to determine ROI. These products can analyze costs and benefits, provide reports, and often provide benchmarks for typical expenditures. You can also choose to hire a consulting firm that will perform the analysis for you and then suggest plans of action based on the results. Many large computer-related firms including Intel Corp. also provide information on their Web sites about calculating ROI for e-commerce services.
Overall, e-metrics and determining ROI for e-commerce is a hot industry topic. Target Marketing of Santa Barbara, California, hosted the E-Metrics summit in June 2002. The forum was dedicated to measuring Web site success, a signal that development of ROI metrics for e-commerce services will continue to evolve. Jim Sterne and Matt Culter, authors of the industry white paper E-Metrics: Business Metrics for the New Economy, summed up the industry's motivation for developing e-metrics, claiming, "e-business is constantly generating new business models, new types of partnerships, and new ways to succeed. To keep up, companies require new metrics—e-metrics—to calibrate their success. Indicators of e-commerce effectiveness are necessary to reveal whether a firm's Web efforts are paying off."
Copeland, Ron. "ROI: The IT Department's Moving Target." InformationWeek, 6 August 2001. Available from http://www.informationweek.com/story/IWK20010802S0004.
Lewis, David, and Mike Koller. "So Many Liars—ROI: Little More Than Lip Service." InternetWeek, 1 October 2001.
Macaluso, Nora. "Report: E-Biz Success Not Easy to Measure." E-Commerce Times, 20 September 2001. Available from http://www.ecommercetimes.com/perl/story/13647.html.
Rothfeder, Jeffrey. "E-Commerce ROI: Many Happy Returns." CIO Insight, 7 May 2002. Available from http://www.cioinsight.com.
Sterne, Jim, and Matt Cutler. "E-Metrics: Business Metrics for the New Economy." Cambridge, MA: NetGenesis Corp., 2001. Available from http://www.customercentricsolutions.