The basics of calculating Return on Investment

There are some fairly obvious ways you can try to calculate the value of your e-commerce Web site. The direct sales made on your the Web site, and the lifetime value of repeat customers are good indicators of the income your e-commerce shopping cart has generated. However, there may be significant other revenues coming from sales made by e-mail or phone calls that can be directly attributed to your e-commerce web site.

In addition to sales, cost reduction is an area where your Web site can help your business; if your website reduces the number of incoming calls that need to be answered, it can save you a lot of time and money! Finally, your E-commerce site can act as a fulfillment agent for your marketing and customer support materials, significantly reducing costs if prospects and customers are prepared to download materials rather than have items mailed to them.

However, determining e-commerce ROI can be more complicated than adding up revenue and cost savings, and then deducting the actual cost of the site. First of all, companies often can't pinpoint how much incremental revenue an e-commerce site generates. Did the Web site earn the sale? Or did it cannibalize a sale that would have occurred anyway?

So if you are thinking about starting to sell on the Internet, it pays to decide how you will calculate the return on investment for your potential e-commerce site ahead of time. Return on Investment (ROI) can be defined as the percentage of profit or revenue generated from a specific activity. At a basic level, we can measure the ROI of an e-commerce site by adding up the total amount spent on the Web site over a given period of time (e.g., $2000) versus the amount generated from it in revenue (e.g., $8,000) or the cost savings (e.g. $2,000). In this example, the ROI would then be 500%.

How much does it actually cost to sell on the Internet?

Your costs should be relatively easy to calculate, depending on whether you have your own internal technology department, and manage your equipment, software and internet connections in-house, or whether you outsource your e-commerce store to a hosting company. In addition, you will need to consider the cost of sales, such as potentially higher merchant account fees for retailers who sell on the Internet rather than through a bricks and mortar store, and shipping and handling. You will need to estimate the cost of setting up and maintaining inventory in your store. If you do this yourself, how much is your time worth?

How much revenue really comes from your e-commerce store?

On the revenue side, it is fairly easy to calculate the total sales, minus their associated costs (including a portion of the costs of setting up and maintaining the site). However, do you know which sales you would have probably made anyway? For some regular customers who originally did not buy online, you should probably remove a portion of their sales from your calculations.

Conversely, do you know which of your customers purchased offline after researching you online? The Platt Retail Institute consulting firm noted that online sales of autos (and auto parts) will amount to only 2 percent of all U.S. retail sales in that category this year. By contrast, noted Platt, his automotive clients say that as many as 70 percent of their customers do all their research online before shopping for a particular car at a dealership. So depending on your category of goods, your online store could be generating significant sales for other channels to fulfill. One way to find out if this is true with your customers is to provide an online coupon that they can print or a code they can quote when placing an offline order. Or you can ask your customers whether they visited your Web site before deciding to buy from you.

You can also install analytics software on your Web site to find out whether there is a correlation between the products visitors look at but don’t buy, and the volume of those products sold through other channels. On the most basic level, you want to measure sales, returns and allowances, sales per visitor, cost per visitor, and conversion rate.

The bottom line

Once you have this information, you should allocate a period of time, spread the setup costs of your site over that period, and then add the ongoing costs and revenues. This should give you an idea of how profitable your e-commerce Web site actually is.

In summary, while there is no set formula for evaluating Return on Investment for your e-commerce store, hopefully this article will provide enough information for you to make an educated assessment.