25. Return on investment, a few words

During the dot bomb crash companies on-line failed because their returns on investment were poor to say the least.

The early days of web euphoria have gone. The days of ROI are back.

Any commercial organization needs to measure its return on money expended. The number of terms and definitions however can be mind boggling and on the Internet there is an opportunity to confuse people even more by creating ones very own definition.

I see little point in fooling oneself so lets try and introduce some sense into definitions bearing in mind what is really important.

RETURN ON DIRECT COSTS OF OPERATING WEBSITES

Every website incurs running costs. If all the work is done in house the costs are certainly lower than if they were outsourced because once a job has been completed resource can be redirected within an organization.

The direct tangible running costs consist of inter alia:

1. Amortized annual recurring fees such as domain names, hosting costs, pay per inclusion costs

2. Direct labour

3. Direct advertising costs if such expenses are incurred (e.g. pay per click services, promotion in magazines, banner advertising etc)

The point of spending these amounts of money is to attract and then persuade the traffic to buy from us or provide our MWR (most wanted response), which in fact might be an e-mail address.

Money spent divided by total MWRs is the money spent per MWR. This can be high, or low or anywhere in the middle. Thus there needs to be a basis for comparison. Only the business concerned can provide this base. Nevertheless an objective needs to be set.

To give a real world example. If we run 6 ads in a glossy magazine to promote a new product and sell 2,000 new products we would not have sold if we had not run the ad then the return on investment is simple and straightforward to calculate. unfortunately its almost impossible to get the correct information on incremental sales resulting from the adspend. The web makes this not only possible but simple and inexpensive in many cases.

It is actually much easier to track our efforts and successes/failures on the web than it has ever been in the normal world.

TERMS TO TRACK RETURNS

> CPO: Cost per order (gross profit per item divided by CPO may well be a very useful metric in your own organization)

> CPA: Cost per action (how much are you prepared to spend to get an e-mail address for example bearing in mind the long term value of a customer can be very high if handled correctly). Does $1,000 per 1,000 targeted e-mail address sound low or high to you????). To borrow an e-mail list can cost $400 per 1,000 I believe for a single use.

> ROI: Return on investment (try to find a meaningful short term measure rather than get engrossed in theory and long term evaluation techniques)

One thing is certain however you must continuously measure your expenditure and you must continuously measure your success or failure to succeed so that you have a prime motivator to do things differently and better.

> This is the nature of web marketing it is extremely dynamic.

> The playing fields of the web are far more level than the conventional business fields many of us grew up on and they are becoming more level with each passing day.

> A big budget is no longer good enough.

> A big brand is no longer enough but it still helps a lot