Calculating ROI on Your Small Biz Ecommerce Website
The main reason why you have an online store is to make money, and to do that you need to ensure that any investment you make in your ecommerce website pays a return. This includes everything from the cost of creating your small business ecommerce site to making improvements and updates and your social networking and ecommerce marketing campaigns.
If an investment doesn't achieve a positive return, then you need to take action to turn the situation around. In this article, I explain how to calculate the ROI on your website and what to do with the information.
What is ROI?
ROI, or return on investment, is a method of calculating the effectiveness of an investment. You can calculate it for the initial investment you made in establishing your website. You can also use it to calculate the effectiveness of an investment to improve your ecommerce site -- such as a site makeover or implementing an ecommerce marketing campaign to increase sales.
You can make the calculation using real data and calculate the actual ROI, or you can make it with estimated data to calculate the expected ROI for an investment.
The formula for calculating the return on an investment is:
ROI equals (Gain from an investment) minus (Cost of the investment) divided by (Cost of the investment)
The result is a percentage, and if it's a positive value then you have a positive return on your investment -- that's good. If the result is a negative then you're losing money -- and that's not good.
Calculating Gain and Cost
When your online business is your only business, calculating ROI is a little simpler than having an online business as an adjunct to an offline business.
Where you operate only online, you can calculate the cost of your investment and your gains more easily. Remember that your gains are not only the increased profits for the business, but also the increase in value of the business from the investment.
If your business operates offline and online then the calculation will be a little more difficult because some of the sales associated with the online business may come at the expense of offline sales. If your website attracts customers away from your offline business, then part of the gain from the online investment may be a reduction in expenses for your offline business -- because you need less sales and fulfillment people in your offline business. However, the profits from your offline business will also be affected as a result.
Other ways that an online site can register a gain not directly associated with sales is where information such as FAQs and product information is made available online. If providing this information reduces the number of calls to customer service, then there may be a gain to the overall business in the reduced expense of customer support.
It's important that you identify all areas of the business where costs will be incurred or gains made as these won't always be immediately obvious.
Plan Your Results Ahead of Time
If you are planning an update to your website or start a social marketing campaign, calculating the anticipated ROI will help you determine if your investment is likely to pay off.
For example, you might have a target for your social marketing campaign to increase visitor numbers by 10 percent. If you already track your visitor numbers, your conversion rate and the value of your average sale, you can estimate what an increase of 10 percent in visitor numbers is likely to bring in increased sales. You can also calculate the increased value of these additional visitors to your business. On the flip side, you can also estimate the additional cost of servicing these increased sales.
By estimating the gain from the investment in your social marketing campaign, and by knowing the anticipated cost of that campaign, you can determine the anticipated ROI for the investment. If the results aren't positive, then it is time to rethink your approach. Can you reduce the cost of the campaign, can you increase its target results or should you ax the campaign altogether?
Of course in any undertaking there are always risks and unknowns, and your actual results may exceed or they may fall short of your estimates. Because of this you should never base your investment decision solely the anticipated ROI. However, ROI is one of the tools that you have at your disposal, and it makes a valuable addition to your business financial planning toolkit.
Like other planning tools, ROI can help you make better decisions about how you invest in your business. And remember the old adage: those who fail to plan, plan to fail.
Helen Bradley is a respected international journalist writing regularly for small business and computer publications in the USA, Canada, South Africa, UK and Australia. You can learn more about her at her Web site, HelenBradley.com
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