Measuring return on investment in e-commerce can be a challenge for distributor. This article offers ways to measure the ROI and key expense components that distributors should include in the evaluation.
Are you struggling with how to think about ROI for your company’s e-commerce implementation? Are you frustrated with the low adoption of your current e-commerce implementation? Do you believe you could benefit by changing or upgrading the platform? Is the technology not right? Has the digital channel not been marketed aggressively? These are questions we hear every day from B-to-B distributors.
Research from the previously published annual 2015 State of E-Commerce Study indicates that more than 41 percent of distributors are generating less than 5 percent of revenue through e-commerce. Only 4.3 percent of distributors obtain 40 percent or more of revenue through the e-commerce channel.
There are many reasons why companies with a highly mature e-commerce channel are successful. Type of product sold online is a factor, with MRO products generally having high online adoption. However, the biggest and most important factor for a successful e-commerce adoption – and growth velocity – is a strong digital strategic plan.
In the absence of a solid digital strategic plan, companies often focus on the technology by selecting a platform and integrating with ERP. But the actual technology is just one component. Knowing what features and functionality customers need and expect provides the foundation to a digital road map and selection of the right e-commerce platform. After all, without understanding customer needs, how do you know what functionality to provide and in what order?
E-commerce returns on investment fall into two categories.
- Hard cost savings
- Revenue gains
Hard cost savings
Hard cost savings are the savings a company gains by reducing the cost to serve. There are many areas where e-commerce generates hard cost savings, such as:
Decreased cost of order entry: Fully loaded cost estimates for order entry without e-commerce integration usually range from $50-$150 per order. That number can fall to below $25 with e-commerce. Consider the number of minutes a salesperson or customer service rep takes to enter, review, communicate and handle the order. Working out the cost annually, including benefits and overhead, will provide a good estimate of your cost per order.
Reduced mailing costs: As invoices are generated and delivered digitally, the cost of mailing, including handling time, can be reduced. But don’t jump to the conclusion that print catalogs and flyers can be completely eliminated with a good e-commerce site. Many distributors see a significant lift when implementing a print catalog/flyer program that works in conjunction with their digital channel.
Reduced errors: Human errors, such as transposed numbers or incorrect ship-to addresses, will be reduced. Because the customer controls the order entry process, he or she can review the order details prior to hitting the submit order button, minimizing errors created by salespeople transferring order information from the napkin they wrote the order on while in the car, for example. Additionally, shifting orders to an online channel can improve the productivity of your sales team. Errors impact the accounts receivable team who has to address and correct the errors.
Those are just hard costs and don’t take into consideration the loss of goodwill with your customer every time there is an error. Customers will gravitate to distributors that provide a high percentage of error-free transactions.
In addition to hard cost savings, implementing the right e-commerce strategy and platform can improve the top line in many ways, as well.
Increased customer retention: Being able to meet customer expectations and needs can keep your customers loyal, which leads to increased business. Customer retention is a result of customer satisfaction. Just a 0.5 percent increase in retention can result in significant revenue gains.
Increased average order value (AOV): Average order value for e-commerce sites often are higher than offline. Several reasons for the AOV increase include:
- Cross-sell and upsell during the order process. This generally is available with more mature e-commerce implementations.
- More relevant and better promotions. Combining a strong digital marketing effort with an e-commerce platform will lead to better conversion and a much faster adoption of the digital channel.
- Increased wallet share of existing customers. Knowing that a majority of B-to-B transactions start online, making it easy for search engines to know what products you carry can increase your wallet share of existing customers.
- New customer acquisition. Doing search engine optimization for existing customers also makes it easier for a potential new customer to find your site and place orders.
- Increased awareness of products, including long-tail product availability. Another benefit of continued SEO efforts is the ability to quickly add products to the portfolio, including ones that may have lower turns. Assuming cost to serve is in line, providing access to long-tail products can be a powerful way to increase business and position your organization as the key supplier.
Expense components for the ROI model
There are several cost-benefit areas to consider when evaluating which e-commerce solution is best for an organization, including whether or when to pursue an e-commerce strategy. Many companies focus initially on cost comparisons for acquiring a solution, while more experienced organizations have a deeper understanding of the types of business improvements they want to achieve.
At a minimum, organizations should understand a total cost of ownership for the solution in terms of acquisition, ongoing operations costs, efficiency and productivity objectives, and future needs for agility and flexibility. For example, the least expensive product to acquire and implement may require substantially more people and time to maintain and use during the course of business.
Capital costs, development costs or subscription costs to acquire or develop the e-commerce platform and related software or data content may seem like the main cost items, but they are typically only a portion of the costs. The main aspects to consider for this are primarily financial considerations, such as initial cash outlays, and the impacts of these expenses on the financial statements for the company.
In addition to initial e-commerce product costs, an e-commerce solution requires substantial time and resources to implement a complete solution that is specific to an organization and which can be used by internal users and customers. Minimally, this requires a customized look and feel, corporate branding and company-specific information. More importantly, it generally requires integration with other systems, such as product information manager (PIM), ERP system and other point solutions for logistics, payment gateways, punch-out catalogs and supplier-specific systems.
Finally, the actual content for the e-commerce solution must be provided, including product catalogs, pricing information, customer data and the initial online search information used to find the business and products online. It is not unusual for the implementation process to require from two times to more than five times the initial acquisition costs to complete an e-commerce integration. The complexity of this process, along with the ongoing need to maintain this information, should be a major consideration when evaluating an e-commerce platform.
The ongoing costs are mainly operational and will be affected significantly by the number and skill sets of staff members, as well as the effectiveness and usability of the solution for improving systems and processed throughout the organization. These costs are also influenced by the main business objectives for the e-commerce solution. A primary objective should be to lower the cost of doing business for customers: simplifying the task of finding the right products, placing orders, fulfillment and other support services. This should come with a measurable increase in customer satisfaction and a better user experience and should be measurable by observing actual order history for customers.
The most successful e-commerce initiatives are able to implement and measure substantial increases in business due to the marketing capabilities of the solution. Costs associated with marketing should be easy to measure in conjunction with marketing value and payback with metrics built into the e-commerce solution or with other simple tools. These costs usually include internal staff resources for designing and executing marketing promotions and campaigns. They may also include external costs for marketing services, such as advertising, search engine optimization, localization to the customer and other outside expenses.
While the costs for marketing activities may be significant, the focus should be squarely on the payback from such investments in terms of new customers, repeat business from customers and increased sales to customers from more products purchased over time.
The digital strategy exercise should be thought of as a continuous improvement process. The expectations of customers continually evolve and, therefore, new features and functionality may be needed. The strategic plan should account for gaining the voice of the customer to capture that knowledge.
Additionally, while the technology may be in line with what customers say they need, if they don’t know about that functionality, the technology won’t be as successful as it could be. Knowing differences in customer segment needs for functionality provides a strong basis for communications that are highly relevant and convert well.
Here are basic assumptions used as a foundation for basic five-year expense and ROI calculations in the example below:
- Small distributor ($25M revenue): No current e-commerce, 1,000 customers & 5,000 SKUs.
- Midsize distributor ($100M revenue): Current custom e-commerce, 2,500 customers & 10,000 SKUs.
- Large distributor ($500M revenue): Current custom e-commerce, 25,000 customers & 50,000 SKUs.
Based on average annual ROI, most distributors can financially benefit from an aggressive e-commerce initiative.
A recent survey showed an example of a distributor with more than 20 percent of revenue that could be at risk of moving to a different supplier providing a better e-commerce solution. For a $100 million distributor with a 25 percent gross margin, that means more than $5 million of gross profit dollars are at risk. Just because an e-commerce solution is in place does not mean customers are happy with it.
Distributors that have a strong digital strategic plan have a much higher probability of achieving the best return on investment in their digital channel transformation. Many distributors have very good expertise on the operational and financial side of the business, but little or no experience on the digital side. If that describes your organization, you will likely benefit by finding an experienced third-party resource that can help your company navigate through the digital waters.
Rob Kelley, CFA, is a partner at Real Results Marketing. He has been a leader in developing and applying new technologies to a wide variety of business problems across multiple industries. At Real Results Marketing, Rob creates quantitative analytics models and software applications used for pricing optimization, economic value models, competitive analysis, customer profiles and market segmentation.
Dean Mueller is also a partner at Real Results Marketing. He has more than 30 years of experience in sales & marketing and rich e-commerce experience, driving distribution customer engagement, leading to millions of dollars in additional revenue and gross profit.