Printer friendly version (PDF)
Return on Investment
Why is ROI Important to My Small Business?
There are many ways you can spend your investment and operating dollars. Everywhere
you turn people and organizations are willing to show you how their product
or service can help your small business. Your phone is likely ringing off the
hook with “have I got a deal for you” opportunities. Internet and e-business
solutions present such opportunities, but you must carefully consider the costs
and benefits of your investment. It is not unusual for a casual approach to
website development and web-enabled applications to result in an unprofitable
project, rather than one that generates a positive return on investment.
How is ROI Measured?
There are many ways to measure the return on an e-business project, and a
ROI analysis should form part of your decision-making process. Often entrepreneurs
measure ROI as the cash returned from a particular investment. In many cases,
however, determining ROI is not so obvious.
Consider the following possibilities:
Return on Dollars Invested
This is the simplest and most obvious way to determine ROI. Calculate all
of the expenses for your web project and then identify the revenues that can
be directly attributed to your site. Calculating expenses is the easy part;
identifying revenues that would not have been generated anyway can be a bit
of a challenge.
Return on Time Invested
If you are like most small business owners, you are already investing long
hours in your business. Early mornings, late nights, and weekends are just
part of the life of an entrepreneur. The last thing you want is another personal
project that will take up your time and potentially detract you from your primary
business function – running the business. Whatever your time investment, it
better pay off. Keep in mind that whether you hire someone to develop your
site or not, you will need to invest your personal time. Keep track of this,
budget for it, and consider the real value of your time.
Return on Other Assets and Investments
An effective website will improve your brand image and recognition (i.e.,
goodwill) and lead to better overall business performance. Conversely, an unprofessional
or non-existent website can erode the goodwill that your offline business has
already built. Although goodwill is somewhat difficult to quantify, it should
Consider that by investing time and money creating your website, you may miss
out on potential business opportunities. Keep these “opportunity costs” in
mind as you decide on your level of investment in e-business.
Your web project will impact your investments, resource usage, and other priorities.
Give thought to all of the potential expenses and impacts on you and your business.
Non-Financial Benefits to Consider
Building a Contact Database
One of the most valuable assets a small business has is its database of customers,
prospects, and suppliers. A well developed website can make gathering and maintaining
these contacts much easier.
Pre-Qualification of Potential Clients Prior to Consultation
In the example that follows, one of the surprising benefits is the improvement
of the sales-closing ratio. Prior to having a website, an entrepreneur determined
that she closed an average of 30% of her deals. After developing a website,
this closing rate jumped to over 50%. Customers who contacted her were much
more qualified and were familiar with her products and services. They also
had a chance to review an online portfolio of her work.
What will Your Web-Based Project Cost?
One of the questions often asked by small business owners is how much they
should expect to spend on their website. It’s a bit like asking “How long is
a piece of string?” There is quite a number of things to take into account
when calculating the total cost of your web project. Here are just a few of
There is much debate about whether you should build your own website or hire
someone. If building websites is your business or your hobby (and you are competent),
then by all means build it yourself. If you sell car parts, provide accounting
services, or sell clothing, then stick to your core business. Building your
own site can result in you neglecting your day-to-day operations. In addition,
you may end up with an amateur-looking, unprofessional site.
If you choose the do-it-yourself route, then your investment will be in web
design software and possibly a more powerful computer and peripherals (e.g.,
printer, scanner, digital camera).
Hiring a Web Developer
Below are some ballpark estimates of what it might cost to have a competent
developer work on your site. A word of caution: Make sure you know what you
want, how you want it to work, what functionality you require, and how the
site should look and feel. If you are not clear on these points, you run the
risk of having someone else decide for you.
A brochure website is exactly what the name implies - an electronic version
of your company’s brochure and/or marketing materials. Brochure sites can be
very simple or extremely extensive. Brochure sites are usually developed through
the use of a template, or by someone custom designing your site. A template-based
site follows a few standard formats offered by the developer. A simple site
can cost as little as $800, but generally cost between $1,200 and $2,500. If
a more extensive brochure site is required, you can expect to pay $2,500–5,000.
An interactive site may use technology such as Macromedia Flash or Shockwave
to display information or gather input from site visitors. The site may also
require databases to store information and provide a more personalized user
experience. Expect to spend a minimum of $2,500; many sites can easily cost
$10,000 or more.
E-Commerce and Catalogue Sites
Adding a product catalogue to your site increases complexity. Some web hosting
services and developers have simple catalogue applications that can be added
to your site for a fee. In addition to a catalogue, you may also require e-commerce
software and connections to a payment gateway and your bank to process credit
card payments online. Often these services require a start-up fee, monthly
fees, and a transaction fee. The charges vary widely, so we encourage you to
contact your banker and payment gateway for more information.
Capital and Operating Costs
Here is a list of other expenses you need to consider:
Hardware and software – The cost of computer systems,
peripherals and applications
Communications and network equipment – You might need
a network if you have more than one computer and want to share resources
such as printers, disk storage, a scanner, and printers.
Domain names – While a domain name may only cost $15-30/yr,
you may find that you would like to register several domain names to protect
your name or brand. For example, you may want to purchase .com and .ca addresses
for your company and register any common misspellings of your company’s name.
Merchant accounts – You may need an Internet merchant
account at your bank if you want to process credit cards online. Depending
on your products and services, your bank may require you to post a bond to
offset the risk of fraudulent purchases.
E-commerce set-up fees – Some e-commerce services require
a set-up fee. It is not uncommon to be asked for a $250-500 set-up fee.
Development costs – These costs will form the bulk of
your initial investment and will vary depending on your budget, site complexity
Website design – It is likely that you will need the services
of a graphic designer to create your logo, letterhead, envelopes, brochure,
and website. The development of these materials can cost several thousand
Website content – Incomplete site content can delay the
launch of your website. You may want to hire someone to write your site content.
Internet Access – Internet access will also cost anywhere
between $10 and $50 per month, depending on your needs.
Web hosting – Hosting may be provided by your Internet
Service Provider (ISP) or by a separate web hosting company.
Small Business Example
The example below outlines the ROI calculations of a small Alberta-based professional
photographer. The case can easily be applied to anyone in a professional services
business such as a consultant, trainer, accountant, and laywer.
||A developer was hired to create a website based
on the design criteria provided by the owner.
||It is estimated that the annual maintenance of
the site will come to 20% of the initial investment, or $500. The developer
will make significant changes and the owner will invest 2 hours of her
time per week to keep the site current
104 hrs per year (owner)
||Costs were incurred to complete the site content
for the developer. Items such as scanning pictures, hiring a writer for
the major sections, and other miscellaneous expenses.
|Personal time of the owner
||Do not underestimate the amount of time that you
will have to spend getting your site ready. One of the major challenges
is gathering and writing the site content and determining what you want
in each section of your website.
||100 hrs (owner)
||The owner purchased 2 domain names as the business
is know by both the business name and a marketing tagline. Both were .com
domains. You may want to register .com and .ca addresses.
||$60 per year
||There are many choices for web hosting and just
as many prices. The owner selected a hosting company that was recommended
based on reliability and service.
||$240 per year
|Internet access and ISP services
||Access may or may not be part of the web hosting
package. Many ISPs offer a combined package but, in this case, the access
was provided by the local cable company.
||$420 per year (high-speed Internet access)
|Hardware and software
||While the owner already had a computer and some
office software, it was necessary to upgrade the computer and purchase
some additional software so she could make simple website changes by herself
$360 per year (hardware lease)
$750 per year (software)
||$5,830 (first year)
||204 hrs (first year)
Projected Return on Investment
Before the web project had begun, the owner calculated a return on investment
that would make the project worthwhile. This is how she calculated the return.
||This owner knew that she had two kinds of customers:
non-commercial and commercial. A new non-commercial customer spent an average
of $500, while commercial customers spent an average of $1,500. This was
for first orders and did not take into account the lifetime value of each
customer. Her goal was to attract two new non-commercial customers and
one commercial customer per month strictly from the website, or an additional
$30,000 per year in business income.
||A new potential market for the owner is the sale
of stock photography. She plans to sell 10 images per month from the website
at an average of $100 per image. This would result in revenues of $12,000
per year. She also planned to start offering photography classes to experienced
hobbyist photographers and expected the website to attract 10 participants
per year at $750 each, or another $7,500 per year.
||Total Projected Revenues
|$49,500 (projected new revenues) / $5,830 (projected
costs) is approximately 8.5.
|When the owner’s personal time was factored in
at $75 per hour, the time investment amounts to $15,300. By adding this
cost to the project, the return is still 2.3 times greater than the investment.
Determine your ROI goals before engaging a web developer. Calculate all costs
in terms of dollars and time and track them. Monitor the progress of your site
based on the initial criteria for success. Invest where the largest returns
are generated, and divest where there are low returns or losses generated.