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Papers & Articles > Web Site Promotion > Cost/Benefit

...Web Site Promotion

COST VS. BENEFIT ISSUES
The relationship between the benefits and the costs of a particular activity are often forgotten when dealing with promotional issues. Increasingly with web related business, the data and the measurement and analysis tools are there to be used.

No longer should John Wanamaker's famous quote:

I know 50% of my advertising is wasted, but I don't know which half...

be used as an excuse for happy-go-lucky planning.

Simple arithmetic can help to define the relationship between costs and benefits and provide a framework for rational decision making.

For example, consider a promotional activity P, which costs Pc to implement, and delivers an extra number of visitors, V to a web site. If the average conversion rate for changing visitors into prospects (i.e. willing to submit contact details and receive further information) is C1, and the conversion of these qualified prospects to new customers who place orders is C2, then the number of new buyers delivered by P will be:

V X C1 X C2

If each new customer generates £S of business on average, then the break-even point (where costs are just balanced by benefits) for any promotional activity is given by:

PC = V X C1 X C2 X £S

A sensible time scale must be chosen, depending on the nature of the buying cycle. The equation is for a fixed period of time, but clearly further revenues accrue over much longer periods of time, with repeat purchases if the customer is satisfied. The equation does not take into account the effect of personal recommendations by happy customers, or the long term effects of brand and image building, so the secondary benefits can be significant.

Another constant could be introduced if need be to cater for such word of mouth or 'viral' phenomena. To take a specific example, say a promotion costs £1,000 and produces 800 extra visitors. The company knows from past records that about 10% of visitors to the web site sign up for a newsletter, or supply an address for receiving more information. Once on the database, about 15% of these prospects may be converted into buying customers within 6 months, with an average order value of £100. Here

Revenue = 800 X 0.10 X 0.15 X £100 = £1,200,
which is > PC

so the exercise is just about worth it (20% Return on Investment) over a 6 month period.

Different activities may yield different conversion rates - e.g. visitors arriving via a search engine are likely to be more focused than people who have clicked on a banner offering a prize. Of course, many new businesses do not have this data immediately available, but this at least provides a framework to make an assessment of any new proposal (is it worth doing or not?).

Approximate conversion figures might be obtained from other companies in similar industries, and online advertising agencies will have at least indicative industry statistics on banner ads for example. After a short period of promotional activity, the real figures will begin to emerge, and these can be re-incorporated into the above equation, with ever increasing levels of accuracy. It is better to start with a guess, and then iteratively converge on more accurate figures. All activities incur a cost, even if it is just someone's time - so it is important all real costs are accounted for.

The cost / benefit equation may of course be further refined to include variations for product or market segments, or more detailed metrics (e.g. CPM and click-through data) available with some channels such as online advertising.

A more graphical way of looking at the cost benefit - equation, which also takes into account the cost of the web site and its maintenance costs is shown in Fig. 4.3.

The original development cost of a web site may be considered a fixed cost, but its maintenance and ongoing evolution are variable costs which relate to the number of visitors. The number of visitors is also proportional to the promotional costs. The sales generated by the web site (either directly online, or indirectly offline) are assumed to be directly related to the number of visitors, so the beak-even point occurs where the sales curve crosses the total of fixed and variable costs.

Fig. 4.3

The maintenance, promotion and sales curves are all interactive, and the model illustrates how maintenance and promotion are necessary to sustain sales, but if the amount of traffic generated does not exceed the break-even point, then the business cannot make a profit. Cutting promotional costs to save money might actually cost the company more if it drives the sales curve into lower sales.

Many businesses, particularly small ones appear to view promotional expenditure as an unnecessary extra burden, and some even regard their web site as a one off expense which must 'pay for itself' before warranting any further investment.

As Chaffey et al (8) point out, maintenance costs for web sites typically vary between 25% and 50% of original production cost, but they find anecdotal evidence of very low site promotion expenditure. Chaffey reports that his seminar attendees indicate their companies only spend between 0 and 5% of their original investment.

Clearly a balance must be struck between the excessive advertising spend of some of the early 'dot coms', and negligible promotion expenditure which will predictably produce very disappointing results.