The cost of a Web site can either benefit or harm a business
Janet A. Harte
Small Business Development Center
Q: A year ago, I invested $10,000 to have an e-commerce Web site developed and launched for my company. I’m not sure it’s paying off. What can I do to evaluate it?
A: For $10,000, you received services to develop a site, purchase software, set up hosting, acquire a domain name, set up a merchant account, acquire the necessary hardware and connect to an Internet Service Provider. Given the size of the investment, it is unlikely you would recover it in the first year. Most companies take a longer term approach to cost recovery. A way to do this is to use your net profit margin to predict payback of your investment. For example, if your sales are $125,000 and you have a net profit margin of 5 percent, profit is $6,250 per year. If profit is used for nothing else, you would recover the investment in less than two years. However, this calculation is dependent on growth in sales and changes in profitability.
Q: So my return on investment is predictable depending on profitability and sales growth. What about all the money I have to spend to keep it operating?
A: Direct ongoing monthly Web site costs could be overlooked because they are lumped in with all the other fixed costs. However, these costs should be well managed because there is a direct relationship to the sales level required to support them. For example, let’s assume your monthly Web site operating costs are around $190. This amount includes hosting, merchant account, merchant account per transaction charge, Internet Service Provider and webmaster. If your gross profit margin is 43 percent, divide this into the fixed costs of $190 per month. The result is that an additional $441.86 of sales will be needed to pay for the costs to operate the site. If the average purchase price is $35, then you will need to sell 12.6 items per month to justify the cost. Ide-ally, these sales will come directly from the site. If you choose wisely, your fixed Web site costs will be minimized, which, in effect, reduces the sales requirement. Keep in mind that, at this point, you have only covered the costs related to operating the site. More sales are required to contribute to other fixed costs and profit.
Q: How far should I spread out the payback period?
A: Since technology is constantly changing, you may need to invest in upgrades and other features to meet the needs of your customers. You should plan to recoup your initial investment within two to three years. Just as importantly, track your operating costs so you know at all times whether the Web site is meeting your sales expectations. If it doesn’t create enough sales to consistently cover its own operating costs and contribute to other fixed costs and profit, then it has little value as a viable distribution channel.
Janet Harte is the Washington State University/SBDC business development specialist for Southwest Washington. The SBDC offers free confidential business management counseling to small and mid-sized businesses. Call 360-260-6372 or e-mail email@example.com if you have questions or wish to make an appointment.