ROI: The 800 lbs Gorilla in the Corner pt 2

Image via WikipediaA surprising question appeared on a business forum recently: Do I need to get business cards?
The poster said that his business was entirely online. He had no face to face contact with his customers. The only communication was by order and email, with an occassional phone call to clear up immediate problems. He didn't see why he needed business cards - and his arguments were pretty sound.
The question must have astonished most of the forum. No one replied for nearly 3 weeks.
Finally, someone posted that business cards had helped build his business. He included business cards in all packaging along with the invoice, and passed them out whenever he met someone. The business cards helped his customers remember his business, or to find his online store.
The discussion ended there.

The question is valid though: Does a small wholly online company need business cards?
Marketers will say emphatically Yes. Invoices with contact information are good. Most people put them away after they're paid. The only time an invoice gets any attention is at tax time.
People handle business cards differently. They're usually put into a card file on the desktop. Whenever the person thumbs through the cards looking for something, they momentarily see each business card. Even though it's just a fraction of a second, that's enough to remind customers of the business.
For that small moment, the Customer will remember the purchase. They may even return to the website - and buy something else. That's enough. The business card has paid for itself and more.
5oo business cards cost about $100, or about 20 cents a card. If the merchant makes $5.00 on the purchase, that's an ROI of $5.00 (- not counting the original purchase -) for 20 cents.

Let's have a little fun with the numbers.
If that were the only purchase anyone made because of a business card then the guy spent $100 to get $5. That's assuming he got rid of all 500 of the cards. If he did put all 500 cards into potential future Customers' hands, the chances of him getting the one sale is .. 500 to 1.
That's pretty good odds. - Sorta.

How many Customers have to buy something for him to break even on the business cards? $5 per sale. He needs to make $100. That means he has to make 20 sales to cover the cost of the business cards. - What are his chances of that? 20 out of 500, or .. 25 to 1.
The odds are getting closer. But most people would make a bet if they knew there the odds were 25 to 1 in their favor.
What if he only passed out 100 cards? That's 5 to 1.
Or 200 cards? 10 to 1.
The odds are still in his favor. But where does he decide he's willing to make the bet. He's betting his business and income, remember?
The potential ROI on his business cards depends on how many cards he puts into potential customers' hands.

There's a joker in this deck of cards. What he makes depends on how quickly he gets the cards out. Let's say he finds for every 10 cards he passes out, he makes a sale.
If he passed out 100 cards, - That's 10 sales. - or $50. He hasn't paid for the cards.
If he passed out 300 cards, - That's 30 sales. - or or $150. He's paid for the cards, but hasn't really made much.
How long will it take him to pass out 300 cards? A week? A month? A year?

If he made $50 ($100 for the cards. He made $150 from 30 sales.) from 300 cards in a year, that hardly makes the cost reasonable. He could make more money from doing something else to promote his business.
Thinking about ROI means thinking about thinking about how long it will take to recoup the investment.
If his online store made 1000 sales in a year, and only 30 of them resulted from the cards, is that a worthwhile investment?

The answer is .. Yes. -- Why?
After the cost of the cards, he only made $50. Then again, he sent out 700 invoices that didn't have business cards, didn't he?
There are maybe 700 of his Customers that never got a card. And he could have handed out cards in other places.

But none of these numbers are the real reason he should have a business card. The reason he should have a business card is Customers' expectations. A business card with the invoice supports the perception of the business.
If he meets someone, handing out a business card is expected. People question of he's really in business if he doesn't have one.
A business card supports his reputation. There is nothing more valuable to a business -especially a small online business- than their reputation. It reflects upon the perceived integrity of the business.
But how do you put a value on reputation? It's part of his investment in business cards.

There are significant factors in ROI that can't be expressed in hard numbers.
How valuable these factors are to a business depends on the nature of the business.
If the owner assumes that Customers will come to the site one time to either make a purchase or not, then there is much less value to distributing business cards to help establish reputation. There is still some value since one-time Customers may refer others.
If the company expects to sell repeatedly to Customers, then the value of business cards to establish reputation -and to bring Customers back- is much greater.
More depends on the long-term plans of the business:

• Does the business plan to add more products?
• Will the new products be more profitable?

We now have a significant factor that affects many more significant factors. In order to understand the value, how do we quantify these factors?
Incorporating a little fuzzy logic may help. There is an old marketing adage that it costs 6 times as much to keep a Customer as it does to find a new one. That means the $150 he made from the business cards is worth .. $900. He only made $5000 for the year. Suddenly, the value of the business cards is worth nearly 20% of the revenue.
It is using fuzzy logic, but the difference of $650 can be seen as the long term value of the investment in business cards.
On a card by card basis, the $100 spent on each card represents an ROI of $900. The cards that cost 20 cents each have returned $1.80 per card (- really $3.00 because only 300 of 500 cards were distributed.)

There are many other factors. Some can be quantified, and some can't. Determining the quality of these factors depends on the priorities of the business.
Assuming again that the company made $5000 for the year:

• How many visitors came to the site? We know that 1000 people bought products.
• How many times did repeat Customers return to the site?
• How many times did visitors come to the site before buying?
• Why did people return to the site?
  

For web design, software training, community building, and web programming a similar sort of analysis can be made. Hard numbers can be put to some things. Some things are difficult to express in numbers. Overall, the value of these unquantifiable aspects is qualified by the goals and vision of the business.
We'll explore a few of the specifics in another article.

SEO/SEM in Australia is a special issue for so many reasons. Join me was we explore. It will be a fascinating and informative journey.

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ROI: The 800 lbs Gorilla in the Corner pt 1

Image from WikipediaA lot of the stuff I do is difficult to present in terms of ROI: web development and programming, software training, SEO/SEM, and Community Building can be very esoteric in terms of raw dollars.

Old Days
It's been like this since my first days in the computer field.
My second job in IT was as a commission sales person for NEC. To the world back then, IBM meant Computers. NEC was unknown outside Japan. They entered the US market through Europe with a superb microcomputer system based on the new 286 processor. (I did warn you I'd been at this a long time, right?)
Not only was the system faster, but it had the best color monitor on the market. It could be networked - with a little careful programming- with the new Netware software, so it didn't need a license for token ring technology from IBM.

I didn't know much about programming or computers in those days. All I knew was I wanted to work with this cutting edge stuff. Fortunately, microcomputers leveled the playing field for folks like me. Colleges were training people on mainframes. Even people with Masters' degrees in Computer Science had rarely seen a micro.
My only real advantage was to be organized. I might not have had much more to say than what was in the brochure, but I made sure I got to every appointment on time to say it.
I was really excited to be working for one of the obvious industry leaders as it expanded into a vast new market.

This one manager was impressed with my naive enthusiasm. On the second visit to his distribution company, he smiled and told me: "If you can find me one piece of software that will run on that system, I'll replace every computer in the room." I looked across the room at 25 computers, and my pupils must have dilated.
Then he said, "I'll replace them all,...if you can find me one piece of software that will run on 286 systems." Then he handed me a copy of DataSources. DataSources was once the Bible of the computing industry. These two huge books were 4 inches thick and the size of a coffee table book. One was for software. One for hardware.
"Go ahead. You can take them with you. You find one piece of software, even if I can't use it, and I'll sign the requisition today," he said. "Then come talk to me next week."

I took those books home and poured over them. I even looked through the hardware book hoping to find something to trace down in the public library. There was nothing.
I had to go back in there the next week and admit defeat. He just laughed as he handed me some coffee.

The new DataSources came out in about 6 months. It was filled with software that ran on 286 systems, and software that was compatible for both 286 and 8080 systems. Both had options to use CP/M, PCDOS or MSDOS as the operating system.
Turns out, he did replace all his computers, networked them, and signed on to an annual service contract to contain his costs - all through me. I ended up doing a lot of the work myself. I followed the NEC tech around and helped him to learn about all the new technologies.
The owner and I had a lot of coffees together.

This was the days before the Internet and Windows. Windows was out, but version 2.x didn't work reliably. It was a year or so later when version 3.1 came out that Windows began to make a place for itself.
The Internet was a secret subject for tech people. We wished upon the stars for it. It was more an impossible dream than reality. And many people thought it would never happen. The Internet would mean too much information and freedom, the hacks canted. No government would allow that.

Faith?
Thing is, this guy didn't replace his computers because he could show a real return from the dollars spent. He didn't buy them because he needed the fabulous 10Mbyte harddrives, or the advanced CGA graphics.
There wasn't any way to calculate an ROI on so many unproven technologies. The technologies were so new no one knew how much it would cost to keep them running. Netware was promising to make micros work like mainframes. It sounded almost impossible.
It wasn't hard for IBM to show that converting paper records to searchable databases saved money and increased productivity. But that was for big business with hundreds of thousands of records. IBM had whole systems: printers, terminals, harddrives, and mainframes.
No one even knew how to connect printers to these new microcomputer networks. In most cases, a programmer had to write a driver for a Netware network. How do you figure that cost into the ROI?

IBM threatened, then released their own Personal Computers. But they didn't even connect to the mainframes. PC's worked like dumb terminals which cost much less. IBM only got into the microcomputer market to quash the upstarts.
We know now it didn't work. But when this guy bought that room full of micros and networked them, he could not have justified it to anyone.

So ... Why did he buy 25 computers, a network, and a long term service contract on unproven technology and put his whole career and business on the line?

• Part of it was the excitement of the microcomputer revolution.
• Part of it was a need to keep technologically ahead of his competitors.
• Part of it was to keep up his company's reputation.
• Part of it was NEC's international reputation.
• Part of it was all the times I came to him over coffee so many times to tell him exciting and good news about the developing industry.

He made the right decision. But he only saw the ROI in passing. I doubt he ever sat down to figure it all up. If I had had to justify the purchase in terms of his return on investment, he would never have made the purchase.
Many times, I've sat down with prospective customers and told this story.
I emphasize the brilliance of his foresight by quoting Napoleon "L'audace. L'audace. Toujours, l'audace." Then I mention the practicality of the long term service contract which guaranteed him support any time, and specified hourly programming fees - and how that limited his exposure to the uncertainties.

Options
Could he have made safer, more productive choices? Maybe. No one knew it at the time, but his network absorbed technology and upgrades for almost a decade. Netware upgraded to accommodate 386 systems and software, then 486 systems.
If he had networked 8080 or Z80 systems with Netware, it would have been much more risky.
Software is defined for workers in terms of the interface. The costs of retraining staff would have been much more dramatic to move from green text on black screens to 16 and then 256 color monitors.

Color screens turned out to cause less eyestrain, headaches and were proven to be more productive. People were more willing to put in long hours and could concentrate easier on choices distinguished by different colors.

NEC did not offer a long term contract for support on such an ad hoc (technologically) network. Programming and technical support would've had to be billed at the market rate. Netware was made to run on the 286 (or at least the 8086/80186).
Replacing 286-based systems turned out to be much less expensive because IBM opened up its architecture (in a last ditch attempt to bury micros, many thought).
But no one could have known all of that.

What does this story prove?
As the story unfolds, many advantages showed themselves:

• color screens for productivity (and employee moral);
• harddrives saved server time;
• projects and departments were separated for security and practicality;
• improving technology melded software and hardware to reduce upgrade costs;
• Microsoft broke free from IBM and Windows came into its own;
  
• and much more.

Today we have the advantage of those years of anticipation and determination. But still, many purchases come down to prioritizing the goals of the business. That's really how this forward-thinking manager made his decision.
Look back at the list of reasons I gave. Then glance over the whole article. Not many of those elements could be expressed in hard numbers going in. They had to be managed to prove themselves.
And there is an element of just plain luck.

He chose to make the purchase because of his own priorities. His priorities were not easily quantifiable. There is no question they are qualifiable though. And in time some of his qualifiable reasons proved themselves.

The story illustrates a reality of any technology purchase: hardware, software, training, websites, SEO/SEM, and community building, the decision is made on priorities, not necessarily hard numbers. Technology in business is too closely integrated with ergonomics to quantify everything. Employees and customers are a part of the equation.
If the technology is not a priority, it will not be purchased no matter what is quantified.

Does that mean not to put into numbers anything that can be quantified? No. At every opportunity, quantify. Managers need numbers to manage. It's an old adage of management.
But management at every level has to respect the elements of technology that are qualifiable, but resist being quantified.
We'll explore these topics further in the next few posts in terms of each of the services and products.



SEO/SEM in Australia is a special issue for so many reasons. Join me was we explore. It will be a fascinating and informative journey.

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