Recently, we have been focusing on small to medium-sized businesses. These are clients who either don’t have a web presence or need to pivot from a business-to-business model wholesale approach to a business-to-consumer direct eCommerce approach. What I’ve observed from some customers is a reluctance to pay the money to make the necessary changes. And it’s made me ask why. I think it’s because some clients struggle to see the difference between a cost and an investment.
An investment is more than a cost because the purpose of making an investment is the spending money in order to make a return. A cost on the other hand is something like paying taxes or registering a business. Being able to see the difference between these two things is critically important as a business owner wanting to maximize profits.
Investments are important. As the old saying goes “you have to spend money to make money.” The trick is to spend it in the right places AND understand what return you’re going to make from your outlay.
Doing business online is smart. For one, you don’t have to support costly bricks-and-mortar retail locations. You’re not worried about how many customers pass your door and your website is always open and able to attract new customers around the clock.
Many who have traditionally only worked in the wholesale market have been thankful for not having to prop up retail locations. They leave ‘the hard work’ up to retailers who take a larger slice of the pie for managing the customer channel. But wholesalers don’t have to worry about the typical high street rents and other concerns with managing a bricks-and-mortar location.
For the wholesaler, they earn about 25% of the cost price of goods as they leave their warehouse.
As an online retailer, you keep all the infrastructure you already have but you add a direct-to-consumer sales channel through your website. This process of bypassing the middle man opens you up to a much bigger range of customers.
There will be some retraining involved as your team needs to now handle more phone calls, manage customer inquiries and physically manage a larger number of small orders, but the reward is that you are yielding 60% gross revenue from each sale from selling the same product.
Let’s take a look at what this can look like with a real practice example. Let’s consider Bob, who is a food producer and retailer. Bob sells produce boxes that cost $25 to put together, and he retails them for $100.
As a wholesaler his figures look something like this:
Production cost: $25
Wholesale price $50
Retail Price $100
As a wholesaler, after costs, Bob makes about $25 per unit he sells. This is his wholesale price, less the production costs. If he manages to move 1000 boxes of produce per month, he makes $25000.
Now, imagine Bob uses a website to sell directly to customers. Let’s assume his production costs remain the same at $25, but he incurs a delivery cost of $10 per box.
Production cost: $25
Delivery cost: $10
Sale price $100
Instead of making $25 per unit as a wholesaler, Bob is now making $65 per box even taking into account the fact that he pays for delivery. This means for moving 1000 units of product, by selling directly to the consumer he’s making $65000. Netting an additional $40000 profit just by selling directly to consumers online.
Now we can’t assume everything is equal, for example, you may need to employ some more staff to be able to manage that number of orders. But even if you had to employ some more folks you’re still better off selling direct to consumer than using the wholesale model.
Over a year, your nett revenues could make $300,000 to $60,000 annually. The next question is: how much should I invest in order to double my money?
Know your website cost
To be sure, you have to know the cost of your website. Annual maintenance, upkeep, and the cost of your domain will all be included in that total. Get an estimate of this variable from your web developer.
Before calculating ROI, you must first track your web visitors. Without a good traffic analysis strategy, it will be difficult to assess how much revenue your website is generating. A Google Analytics-like solution will be of assistance.
Understand how many visitors turn into customers
When you know how many visitors your website gets each month, you should understand how they move through your sales funnel. To summarise, how many of your visitors follow up to become inquiries?
Of course, the sales funnel doesn’t end with enquiry conversions. You also have to understand your close rate or the percentage of leads who end up as customers. For most industries, the visitor-to-lead conversion rate is around 3 percent, and the close rate hovers around 20 percent. Rates may differ, which is why knowing your own sales funnel is important.
Calculate your customer lifetime value
Website ROI is an estimate of the future revenue you can expect from a new customer. Most of the accuracy in your average customer lifetime value (CLV) will depend on whether you run your business on subscriptions or one-time sales. Use this infographic to learn more.
How to Determine the Return on Investment (ROI) of Your Website
Perhaps, your website costs $6,000 to develop. The 3-year estimate indicates that your yearly web development cost will be $2,000.
To justify this investment, $2,000 per year in profit must be generated. In order for your website to generate 2 new customers each year, your average customer brings in $1,000 in revenue.
Your website is currently having an impact in terms of generating customers. Based on the above, you might know that the website generates approximately 6,000 visits each year. 3% of visitors become inquiries, generating 180 new leads each year. And again, if 20 percent of these leads become customers, that means 36 new customers annually.
Knowing the average value of your customers simplifies all of your website profitability calculations. If your average customer is worth $500, then your website generates $18,000 in revenue each year. Also, the annual cost is $2,000, and the website ROI is 900 percent.
Here’s the formula
Annual website cost divided by average customer value = website ROI.
If you need help generating more business through your website, then reach out to us at Asporea Digital. We’ll be happy to help you.