Jane Dudman explains why measuring the success of an online business has become paramount to its long-term survival
Who would ever have thought that Australian TV soap opera Neighbours could have summed up in one episode the ongoing debate about online business metrics: they're far too optimistic and based on figures plucked out of the air.
The conversation between cautious coffee shop owner Madge Bishop and optimistic pub owner Lou Carpenter about the launch of their proposed Aussie Chef website went something like this:
"If only 10% of people who visit the site buy something, we'll be in front."
"You're assuming we'll get 100 hits a day."
"It's a fair figure."
"It's not the way you run the pub, is it? Neither of us looks at our trade, doubles it, looks for some offshore business and then doubles that. It's not realistic."
The real world
In the real world, Madge's caution is being reflected as dotcoms and traditional businesses weigh up their e-commerce strategies and begin to haul back in the baby of boring business common sense, which was previously thrown out with the bathwater when online businesses were in the first flush of enthusiasm and venture capitalists were chucking money at them.
All of a sudden, being able to measure the success of an online business has become very important and one sign of the times is the recent launch of an e-commerce scorecard under the slogan: "You can't manage what you can't measure." The scorecard concept is a familiar one in traditional business. It enables organisations to decide on a range of key performance indicators (KPIs) from across their operation in order to measure how well they are doing. Now, that concept has arrived in the online world, explains Derrick
Sheppard, a partner at Score Research, which has helped develop the e-commerce scorecard (www.ecommscore.com). "There are very few independent, comprehensive, constructive frameworks to help businesses - whether they are dotcoms or traditional businesses - assess where they are in terms of e-commerce and where they need to focus," says Sheppard.
The Windows-based tool is based on a number of business processes focused on traditional areas, ranging from marketing, selling and delivery, to finding and managing suppliers.
The real challenge, says Sheppard, has been trying to keep the number of KPIs down to a manageable number, so as to make the tool easy for senior managers to use and get a snapshot of their e-commerce business. "After a lot of work, we have been able to get it down to just over 2,000 KPIs," says Sheppard.
That may sound like a lot, but it will provide managers with a clear view of both the business and technology indicators in their online operations, according to Score Research.
"The important business measures are not new," comments Sheppard. "They are things to which any business needs to pay attention, including turnover, costs, profit, cash management and employee productivity."
The e-commerce scorecard costs from £1,500 and is being backed by organisations like e-centre UK and EEMA, as well as companies such as BT, which is developing a smaller version of the scorecard based on 50 key questions about an e-commerce operation.
The launch of the scorecard marks perhaps a turning point in the development of online business and symbolises a return to the use of traditional metrics. But many online businesses have to use a combination of the old and the new, and some are having to improve the way their traditional counterparts do business, like online relocation service ActiveAbroad, which is looking to improve the number of casual enquiries that get turned into real business (see box, ActiveAbroad: A low-key approach).
The metrics system
Helen Bridgett, a director of London-based gardening site Greenfingers.com, which employs 20 staff, has experience of both traditional and online selling and says companies like hers have to look at both classic business metrics and those that relate more directly to the online business. "I use all the classic measurements, like sales, cost-per-order, profit-per-order and so on," she says. "But we are also measuring the website and using our own metrics, such as time spent online by customers, footfall through the site, what people are buying, and what we have to do to get them to come back again. Those metrics are more to do with the cost of acquiring customers and the lifetime value of customers, which are also around in existing retail businesses."
Bridgett adds that many of the measurements used in looking at Greenfingers' business are also used in other direct-selling operations, such as mail-order, she says. "So we combine business and website metrics with mail-order metrics, and that gets us very close."
Bridgett, who previously worked for Tesco's online grocery business and Abbey National's phone-based selling business, says the online sector has gone through a big shift, mainly brought about by those with the funding. "At one time, land-grab was the name of the game; now it's about acquiring customers, but the metrics themselves haven't changed," she says.
"It comes back to the way dotcoms are funded. Most are funded by venture capital firms and their criteria for evaluation have changed. Previously, it was about how well-known your online business was; now they've returned to the old criterion: profit."
Maturing with age
Mike Thompson, research director at Hull-based research firm Butler Group, says the whole online business sector is so new that companies have not yet had time to work out what metrics they should use. "Businesses generally measure performance against historical data and against their competitors. In this market, however, they have so far been in the dark," he comments.
"But there has been a shift of emphasis in the past six months. Established businesses are now saying: 'Hang on; it does matter how much this costs, because e-commerce is not going to be our entire business. It is going to be just another channel for our business'," explains Thompson.
According to Thompson, online operators now have to start looking at the total cost of ownership of their business. They need to take into account the overall management cost involved in running their systems, as well as the potential damage done to the business as a result of technical failures. "These are harder to quantify, but they have been understated by online businesses," he comments.
Better the devil
Thompson calculates that it could be as long as three years before true metrics emerge for measuring the performance, and the risks, of online businesses. Software tools are available to begin detailed website analysis from companies such as Macromedia and Hyperion but, at the moment, these have to be combined with more traditional accounting yardsticks. David Pattison, sales manager at Reading-based e-business consultancy, Emperian, says there is the potential danger of simply falling back on "classic" business metrics. "Traditional bricks-and-mortar companies getting into e-business will often use some sort of traditional business metrics. What we need is someone to pull them out of that mindset and see that e-business is different," he comments.
"This is a different infrastructure and many businesses haven't yet got a handle on what e-business is, or how to drive it forward."
Others remain sceptical about moving very far from what they see as sound business rules. Martin Kelly, managing director of online information search site Infofast, says the business plan of most dotcoms is akin to selling £1 coins for 90p and hoping to cover the loss by selling advertisements aimed at the rush of people wanting the bargain. "But there is no sustainable advantage in that model," he points out. "It won't be long before someone else is selling them at 80p."
At Infofast, claims Kelly, a lot of time has been spent trying to drive down the cost base of the business, which uses professional researchers to answer queries.
One comfort to online retailers, which have come under severe scrutiny over the past few months, is that their traditional, high street counterparts aren't doing so well either. Retail metrics produce some disturbing results. The average UK consumer spends 73 hours a year queuing, and 56% of consumers have complained in the past year about poor service or faulty goods, up from 39% in 1997.
Expectations of service are rising, and it is not just online merchants that are being measured, and sometimes found wanting.
Further scorecard information can be found from:
From the top: Business metrics
Top 10 metrics for online businesses
- Cash-flow management: ensuring you have enough to pay the bills, including labour costs.
- Profitability: When is the business going to turn a profit? Investors now want this date clearly stated.
- Gross margins: What is the total profit and what is the profit per product/service?
- Return on investment: What is the profit per asset?
- Cost of customer acquisition: How much will it cost to get those customers to your site?
- Management experience: Investors now want to see relevant business track records in any online management team.
- Customer satisfaction: Getting lots of acid emails from customers? That's bad for business.
- Productivity: What is the profit per employee?
- Customer profiling: Who's visiting your site, how often, what do they spend money on and what do you know about them?
- Return on ad spend: What are you going to gain for your marketing money?
Keith Mitchell is a director in IT consultancy at corporate finance firm Pannell Kerr Foster
Made to measure: Online business metrics
Unique visitors: The number of different individuals that access the content of a site or online services, counted only once, even if they visit the same site more than once.
Reach %: The percentage of individuals that accessed the content of a specific site from among the total number of individuals using the Web or online services during the month.
Global domains: Take into consideration unique visitors to all same-name sites, regardless of type of domain or online service. For instance, the domains www.xyz.co.uk, www.xyz.net and www.xyz.com would be ascribed to the global domain XYZ.
Total digital media: The number of Internet and digital media users in each country visiting at least one site or online service in the 30-day measurement period.
Properties: Entities under common ownership or majority ownership.
Average minutes spent per usage, per month: The average number of minutes spent on the category during the month, per visiting person.
Source: MMXI Europe www.mmxieurope.com
Activeabroad: a low-key approach
London-based online relocation firm ActiveAbroad has five full-time staff and has been live since September, providing information, products and services for people coming to London and the UK from the rest of the world.
The company has clear targets for its business. Its director, James Moeskops, says expectations of how dotcoms should be operating have shifted substantially over the past six months. "There is still a lot of interest in how many hits we are getting, but the old Web-based model of bringing people to a site and making money from advertising is now dead," he says.
Instead, companies like ActiveAbroad have to focus on more traditional ways to make money. In ActiveAbroad's case, it's a two-pronged attack. At the moment, the company's income comes from commissions and referral fees on the products and services it provides, such as property sales or rentals. But it has also set up a membership scheme and, in future, wants to make money from charging its members a small annual fee.
"We have 850 members at the moment, and we have calculated we need to register 50 members a day to achieve our revenue targets," explains Moeskops.
In addition to registering members, ActiveAbroad has another target: raising the conversion rate of business received from initial enquiries.
In traditional relocation businesses, which concentrate on small numbers of larger deals, mostly in property, conversion rates are, according to Moeskops, "astoundingly low". To thrive, ActiveAbroad needs to raise that rate, particularly as it aims to make business out of more, lower value transactions. "Some of our customer service partners have a conversion rate of just 1% from net enquiries," says Moeskops. "We're working to boost that rate by going back to our members."
ActiveAbroad is confident it can raise conversion rates. As Moeskops points out, its potential customers are eventually going to have to spend money with someone, and he wants it to be with his company. "Ultimately, these people find property, they get phones installed, they get their kids into school," he comments. "This is not like a discretionary spend, and we want in on this. We are doing well from commissions and referrals, but we will get a lot more if we can increase our conversion rates."
In the meantime, cashflow is tight. Suppliers are wary of extending credit to the business, says Moeskops. "We have to prepay everything, including 15-months rent on our premises and all the books on the site," he comments.
"It makes it more difficult, but strangely enough, it means we have been forced to focus our funds on good business from day one. A lot of Web businesses would probably still be in business today if they had started more quietly and carefully."