A basic formula is:
ROI = cumulative net profit over three years / (initial costs + three year management costs)
In general, costs are tallied for initial development and estimated for the next three years, breaking out the costs for each of these periods. Typical e-business start-up costs include:
1. Research and planning
2. Site development
3. Consulting services
4. Hardware and software
5. Hosting or connectivity
6. Marketing development
8. On-going site management and improvement
The most important element to consider is the cost to obtain visitors and the proposed conversion rate. Be wary that costs to attract visitors is typically much higher than expected, and the conversion rates of visitors to purchasers is typically much lower than expected.
Against these costs, benefits will be applied, which requires a sales projection. Benefits in an e-business are often difficult to accurately predict, especially for a new business in a new market without established ROI benchmarks. Once the sales projection of revenue is made, the profit is applied against the cost in the ROI analysis.
Too often, e-business analysis uses a simple
This was first published in December 2004