The success of a web project is measured by how well it achieves its objectives. The objectives of a project can be multiple: customer satisfaction, increased market share or conversion rate, etc. While it's difficult to quantify the intangible, such as brand awareness or the real value of a follower on Twitter, there are financial indicators that will help you if your project objectives are solid and quantified.
There are two key indicators we can use to distinguish between two web projects: net present value and return on investment. Net present value (NPV) indicates, for example, the present value of a project over a given period. It's a key indicator that will enable you to distinguish between two web projects according to their profitability and duration. NPV will certainly be the subject of an article in the near future. This article looks at return on investment (ROI), i.e. the expected and actual financial impact of a project.
Return on investment
Return on investment (ROI) is a ratio that determines the gain in relation to the investment. It's an essential measure for any project, and one you need to establish before making any commercial decisions. ROI enables you to measure the result in relation to the means put in place to achieve it.
ROI is an exercise that should be carried out periodically, over the life of the project. A forecast ROI, ideally a conservative one, should be drawn up prior to the project. Then, comparative data should be created once the project is in production.
ROI can be calculated for two types of decision:
- Investors: when choosing between different financial products or investments.
- Within a company, in the case of a choice between two projects. The most profitable should be preferred.
It's not necessary for both projects to be tangible: a company might decide that a 7% return on a project would not be sufficient to justify the use of human resources, compared with 5% bank interest rates obtained from investing this money.
CAUTION: Return on investment, while a useful guide to judging a project's profitability, has a number of drawbacks:
- the method does not take into account the earnings profile over time;
- the rate of return is not comparable with the cost of capital, since the basis is different;
- rates of return for projects with different economic durations are not directly comparable.
Formula:
- ROI
Return on investment (%) = (investment gain - investment cost) / investment cost. - Payback on initial investment (ROI in time)
annual profit / investment cost
Example 1
A web project requires an investment of $10,000
The gain will be a profit on sales of $12,500
The return on investment for this project will therefore be (12,500 - 10,000) / 10,000 = 12.5%.
Example 2
A web project requires an investment of $10,000
The gain will be a profit on sales of $2,500 per month.
The return on investment in time will be (10,000 / 2,500) = 4 months, i.e. the company will have recouped its investment in 4 months.
WARNING: Return on investment does not take risk into account. Any form of risk should be calculated using relevant ratios. This is an essential measure in the actual calculation of the comparative value of different projects.
The data
Being a simple ratio, only two types of data are required to calculate the return on investment.
- Total monetary cost ($) of the project: invoices, time, resources, etc.
- Projected project profitability (before), current project profitability (during), total project profitability (after).
WARNING: Return on investment in time does not take into account time or inflation, factors that should be taken into account for projects that will pay for themselves over several years.
Resultats
Positive ROI
Situation 1
Two projects with different positive ROIs. At equal risk, the project with the higher ROI should be preferred.
Situation 2
Two projects with similar, positive ROI. The less risky project should be preferred.
ROI negative
A negative ROI indicates an unprofitable project. It's what usually nips in the bud what seemed to be an interesting project. But not always.
Let's take the example of an electronics manufacturer launching a support application for its customers. Initially, the company wanted to simplify its internal processes and standardize the receipt of consumer complaints, which until then had been handled via several channels (telephone, e-mail, website, forums, etc.). By facilitating the complaints process for consumers, analysts discovered during the course of the project that the costs of the technical support department were increasing due to demand. The number of employees required is higher than anticipated. The positive ROI forecast becomes negative. Theoretically, had the company had all the data at the outset, it would not have had to launch the project, since it was unprofitable.
Thanks to the project, the company was able to collect a wealth of feedback from consumers, enabling it to improve its products. Customer satisfaction has also risen. Finally, the media reported on the tool's ease of use, and tech blogs relayed the information, providing the company with free publicity and enhanced brand awareness. However, this new data could not have been obtained beforehand and is difficult to quantify in the short term.
Who to call?
Although necessary, calculating ROI and interpreting it comparatively may seem a complex exercise. If you don't have an in-house finance or accounting team, you can turn to in-house consulting. For all your web projects, don't hesitate to get in touch with Nixa. We can help you with the financial analysis of your web and marketing projects.