It's All Geek To Me - August 18th 2004

Recently a number of people have been asking me about what I consider to be sort of “basic” stuff. Then yesterday I was interviewed for a B2B Search Engine Optimization article where I learned many of the other people interviewed were perplexed about many of the same basic issues.

People ask KISS about their statistics, referrers, search terms – but fundamentally it all comes down to one very simple question: “Is my website making money?”

The interesting thing about this is the number of pretty smart business people that have no idea how to answer the question. They could tell you sales by department by day for their retail store, or the profitability of the last three jobs they did, or even how many pitches they need to make to get the sale – but they are totally mystified by how to judge one of the best sales tools in the arsenal: the website.

For most businesses there are generally accepted accounting practices (insert your favorite Enron joke here) – and the web has that same basic math. With just a bit of info it isn't hard to pickup the necessary skills to understand from a financial perspective exactly how your website is doing.

So – we hereby present this very simple guide to determine the profitability of your website.

First thing you need to know about is statistics. Yes, there are lots of them – what pages people visited on your website, what search terms they used to find you, how long they spent on your site – but for our purposes we need just one number, visitors. (not hits, not pages, not kb but visitors...aka real people).

Next thing we need is some basic sales tracking – and if you are a small or medium business some assumptions here are just fine. Even if there is no direct sale, assign a value – you want your website to generate solid leads, decide that every one is worth $9 to you. (relax, like all spreadsheets these numbers can always be adjusted later if they are incorrect). A simple example: we have a customer who has people call him and say, “I'm on your website looking at your item...", which naturally converts to a sale pretty much every time. He paid close attention for two weeks to comparing numbers and uses a 15% 'phone factor' – taking the direct online sales through his shopping cart and adding 15% to include phone sales that are a direct result of the site.. This number is definitely wrong – it is probably low – but for his business planning and information needs it works just fine.

So we know two things – the number of people that came to the website and the sales those people generated – stick with me here, this is the slightly complex part (but it is so worth mastering)

If we take the total number of people that came and divide by the number of orders we have our customer order rate or COR. This is also known as the conversion rate and it is a critical number for improving websites, but that discussion is for another issue of this newsletter. COR really depends on your product, and we have clients that range from 1/100th of 1% all the way up to 11% or more - but let's assume an average for our purposes here of one percent. It takes 100 people visiting the website to get one sale, COR of 1%.

Then we go back to the sales data – let's say we sell T-Shirts and had 485 orders that averaged $25 each. (this works the same if you sell real estate and have an order per month for $4000 just as well – does not matter). OK, so 485 orders at $25 = $12,125. When someone buys your T-Shirt, it costs you to make and ship it – so let's say rough profit of about $12 per unit sold. This number is your Average Order Profit, in this case the AOP is $12.

In this case we had 48,500 visitors to the website this month to make these sales (485 sales at a 1% COR = 48,500 visitors).

So, now – here's the math...
48,500 Visitors x 1% COR = 485 Orders x $12 AOP = $5820 Profit.

And here is some neat stuff you can do with this math....
Say this site cost you $18,000, and you spend $650 a month marketing it. That means if you figure an 18 month site life, it costs $1650 per month to make this go. Subtract that from our profit above and the site is positive by $4170 per month, or a bit more than $50K a year.

Say, further, you were considering doing more marketing, and wondered what to buy and how effective it would be. All marketing can be tracked and a precise customer acquisition cost (CAC) can be easily figured. Example: you spend $250 for an online ad and you get 500 people as a result – those people will have cost you $0.50 each.

With your conversion rate of 1% you can expect 5 orders from those folks, at your AOP of $12 that's $60 – so your $250 ad would be a major mistake. That is because for this ad campaign your CAC was $0.50, which is much more than you can afford.

And now for our last formula – the most important one of all, the infamous BECAC formula. (BECAC = Break Even Customer Acquisition Cost)

We take our profit of $5820 and divide by the 48,500 visitors = $0.12

So, if we buy ads where it costs us $0.13 to get people, it is a loser, and if we buy ads where is costs $0.10 to get someone, it is a money machine.

If you have a website you should know how many people show up each month, roughly how much stuff they bought, and then it becomes very easy to figure out what makes sense for your business. When it comes to buying online advertising it is even more simple - Know your BECAC and never buy above it.

PS – here is a handy dandy handout showing the formulas used here and some example calculations: http://www.kisscomputing.com/pdfs/themath.pdf

Tech Tip

by Michael McGrath Let me describe an email symptom to you, and see if it sounds familiar: You boot up, open Outlook Express or Outlook, check for new messages, a few appear in your Inbox and then you get an error message and the session ends. The next time you log in, the same messages are downloaded, and you get the same error message. Ring a bell? We get calls often from clients describing these symptoms and asking us to fix their email. Let me tell why we can't. First, and I don't say this disrespectfully, it's not our problem. In order to understand what's at play, it's important to understand what an email program does. Outlook Express (and Outlook, Eudora, etc.) performs three main functions: 1.It logs into your email box with your user name and password. 2.It downloads all messages from your box. 3.It sends a command to the server to delete the messages it has just finished downloading. If you've experienced these symptoms, though, my guess is you also have an anti virus program installed, maybe Norton or McAfee. Let's see what these programs do in order to complete the picture. Most people have their anti virus program scan messages before downloading. When an anti virus program detects a virus, it kills Outlook Express's connection to the server so it can not download the infected message. This is good protection, but in breaking the connection with your mail server, Outlook Express never gets to send its command to delete messages it has already downloaded. Thus, they remain in your email account, so the next time you log in, they're downloaded again. Thus, the symptom. What do you do? My suggestion is to change your anti virus settings to scan email after it has been downloaded (rather than before) but to scan before you open it. The literature that came with your anti virus software will tell you how to do this. Microsoft Tech Support also provides a list of helpful notes that explain how to configure Outlook and Outlook Express with your anti virus software so they play well together. To identify your specific symptom, go to Google and enter the error message you get at times like these, "0x800ccc0f", for example. Google will list the exact page at Microsoft where the Tech Support instructions are published. P.S. You've received those emails from Nigeria asking for your help in liberating $50M, for which assistance you'll be paid $10M, and you wonder what's up and should you respond. Want to read about my experience with these? Have a story to tell? Want to publish it? Email me and I'll tell you about our Blogware Products.