Whitepaper ds roi_en

Delivering Multi-Vendor Product Information to Facilitate Customer Purchase Decisions:

Evaluating the ROI of CNET Channel DataSource™ December 2004 A White Paper developed for CNET Channel Project Director: Ed Callan, Principal

Callan Consulting 61 Baywood Avenue San Mateo, CA 94402 U.S.A. Phone: +1-650-375-0573 Fax: +1-650-375-0144

Delivering Multi-Vendor Product Information to Facilitate Customer Purchase Decisions: Evaluating the ROI of CNET Channel’s DataSource

Circulation or disclosure in whole or in part of this report outside the authorized recipient organization is expressly forbidden without the prior written permission of Callan Consulting. © 2004 Callan Consulting. All rights reserved. Reproduction or redistribution in any form without the prior permission of Callan Consulting is expressly prohibited. This information is provided on an “as is” basis and without express or implied warranties. Although this information is believed to be accurate at the time of publication, Callan Consulting cannot and does not warrant the accuracy, completeness or suitability of this information or that the information is correct. Information Callan Consulting provides is general background and is not intended as legal or financial advice. Callan Consulting cannot and does not provide legal or financial advice. Readers are advised to consult their attorney or qualified financial advisor for legal and/or financial advice related to this information.

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Table of Contents Executive Summary Page 4 Introduction and DataSource Overview Page 4 DataSource ROI Components Page 5 Reduced Database Implementation and Maintenance Costs - Initial Database Build - Ongoing Maintenance

Pages 5-6

Increased E-commerce Revenues - Cross-Selling and Upselling - Improved Close Rates - Repeat Sales

Pages 7-8

Reduced Sales and Customer Service Costs - Reduced Calls to Sales and Support - Improved Call Handling Efficiency - Improved Inside Telesales Ramp-Up Time - Improved Proposal Development Efficiency

Pages 8-10

Other ROI Benefits - Improved Telesales Margins - Reduced Cost of Error Handling and Returns

Page 10

DataSource Solution Costs Page 11 Sample ROI Calculation - Inputs - ROI Benefits

Page 11-14

Conclusion Page 14-15 Appendix: Notes on the ROI Model Page 16

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Executive Summary Introduction and DataSource Overview To succeed in the highly competitive IT and consumer electronics e-commerce world, online resellers need to differentiate their offerings, increase revenues, and reduce operating costs. Many online resellers depend on their online product catalogs to both generate revenue and differentiate their offerings. And while product catalogs are frequently considered only as a cost center, they do get results. A recent survey of over 2,500 IT consumers noted that “access to detailed product specs” was the #1 factor for consumers making online purchase decisions. This is where CNET Channel DataSource™ comes in. DataSource provides online resellers with a complete, accurate, and impartial source of worldwide IT and consumer electronics product information. DataSource contains product images, marketing descriptions, and detailed specifications on over 2 million SKUs in 12 languages. Resellers that use DataSource rather than building their own product catalogs gain access to constantly updated, multi-vendor, and multi-lingual product data—while saving time and money. DataSource leads the market in breadth and granularity of vendor data, as well as in the number of languages it supports. Online resellers using DataSource access product information customized to meet their specific needs. By using DataSource as their trusted source of product data, online resellers can:

• Decrease costs associated with creating and maintaining an in-house product database. Additionally, with accurate and complete product information featured on their websites, resellers reduce costs to handle customer complaints

• Boost revenues through improved website cross-sell and upsell—increasing customer loyalty and shrinking sales drop-off rates

• Improve organizational efficiency by making it easier for telesales representatives to search product information. DataSource also enables resellers to provide customers with better website self-service, thereby reducing calls to customer service. And, with better data at their disposal, sales organizations can more efficiently generate detailed proposals

• Greatly enhance the customer experience by enabling customers to

easily access complete product data, compare multiple products, print datasheets, and select compatible accessories

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To demonstrate and quantify the economic benefits associated with DataSource, CNET Channel contracted Callan Consulting, an independent business modeling consulting firm, to develop a detailed return on investment (ROI) model. Callan Consulting interviewed a broad range of CNET Channel customers and gathered data from a variety of secondary sources to create the DataSource ROI model. As this white paper describes key ROI benefits, it can be read either as a stand-alone document or in conjunction with the ROI model. DataSource ROI Components Organizations that implement DataSource typically achieve economic benefits in three major categories:

• Reduced costs to implement and maintain a product database • Increased revenues from the e-commerce website • Reduced sales and customer service costs

Reduced Database Implementation and Maintenance Costs

Initial Database Build

An online reseller can spend a great deal on building its initial product catalog database, especially if it builds the database using internal resources. Human capital costs can quickly escalate, as building a reasonably sized database requires significant investment in data entry operators, data entry managers, QA managers, product managers, and database ontologists (librarians). Consider this. Data entry operators typically enter 25-30 SKUs per day. At this rate, a reseller would need to employ six data entry operators to build a database of 50,000 SKUs over a six-month period. To create the database, select products, and define product interrelationships, the reseller would also need at least one full-time employee equivalent (FTE) data entry manager and several FTE QA managers,

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database administrators, and ontologists. Thus, the fully-loaded staff costs for the entire database build team could run a half a million dollars or more. By outsourcing this entire operation to CNET Channel, an online reseller can bypass these costs entirely.

Ongoing Maintenance

Once it has built its database, the online reseller must then invest labor hours to maintain and update it. CNET Channel estimates that product catalogs typically change by about 10% per month—resulting in a complete catalog change-over within one year.

To maintain the database, resellers need the same laborers required to build it: data entry operators and managers, QA personnel, database administrators, product managers, and ontologists. Using the same assumptions described above, the costs to maintain a catalog can run into the hundreds of thousands of dollars per year—a figure supported by a recent survey of Catalog Age subscribers (Table 1). Table 1 – Mean Annual Cost to Maintain an E-commerce Web Site Among Multi-Channel Catalog Companies, 2004 Consumer merchants $197,935 B2B merchants $125,611 Sales less than $10 million $53,204 Sales $10 million to $49.9 million $172,593 Sales at least $50 million $362,500 N=249, Catalog Age subscribers; Source: Catalog Age, July 2004

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Increased E-Commerce Revenues

In addition to reducing or eliminating the cost of building and maintaining a product catalog, DataSource also helps online resellers to increase e-commerce revenues by improving product cross-sell and upsell, reducing the shopping cart abandonment rate, and increasing repeat sales.

Cross-Selling and Upselling

DataSource includes normalized product cross-selling dependencies, enabling e-commerce resellers to build multi-vendor accessory selectors and offer relevant cross-selling products at the point of sale. Experience shows that when the right products are offered in a cross-sell environment, take rates rise significantly. Moreover, these add-on products are typically sold at a higher gross margin percent than the primary product, resulting in a disproportionately greater margin impact. The situation is similar for upselling. DataSource provides normalized uinformation, enablinresellers to provide customers with pertinent offers at the point of checkout. Again, upsell products typically command a higher price and higher gross margin, leading to an attractive margin impact.

psell g

Cross-selling and upselling are treated separately in the ROI model so resellers can consider their benefits individually.

Improved Close Rates

E-commerce resellers are all too familiar with the tendency of online customers to fall off at various points in the purchase process. As a result of these fall offs, significantly fewer customers complete sales than originally initiate the shopping process. One estimate published by DoubleClick in 2004, is that for every dollar made in e-commerce, approximately five dollars are left in abandoned shopping carts.

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DataSource reduces oshopping fall off rates bproviding multi-vendor product compariquicker, more targeted searches for online customers. Because DataSource makes it more likely that customers will find the products they seek, they are less likely to abandon the process prior to completing their purchases.

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sons and

NetIQ estimates that fully 17% of shopping cart abandonment occurs because customers lack sufficient information to make their purchases. CNET Channel estimates that resellers can reduce average shopping cart abandonment from 41% to 38% by using a structured catalog such as DataSource.

Repeat Sales

Finally, improved repeat sales result in an e-commerce lift. Because repeat customers are typically the most profitable segment for an online reseller, increasing customer loyalty and/or turning casual buyers into regular customers can yield tremendous gains in profitability. With its support of multi-vendor product comparisons, normalized product information, and ability to format data into attractive data sheets that are easier to comprehend, DataSource provides the cornerstone for a more satisfying and complete purchasing experience. And higher customer satisfaction leads to increased customer loyalty—and a greater likelihood that casual purchasers will return to, and purchase from, the reseller’s site in the future.

Reduced Sales and Customer Service Costs

Many businesses use DataSource for their employees, enabling them to perform more accurate and improved internal catalog searches. Whether or not a company has implemented DataSource for its online commerce site, DataSource can aid employee product searches—resulting in a number of efficiencies for internal sales organizations.

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A note on nomenclature – depending on the business model of the organization in question, affected organizations could include inbound telesales, inbound telemarketing, inside sales, or customer service organizations. In this paper we will refer to the benefits for the telesales organization, although benefits apply equally well to any of the aforementioned functions.

Reduced Calls to Sales and Support

By having more complete and accurate product information available on its website, a reseller can reduce calls into its telesales and support organizations. Because customers can easily find more complete product information on the website, they are less likely to place sales calls over the phone. And because they are won’t encounter missing or inaccurate information, they are less likely to call support with complaints or problems. It is typically much more expensive on a per-incident basis to handle calls via a live rep than enabling customers to serve themselves via the web. Multiply the per-incident savings over a large number of customers, and online resellers using DataSource will see dramatic overall savings.

Improved Call Handling Efficiency

Because telesales organizations are one of their largest cost centers, resellers try to squeeze efficiencies out of their telesales representatives. By directly increasing the product search efficiency of telesales reps, DataSource can significantly reduce costs in this area. Just as DataSource’s multi-vendor accessory selectors, multi-vendor product comparisons, and more targeted product searches can improve an online customer’s experience, it can also improve the efficiency with which an organization’s telesales reps can service customer needs. By reducing the time required to handle individual calls, DataSource enables resellers to reduce overall telesales costs without adversely impacting the customer experience.

Improved Telesales Ramp-Up Time

Telesales organizations have notoriously high turnover, with some statistics citing 33% annual call center turnover rates. Resellers pay new employees throughout training, even though their initial productivity is limited. This creates significant drag and increases costs.

DataSource reduces trainee ramp-up time by providing all product catalog information in

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one quickly and easily searchable repository. Instead of wasting time learning to navigate multiple, disparate product data sources, telesales reps leveraging DataSource can easily access product data and achieve maximum productivity sooner.

Improved Proposal Development Efficiency

Inside and outside sales reps in direct sales organizations spend significant time developing proposals and responding to RFPs. During this “dead time,” the rep is not identifying new contacts or developing new business. By providing complete catalog information all in one place, DataSource enables inside and outside sales reps to develop proposals and respond to RFPs quickly—freeing them up for more productive tasks that can have a sizable impact on the bottom line, such as identifying or bringing in new business.

Other ROI Benefits

Improved Telesales Margins

Resellers can implement DataSource to include contribution margin information for each product in their catalogs. If inside sales representatives have margin information at their fingertips while assisting customers, they can steer customers (all other factors being equal) to products that provide the reseller with the greatest margin contribution.

Reduced Cost of Error Handling and Returns

Finally, resellers can realize cost savings by reducing errors and lowering return rates from website sales. If customers have more complete product information when they make online purchases, they are less likely to be surprised by the products they receive, and therefore less likely to return them.

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DataSource Solution Costs To calculate the economic returns associated with the DataSource investment, the model also captures all elements of the upfront and ongoing investment in DataSource. These costs fall into one of three categories:

• Ongoing DataSource licensing fees • One-time, up front professional services installation fees • Any other up front hardware, software, or services fees (such as costs to

develop and integrate the data feeds) The model's ROI and payback calculations assume the licensing fees for DataSource are paid in quarterly installments spread over the contract period, and that all other upfront costs (professional services, hardware, or software requirements) are incurred by the end of the first quarter of the analysis period.

Sample ROI Calculation The following section provides a sample ROI calculation for a hypothetical online reseller. This sample calculation was taken directly from the ROI model and uses the benchmark data points with which the model is pre-populated.

Inputs

Key inputs for this sample are provided in Table 2.

Table 2 – Key Sample ROI Calculation Inputs

Overall Assumptions Overall number of e-commerce transactions per month 30,000 Average current revenue per e-commerce transaction $75 Reduced Costs to Build and Maintain Database Number of SKUs in database 50,000 Average number of SKUs a data entry operator can add/hour 4 Hourly rate per data entry operator $10 % of SKUs in database requiring monthly update 10% Increased E-commerce Revenues Average increased revenue per cross-sell $15 Cross-sell close rate, % 10% Average increased revenue per upsell $25 Upsell close rate, % 10% Current (pre-DataSource) shopping cart abandonment rate 41% Improved drop-off rate due to improved product data after

installing DataSource 38%

Improved % of purchases casual buyers make from your site due to improved customer experience/ability to find products that match their needs

35%

Reduced Sales and Support Costs Total Inside Sales team reps 10 Calls per day an Inside Sales team rep can handle 40

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Total Outside Sales team reps 20 Reduction in calls into Inside Sales organization 3% Improvement in average call handling time 10% % reduction in training time due to more efficient internal

product search capability and more complete product information through internal search

25%

ROI Benefits The overall ROI benefits by year, broken into all ROI components and hard ROI cost saving components, are shown in Figure 1.

Figure 1 – ROI Benefits by Year, Hard Components vs. All Components

ROI Benefits by Year

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

1 2 3

Year

Other ROI ComponentsHard ROI Cost Savings Components

Additional metrics, including net present value (NPV), internal rate of return, (IRR), and payback period, both for hard ROI components and all ROI components, are provided in Table 3.

Table 3 – Additional ROI Analysis Metrics

Hard Costs Only

All ROI Components

12-month ROI, % 128.4% 268.7% 3-year ROI, % 348.8% 935.7% Payback period, months 1.9 1.2 3-year NPV $1,653,161 $4,065,919 IRR, % 2914.6% 12219.1%

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Figure 2 provides a breakout of ROI component savings by category.

Figure 2 – Three-Year ROI Component Breakout

Detailed ROI Component Breakout - 3-Year Cumulative

9%

39%

4%

0%

5%2%

4%

15%

21%

1%

Initial Database BuildOngoing Database MaintenanceInside Sales/Telesales Headcount ReductionOutside Sales Headcount ReductionImproved Margin from Inside Sales/TelesalesE-Commerce: Increased Cross SellingE-Commerce: Increased UpsellingE-Commerce: Improved Close RatesE-Commerce: Repeat SalesE-Commerce: Reduced Errors and Returns

Finally, Table 4 provides a detailed breakout of benefits by category and by year realized.

Table 4 – ROI Benefits Detail

Annual Contribution Year 1 Year 2 Year 3 "Hard" ROI Cost Savings Components Initial Database Build $ $508,263 $ - $ - Ongoing Database Maintenance $568,140 $825,517 $901,470 Reduced Sales Costs Realizable inside sales headcount reduction $65,678 $87,570 $87,570 Realizable outside sales headcount reduction $ - $ - $ - Subtotal - hard cost savings ongoing contribution $633,817 $913,087 $989,040 Subtotal - hard cost savings total contribution $1,142,080 $913,087 $989,040 Benefits of Other ROI Components Increased E-commerce Revenues Increased cross selling $25,313 $38,053 $42,905 Increased upselling $63,281 $95,133 $107,262 Improved close rates $220,510 $331,500 $373,766 Repeat sales $303,750 $456,638 $514,859 Other Benefits Improved margin from inside sales $75,000 $110,000 $121,000 Reduced e-commerce errors and returns $13,500 $19,800 $21,780 Subtotal - Other ROI Components $701,353 $1,051,123 $1,181,572 Total - Benefits of All ROI Components $1,843,434 $1,964,210 $2,170,611

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DataSource Implementation Costs Annual Ongoing Fees and Costs License usage definition $250,000 $250,000 $250,000 Catalog maintenance $150,000 $150,000 $150,000 Subtotal - ongoing fees and costs $400,000 $400,000 $400,000 One-Time Implementation Costs CNET Channel professional service fees $50,000 $ - $ - Other one-time implementation costs $50,000 $ - $ - Subtotal - one-time fees and costs $100,000 $ - $ - Total DataSource Costs $500,000 $400,000 $400,000 Net Economic Benefits (Costs) in Year Nominal Benefits Hard costs only $642,080 $513,087 $589,040 All ROI benefits $1,343,434 $1,564,210 $1,770,611 Discounted Benefits at WACC Hard costs only $499,535 $914,500 $1,399,886 All ROI benefits $1,146,175 $2,411,249 $3,734,889 Months Required to Implement 3

Conclusion The bottom line is that CNET Channel DataSource provides online resellers with an attractive, cost-effective alternative to building and maintaining an internal product catalog database. By greatly reducing or eliminating the costs associated with internally building and maintaining this database, DataSource can drive tremendous cost savings for resellers. Moreover, by providing customers with an improved shopping experience through more complete, normalized, and indexed product data, DataSource helps online resellers improve their overall e-commerce revenue stream. This uplift can come from improved cross-selling and upselling, decreased shopping cart abandonment rates, and improved customer loyalty. Additionally, DataSource can be applied to internal employee product search tools as well, resulting in telesales efficiencies. Representatives can perform more accurate and efficient product searches, rapidly ramp up the training curve, and generate sales proposals more quickly and efficiently. And with customers better able to self-serve their needs on the reseller’s website, the overall number of inbound telesales calls can be reduced as well. After analyzing the ROI contributors associated with DataSource, Callan Consulting concludes that typical online resellers who implement DataSource can realize significant contribution margin ROI benefits over a three-year period—both when considering all categories of ROI benefits and when looking only at the more quantifiable, “hard” benefits. Callan Consulting recently created a detailed ROI model that describes these benefits and enables organizations to estimate the specific returns they could accrue by implementing DataSource.

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For a custom ROI analysis tailored to your organization, contact your regional CNET Channel sales executive. He or she will be happy to discuss your situation and perform a comprehensive modeling exercise to help estimate your DataSource ROI. Contact information: Scott Danish Vice President, Global Marketing CNET Channel +1-415-344-2722 [email protected] Ed Callan Principal Callan Consulting +1-650-375-0573 [email protected] About Callan Consulting Founded in October 2000, Callan Consulting is a marketing consultancy with specific emphasis on business modeling and ROI analysis. Ed Callan, Principal of Callan Consulting, leverages over 20 years’ experience in technology management and marketing to help companies understand and articulate the economic business value of IT investments. Additional information can be found at www.callan-consulting.com

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Appendix: Notes on the ROI Model Note the following items pertinent to the development of the ROI model described in this paper:

• Margin contribution. The model looks at the margin contribution associated with the DataSource solution, which generally corresponds to Earnings Before Income and Taxes, or EBIT. EBIT impact is a standard for evaluating investment decisions

• Benchmark data. The ROI model comes pre-populated with benchmark assumptions ranging from the cost of data entry operators to shopping cart abandonment rates. These data points can be used directly, or alternatively any of the key inputs can be over-written to tailor the analysis to the organization being analyzed. So, for example, while the model is preloaded with an average hourly rate of $10 for a data entry operator, the user has the opportunity to insert the actual hourly rate for his or her organization

• Different types of analysis. In addition to calculating the return on original investment over several different time periods, the model also provides a variety of other investment assessment benchmarks such as net present value (NPV), payback period, discounted payback, and internal rate of return (IRR)s

• Pick categories appropriate for the analysis. The ROI model developed by Callan Consulting for CNET Channel is designed to quantify the economic returns associated with implementing a DataSource solution. While it captures a broad range of economic benefits, not all categories of benefit are necessarily applicable to all companies’ business models (for example, companies that do not have an inbound telesales organization will not be able to realize efficiencies in their telesales organization). Readers of this paper and users of the ROI model should select the benefits associated with their particular situations.

• All benefits vs. “hard” benefits only. The model separates its benefits analysis into two categories: benefits associated with all ROI components and those associated with “hard” ROI components only. Hard components are those that have a direct, measurable bottom-line effect and include:

o Cost of building and maintaining the product database o Headcount reductions in the sales organization realizable through

headcount efficiencies

Even though Callan Consulting believes all components are pertinent to the ROI calculation, it is frequently difficult to determine with certainty the impact of DataSource on items like overall e-commerce revenues (vs. outside factors, such as overall sales growth in the category). By separating out the hard benefits, the user of the model can determine whether these alone will justify the investment, and any other less easily quantifiable benefits are icing on the cake.

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