OX2 Web Analytics Blog

Last week Aurélie and I were discussing about ways of calculating the ROI of a Web Analytics project. As we see that many companies (specially in the media sector) don’t find WA a priority, we wanted to present them with a formula that would allow them to view the tremendous ROI made possible with Web Analytics.

As we often say when making presentations, accountability is becoming more and more a must reach for marketers and companies in general. This means that when dealing with any investment we need to be able to define the ROI of this investment. We see more and more marketeers needing to report and justify their budgets. Based on this, we propose a little help for the eMarketeers in the media industry wanting to invest in Web Analytics.

This first formula (I’ll try to work on other formulas for other business models) has been developed for the advertising business model websites. In other words websites that get at least part of their income from advertisements as banners or IMUs.

So here’s the formula:

(X+Y) x WACPM = ICPM x Y

Now let’s explain the different items and provide you with a practical example.

• X = The total number of page views in a year (by thousands)
• Y = The total number of additional page views needed to meet the break-even point of the Web Analytics implementation
• WACPM = cost per CPM of the Web Analytics tool and related costs (services, staffing, IT, etc…)
• ICPM = income per CPM that the website generates as an average in one year

I don’t know if you follow me, let’s explain it further. The idea is that, before implementing Web Analytics, it’s possible to calculate the target results to get a break even return on investment. Everything done on top will be profits 😉

So the purpose is to identify the value of Y.

Based on your actual figures you can calculate the ICPM and estimate the WACPM while you should already have X.

So let’s take an example:

You’re in the media industry, and you generate 240M pv per year.

Your ICPM can be calculated based on real figures (total income divided by the number of annual page views in thousands) or estimated (imagine that you have an average of 2 ad spaces on each page and that you manage to sell only 20% of your advertisement space at an average net price of 10 euros; your ICPM will then be of 4 euros – each page view generates an income of 0,4 euro cents).

Calculating the WACPM can be a bit more tricky but here’s how I recommend to do it: take into consideration all the related costs to your Web Analytics investment (Product, professional services, internal staff, IT interventions needed to optimize based on findings, etc…). Once you have all the costs for one year, you divide them by the total number of page views in thousands. From the different calculations that I’ve made with high end products (not GA ;-)) your WACPM should be somewhere between 0,3 and 0,6 euros CPM.

So getting back to the formula let’s fill in the blanks:

(X+Y) x WACPM = ICPM x Y

(240.000 + Y) x 0,6 = 4 x Y

240.000 + Y = 4Y/0,6

240.000 = 6,66Y – Y

Y = 42.4M PV

So this means that, in order to reach the break-even point the first year, you need to increase the number of page views by 17,5%

This is not an unrealistic target as we have seen Web Analytics projects driving far better results (when taking action based on the findings!).

Increasing the total number of page views by 17,5% dosen’t mean that you need to increase your visitors by that rate, as when optimizing your website you will also increase the stickiness and the loyalty of your visitors. You will be able also to better allocate your acquisition investments.

The uniqueness of this exercise is that we can calculate everything based on CPMs as the business model is based on CPMs. Take also into consideration that the WA product prices will be decreasing in the coming years and the advertising CPM will increase as more and more advertisers invest on-line.  This means that the ROI will increase in the future 😉

Aren’t you yet convinced about Web Analytics? You don’t like this formula? don’t hesitate to disagree 😉 but please keep in mind that this only works if you’re in a CPM advertising business model!

This entry was posted on November 26, 2006 at 12:39 pm and is filed under Business Tips and Tricks, Thoughts and Ideas, Web Analytics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.