Modeling ROI for Personalizing Your Digital Properties
This is part one of a four part blog series.
Many studies extol the benefits of personalization. Gartner states “by 2018 organizations that have fully invested in in all types of personalization will outsell companies that have not by 20%”. Forrester, in their Revenue Impact Of Customer Experience, 2015, report found that there is “a clear link between customer experience improvements and loyalty-driven revenue potential, based on increases in retention, enrichment, and advocacy”. While all this talk about personalization is exciting, where do you start with your own digital properties?
Implementing personalization requires a transformation; transformations that live or die based on senior stakeholder commitment, governance and control. These three things are best achieved when there’s a clear shared goal - and a great, clear goal is often revenue. Therefore, the best place to start a personalization initiative is to quantify a financial return on investment (ROI).
Acquia’s personalization ROI framework was created after discussion with many prospects and customers. We also have an Excel model to help model actual numbers.
Acquia’s Personalization ROI Framework
Step 1: Understand the Core Business and Digital Customer Experience
In my experience, the best place to start your personalization initiatives is by understanding how your digital properties support your core business. For the purpose of this post, it is assumed that the digital property is a main corporate website. However, this approach could equally apply to any digital customer experience.
Understanding the core business model and how the digital property supports this may sound simple and in some cases, it is that simple. However, in many cases actually quantifying the value can be a challenge. A single website will often include different business models. I have mostly encountered four models, as follows:
- Sites selling something (direct revenue), e.g. commerce, subscription sites
- Sites aiming to sell something indirectly, e.g. content for commerce, lead generation sites
- Awareness sites including news or publishing. These mostly rely on advertising revenue and occasionally subscription revenue
- Sites for savings, e.g. process efficiency, help, support or FAQ sites.
Whilst many sites will merge these models, to keep things simple, I suggest focusing on just one aspect of the digital property when starting out.
Each type of site will have goals with site metrics. Where the site metrics are dollar (revenue) related, quantifying value is obviously straightforward. Examples of these types of metrics include those for commerce or subscription sites; ‘total sales / revenue’, or ‘average revenue per user (ARPU), or average order value’, together with total conversions etc.
Where site metrics are not directly linked to dollar values, quantifying value can be a little more challenging. Examples include engagement, using metrics such as; ‘click tracking’, ‘page views’ or ‘time on site’. Here we need to be a little more creative in understanding the link between a metric and a dollar value. Conversion metrics can play a part here; we can set goals or events and estimate a value for these. For example, a form fill may capture an email address, converting an unknown user to a known user. The email address may be linked to a dollar value, albeit indirectly.
Step 2: Detailed Proposed Personalization Use Cases
Once we understand the site business model and metrics, the next step is to model potential personalization use cases. For example, targeted content means showing specific and relevant content based on context-aware information. We can hypothesise that this may result in increased engagement, which may in turn lead to:
- Increased purchases, or subscriptions, on a commerce or subscription site.
- Increased brand awareness, resulting in conversions on a lead gen site.
- Increased page-views, dwell time or click-through-rate (CTR) and social sharing on an awareness site, leading to increased ad-revenue.
- Process efficiency, leading to reduced cost to serve, cost takeout elsewhere or simply increased customer satisfaction.
For any of the examples above, simply collecting user data in itself may be valuable. This data can be used to better understand customer behaviour and drive different business behaviours. Indeed, many studies show that a better understanding of your customers can have significant business benefits.
Understanding the type of site we’re dealing with, including the site goals and metrics, involves a consultative discussion with site stakeholders. We typically need to explore scenarios, agree on assumptions and variables and develop hypotheses for how personalization will increase value. This can be ‘art’ as much as ‘science’ but in some cases we can test assumptions with small trials in order to harden and test our hypotheses as we go.
Step 3: Estimate Investment
Once we’ve agreed the potential benefits of specific personalization use cases and monetized these, it’s time to look at the required investment costs of implementing personalization. This goes beyond project implementation costs to include total cost of ownership (TCO) over an agreed timeframe. TCO includes “people and process” costs, as well as technology costs. Complete personalization initiatives often result in a change to the target operating model (TOM), so this should be modeled too.
Step 4: Calculate the Project’s Net Economic Return
After estimating potential benefits and costs, the ROI is calculated: (benefits minus costs) to reach a quantified (dollar, or Euro, or GBP, or other) number. I typically model this per year, over three years. Any longer than a three year ROI is a long time in digital. Also, most organizations want to see a return on Personalization within the first six months to a year.
If required, we can apply standard ROI adjustments, for example applying net present value (NPV) adjustments. This basically reduces future costs and benefits, based on a weighted average cost of capital (WACC), as future money is worth less than money today. In my experience, this adjustment is rarely required, given the broad-brush levels of accuracy we’re dealing with.
Step 5: Detail Non-Financial Impact
Once we have a hard quantified ROI, we should also consider the softer impacts of implementing personalization. An example of a soft positive impact could be non-quantified customer loyalty and advocacy. This is clearly beneficial to the business but may be difficult to actually agree on a dollar value. An internal positive indirect impact could be attracting and retaining talent in your organisation as you use interesting technology. Or, it could be simply keeping up with the competition. Conversely, an example of a potential negative impact could be customer perceptions; customers can feel personalized content and offers are creepy if not done right. A sound and complete business case always considers more than just the numbers and sometimes it is the soft benefits which will justify a Personalization initiative, especially if the numbers alone are underwhelming.
Finally, the ROI model should leave some scope for investigating various scenarios, sensitivities and risks. What will happen if the expected benefits aren’t fully realized, or if the project costs over run? What is the risks of doing nothing? A do-nothing baseline may result in a natural decline as the competition implements personalization. Many organizations may be driven by fear of a ‘do-nothing’ approach, rather than an ROI opportunity - sheer FOMO (fear of missing out).
Assuming we estimate a positive ROI, we have a great starting-point to progress a personalization initiative. A typical minimum net ROI is 3x to justify such a change program. A higher ROI is great but has to remain credible. Less than 3x ROI can be risky. That said, non-financial elements should not be underestimated. In my experience to date many customers place equal weight on the ‘intangibles’ of improving customer experience.
Once we’ve agree the overall value, including the ROI, regularly referencing this value should maintain stakeholder buy-in, increasing the chance of project success. The ROI should also act as a baseline for future benefits realization and continuous service improvement (CSI). This is not simply an one-off exercise to approve a budget, it is key to realizing business value on an ongoing basis.
In the next posts in this series, we’ll take a deeper dive into each of the above sections. If you’d like to discuss any of this further, please don’t hesitate to get in touch. Otherwise, stay tuned.