A significant aspect in planning and executing Internet communications efforts involves the economic forces introduced in the previous lab. It is safe to say that economics drive most projects in a company or organization. Part of driving an Internet communications effort is justifying the expenses involved in developing and operating the effort.
Justification involves answering the question, Is it worth the money? In a business or organization the answer to this question will influence project funding and the future of Internet communications.
We face these types of decisions every day in any buying cycle. In the grocery store, for example, I must constantly decide if the item I am contemplating purchasing will provide a solution that justifies the purchase price of the item. Often these decisions are easy and automatic. But as prices increase (e.g., for specialty foods), the justification of the expense becomes more involved.
Another way this issue is discussed is in terms of ROI (return on investment). Building Internet communications efforts does cost money. This investment of funds and personnel resources requires some type of return to the organization to justify the effort. For example, building a basic Web site with limited database features could cost about $10,000. This is a significant investment for any company or organization. After putting this money into the effort, will the communication it provides justify the expense? Will it return valuable communication for the investment it required?
The answer to this question is yes. But providing expense justification and determining ROI are actions that you'll probably have to be involved in with your own Internet communications effort. The powers that be probably won't take my word for it.
Answering this question and others like it on your own involves examining several factors in an expense justification and ROI analysis. A large part this process involves comparing Internet communication costs and the value of that communication to other traditional media costs and types.
First you need to break down communication costs to a comparable level for each communication transaction that takes place in each specific media. Doing so is called determining the delivery cost of communication. A very basic but useful method for determining the delivery cost of communication is simply to divide the expense involved in executing a particular media effort by the number of contacts or people that are communicated with in the media effort.
For example, in a direct mail campaign that reaches 100 contacts and costs $50 to produce, the cost of communication is 50 cents each. That was calculated by dividing $50 (media costs) by 100 (number of contacts). This gave us a cost/contact of 50 cents.
Assigning value to a communications effort is another useful tool in the justification process. Value is an estimation of quality of communications. Some communication types provide a higher level of quality or value than others. Value is relative to the receiver of the communication, but properties like specific information; satisfaction of wants, needs, and desires; and personal or customized interactions will increase the value of a communication method.
Though this is not an exact science, it can be accomplished by listing all the media types used by an organization. The media types can then be ranked in value relative to the other items on the list.
The three ways I communicate most are by phone, e-mail, and traditional mail. Looking at this list, I'd say phone is of the highest value to the end user because it is personal and supplies specific fulfillment to specific needs in real time. Second would be probably be e-mail because it provides the same properties in a slightly less personal way. In some situations, e-mail may be of higher value because synchronous communication is not needed and text and other documents can be transferred easily The third method, mail, has the lowest value due to time factors and personalization factors. But mailing documents is important to some of my audiences, so that situation is also relative.
Communication value must be considered when looking at communication costs. A low-cost communication method probably delivers low value communication. A high-cost method probably delivers high-value communication. The trick is to balance communication value against its cost. Due to the customizable and asynchronous, on-demand nature of the Internet, Internet communication is relatively high in value while low in cost.
One of the major factors contributing to the low cost of Internet communication can be defined by looking at the difference between fixed and variable communication costs. A fixed cost is an expense that stays the same in each billing cycle. At home my mortgage payment is the same predetermined amount each month. It is a fixed cost for my personal living arrangement. A variable cost for is an expense item that changes, either rising or falling, based on usage. The more it is used, the more it costs. A variable cost me at home is my personal phone bill. The more I use my phone, the more the bill costs at the end of the month.
In another example, people's salaries and the amounts necessary to design direct mail pieces or advertisements are fixed costs in an organization. But travel and other expenses are variable costs. The more the employees travel, the more travel costs. This is the case for most traditional communication methods. As space ads are placed, mail pieces are printed and sent out, phone calls are made, and travel is completed, the communication costs rise. Costs are amortized and discounted at higher quantities, but, generally speaking, as communication increases so do the variable costs involved.
Internet communication is highly attractive because it does not involve variable costs. Internet communication can be funded at a fixed level for development and operation, including staffing and updating. That funding amount will not change as the amount of communication increases. The $10,000 Web site mentioned previously can serve 100 people or 10,000 people at the same expense. Communication costs are fixed and do not rise at the same rate as usage does.
Granted, significant increases in use will require added technology expenses. If a Web site is so successful that it is swamped by users, then increased server capacity and Internet connectivity must be paid for. But this is, again, an increase in fixed costs to operate at a higher level. Once it is funded appropriately, the technology can serve the same size or even larger audience indefinitely with no need for further investment. This is a very important issue to consider when looking at ROI for Internet communication.
Looking at the communication delivery cost for each contact, the value of that communication, and the impact of fixed versus variable costs, we start to see positive reasons for justifying Internet communication. The Internet provides a low communication cost for each contact. The Internet delivers relatively high value in these communication efforts. And the Internet can be classified as a fixed cost that does not rise as communication usage increases, unlike other types of communication methods.
Using the Internet for communication could be equated to having a phone line that is never busy for the end user and is billed for each month regardless of use. The number of callers does not affect the cost. And every caller receives the same level of individual fulfillment by using the line. The Internet is good news for communication.
Another piece of good news is that Internet communication can be further justified by replacing existing media efforts and saving money by doing so. Developing and operating Internet communications efforts does incur expenses. Much of this expense is needed in the initial phases, before any communication can take place. But as Internet communication begins, it can replace other types of more expensive communication. For every e-mail message I send, I am making one less phone call or mailing one less letter.This is an excellent justification for Internet communication. Tracking Internet use can further help justification efforts when it is directly compared to decreases in other communication media. From this perspective, Internet communication begins returning on its investment as soon as its operation begins replacing other communication methods.
Not even considering the increases in value to the end user, the use of Internet communication can be justified by comparing its fixed costs to the variable costs of the other media. Eventually, the fixed delivery cost per contact on the Internet will drop below the variable cost per contact in other methods.
A $10,000 Web site serving 100 customers once seems expensive. That's $100 for each contact. But those contacts replaced 100 phone calls at $3.50 each, or $350, so that amount of money can be seen as contributing to the expense of the Internet effort. Once this Web site has replaced about 2860 phone calls, it has paid for itself ($10,000 fixed cost/$3.50 for each phone call replaced = 2857 calls to cover the fixed cost). Once that level of communication has been achieved, the Web site is saving money for the company or organization while supplying valuable communication in the process.
Another way of looking at this point is the amortization or spreading of Internet development costs over time as usage increases. A $10,000 Web site used once by 100 people is providing a high delivery cost of $100 for each contact. But a Web site serving the needs of 1000 people 10 times has now delivered a delivery cost per contact of $1 each. And the same Web site serving the needs of 1000 people 100 times has delivered a delivery cost per contact of 10 cents each.
While other media methods would increase in cost based on their variable delivery costs, the Internet actually becomes cheaper the more it is used. For this reason and the ones discussed earlier, the Internet is justifiable economically and from the standpoint of adding value to relationships. Both issues provide return on investment for Internet communications methods.