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Delivering Multi-Vendor P roductInformation to Facilitate CustomerP urchase Decisions: Evaluating the ROI of CNET Channel DataSource

December 2004

A White Paper developed for CNET Channel

P roject Director:Ed Callan, Principal

Callan Consulting61 Baywood AvenueSan Mateo, CA 94402U.S.A.Phone: +1-650-375-0573Fax: +1-650-375-0144


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

Circulation or disclosure in whole or in part of this report outside the authorized recipient organization isexpressly 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 CallanConsulting is expressly prohibited. This information is provided on an as is basis and without express orimplied warranties. Although this information is believed to be accurate at the time of publication, CallanConsulting cannot and does not warrant the accuracy, completeness or suitability of this information orthat the information is correct. Information Callan Consulting provides is general background and is notintended as legal or financial advice. Callan Consulting cannot and does not provide legal or financialadvice. Readers are advised to consult their attorney or qualified financial advisor for legal and/or financialadvice related to this information.

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Table of Contents

Executive Summary Page 4

Introduction and DataSource Overview Page 4DataSource ROI Components Page 5Reduced Database Implementation and Maintenance Costs- Initial Database Build- Ongoing Maintenance Pages 5-6Increased E-commerce Revenues- Cross-Selling and Upselling- Improved Close Rates- Repeat Sales Pages 7-8Reduced 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 11Sample ROI Calculation

- Inputs- ROI Benefits Page 11-14

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

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Executive Summary

In troduction 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 reduceoperating costs. Many online resellers depend on their online product catalogs toboth generate revenue and differentiate their offerings. And while product catalogsare frequently considered only as a cost center, they do get results. A recent surveyof over 2,500 IT consumers noted that access to detailed product specs was the #1factor for consumers making online purchase decisions.

This is where CNET Channel DataSource comes in. DataSource provides onlineresellers with a complete, accurate, and impartial source of worldwide IT andconsumer electronics product information. DataSource contains product images,marketing descriptions, and detailed specifications on over 2 million SKUs in 12languages. Resellers that use DataSource rather than building their own productcatalogs gain access to constantly updated, multi-vendor, and multi-lingual productdatawhile saving time and money. DataSource leads the market in breadth andgranularity of vendor data, as well as in the number of languages it supports. Onlineresellers using DataSource access product information customized to meet theirspecific needs.

By using DataSource as their trusted source of product data, online resellers can:

Decrease costs associated with creating and maintaining an in-houseproduct database. Additionally, with accurate and complete productinformation featured on their websites, resellers reduce costs to handlecustomer complaints

Boost revenues through improved website cross-sell and upsellincreasingcustomer loyalty and shrinking sales drop-off rates

Imp rove organizational efficiency by making it easier for telesalesrepresentatives to search product information. DataSource also enablesresellers to provide customers with better website self-service, therebyreducing 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 toeasily access complete product data, compare multiple products, printdatasheets, 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 modelingconsulting firm, to develop a detailed return on investment (ROI) model. CallanConsulting interviewed a broad range of CNET Channel customers and gathered datafrom a variety of secondary sources to create the DataSource ROI model. As thiswhite paper describes key ROI benefits, it can be read either as a stand-alonedocument or in conjunction with the ROI model.

DataSource ROI Components

Organizations that implement DataSource typically achieve economic benefits inthree 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 Implementatio n and Maintenance Costs

Initial Database Build

An online reseller can spend a great deal on building its initial product catalogdatabase, especially if it builds the database using internal resources. Human capitalcosts can quickly escalate, as building a reasonably sized database requiressignificant 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, anddefine product interrelationships, the reseller would also need at least one full-timeemployee 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 theentire database build team could run a half a million dollars or more. By outsourcingthis entire operation to CNET Channel, an online reseller can bypass these costsentirely.

Ongoing Maintenance

Once it has built its database, the online reseller must then invest labor hours tomaintain and update it. CNET Channel estimates that product catalogs typicallychange by about 10% per monthresulting in a complete catalog change-over withinone year.

To maintain the database, resellers need the same laborers required to build it: dataentry operators and managers, QA personnel, database administrators, productmanagers, and ontologists. Using the same assumptions described above, the coststo maintain a catalog can run into the hundreds of thousands of dollars per yearafigure supported by a recent survey of Catalog Age subscribers (Table 1).

Table 1 Mean Annual Cost to Maintain an E-commerce Web Site AmongMulti-Channel Catalog Companies, 2004

Consumer merchants $197,935B2B merchants $125,611Sales less than $10 million $53,204Sales $10 million to $49.9 million $172,593Sales at least $50 million $362,500N=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 productcatalog, DataSource also helps online resellers to increase e-commerce revenues byimproving 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 relevantcross-selling products at the point of sale. Experience shows that when the rightproducts are offered in a cross-sell environment, take rates rise significantly.Moreover, these add-on products are typically sold at a higher gross margin percentthan the primary product, resulting in a disproportionately greater margin impact.

The situation is similar forupselling. DataSourceprovides normalized uinformation, enablinresellers to providecustomers with pertinentoffers at the point of checkout. Again, upsell products typically command a higherprice and higher gross margin, leading to an attractive margin impact.

psellg

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

Improved Close Rates

E-commerce resellers are all too familiar with the tendency of online customers tofall off at various points in the purchase process. As a result of these fall offs,

significantly fewer customers complete sales than originally initiate the shoppingprocess. One estimate published by DoubleClick in 2004, is that for every dollarmade in e-commerce, approximately five dollars are left in abandoned shoppingcarts.

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DataSource reduces oshopping fall off rates bproviding multi-vendorproduct compariquicker, more targetedsearches for online

customers. BecauseDataSource 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.

nliney

sons and

NetIQ estimates that fully 17% of shopping cart abandonment occurs becausecustomers lack sufficient information to make their purchases. CNET Channelestimates 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 repeatcustomers are typically the most profitable segment for an online reseller, increasingcustomer loyalty and/or turning casual buyers into regular customers can yieldtremendous gains in profitability.

With its support of multi-vendor product comparisons, normalized productinformation, and ability to format data into attractive data sheets that are easier tocomprehend, DataSource provides the cornerstone for a more satisfying andcomplete purchasing experience. And higher customer satisfaction leads toincreased customer loyaltyand a greater likelihood that casual purchasers willreturn to, and purchase from, the resellers site in the future.

Reduced Sales and Customer Service Costs

Many businesses use DataSource for their employees, enabling them to performmore accurate and improved internal catalog searches. Whether or not a companyhas implemented DataSource for its online commerce site, DataSource can aidemployee product searchesresulting in a number of efficiencies for internal salesorganizations.

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A note on nomenclature depending on the business model of the organization in question, affectedorganizations could include inbound telesales, inbound telemarketing, inside sales, or customer serviceorganizations. In this paper we will refer to the benefits for the telesales organization, although benefitsapply 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. Becausecustomers can easily find more complete product information on the website, theyare less likely to place sales calls over the phone. And because they are wontencounter missing or inaccurate information, they are less likely to call support withcomplaints or problems. It is typically much more expensive on a per-incident basisto handle calls via a live rep than enabling customers to serve themselves via theweb. Multiply the per-incident savings over a large number of customers, and onlineresellers 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 theproduct search efficiency of telesales reps, DataSource can significantly reduce costsin this area.

Just as DataSources multi-vendor accessory selectors, multi-vendor productcomparisons, and more targeted product searches can improve an online customersexperience, it can also improve the efficiency with which an organizations telesalesreps can service customer needs. By reducing the time required to handle individualcalls, DataSource enables resellers to reduce overall telesales costs withoutadversely impacting the customer experience.

Improved Telesales Ramp-Up Time

Telesales organizations have notoriously high turnover, with some statistics citing33% annual call center turnover rates. Resellers pay new employees throughouttraining, even though their initial productivity is limited. This creates significant dragand increases costs.

DataSource reducestrainee ramp-up time byproviding all productcatalog information in

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one quickly and easilysearchable repository.Instead of wasting timelearning to navigatemultiple, disparateproduct data sources,

telesales reps leveraging DataSource can easily access product data and achievemaximum productivity sooner.

Improved Proposal Development Efficiency

Inside and outside sales reps in direct sales organizations spend significant timedeveloping proposals and responding to RFPs. During this dead time, the rep is notidentifying new contacts or developing new business. By providing complete cataloginformation all in one place, DataSource enables inside and outside sales reps todevelop proposals and respond to RFPs quicklyfreeing them up for more productivetasks that can have a sizable impact on the bottom line, such as identifying orbringing in new business.

Other ROI Benefits

Improved Telesales Margins

Resellers can implement DataSource to include contribution margin information foreach product in their catalogs. If inside sales representatives have margininformation at their fingertips while assisting customers, they can steer customers(all other factors being equal) to products that provide the reseller with the greatestmargin 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 whenthey make online purchases, they are less likely to be surprised by the products theyreceive, and therefore less likely to return them.

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DataSource Solution Costs

To calculate the economic returns associated with the DataSource investment, themodel also captures all elements of the upfront and ongoing investment inDataSource. 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 DataSourceare paid in quarterly installments spread over the contract period, and that all otherupfront costs (professional services, hardware, or software requirements) areincurred 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 onlinereseller. This sample calculation was taken directly from the ROI model and uses thebenchmark 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 AssumptionsOverall number of e-commerce transactions per month 30,000

Average current revenue per e-commerce transaction $75Reduced Costs to Build and Maintain Database

Number of SKUs in database 50,000Average number of SKUs a data entry operator can add/hour 4Hourly rate per data entry operator $10% of SKUs in database requiring monthly update 10%

Increased E-commerce RevenuesAverage increased revenue per cross-sell $15Cross-sell close rate, % 10%Average increased revenue per upsell $25Upsell close rate, % 10%Current (pre-DataSource) shopping cart abandonment rate 41%Improved drop-off rate due to improved product data afterinstalling DataSource

38%

Improved % of purchases casual buyers make from your sitedue to improved customer experience/ability to find productsthat match their needs

35%

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

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Total Outside Sales team reps 20Reduction in calls into Inside Sales organization 3%Improvement in average call handling time 10%% reduction in training time due to more efficient internalproduct search capability and more complete productinformation through internal search

25%

ROI Benefits

The overall ROI benefits by year, broken into all ROI components and hard ROI costsaving 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, areprovided in Table 3.

Table 3 Additional ROI Analysis Metrics

Hard CostsOnly

All ROIComponents

12-month ROI, % 128.4% 268.7%3-year ROI, % 348.8% 935.7%Payback period, months 1.9 1.23-year NPV $1,653,161 $4,065,919IRR, % 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 Sales

E-Commerce: Reduced Errors and Returns

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

Table 4 ROI Benefits Detail

Annual ContributionYear 1 Year 2 Year 3

"Hard" ROI Cost Savings ComponentsInitial Database Build $508,263 $ - $ -Ongoing Database Maintenance $568,140 $825,517 $901,470Reduced Sales Costs

Realizable inside sales headcount reduction $65,678 $87,570 $87,570Realizable outside sales headcount reduction $ - $ - $ -

Subtotal - hard cost savings ongoing contribution $633,817 $913,087 $989,040Subtotal - hard cost savings total contribution $1,142,080 $913,087 $989,040

Benefits of Other ROI ComponentsIncreased E-commerce Revenues

Increased cross selling $25,313 $38,053 $42,905

Increased upselling $63,281 $95,133 $107,262Improved close rates $220,510 $331,500 $373,766Repeat sales $303,750 $456,638 $514,859

Other BenefitsImproved margin from inside sales $75,000 $110,000 $121,000Reduced e-commerce errors and returns $13,500 $19,800 $21,780

Subtotal - Other ROI Components $701,353 $1,051,123 $1,181,572Total - Benefits of All ROI Components $1,843,434 $1,964,210 $2,170,611

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DataSource I mplementation CostsAnnual Ongoing Fees and Costs

License usage definition $250,000 $250,000 $250,000Catalog maintenance $150,000 $150,000 $150,000Subtotal - ongoing fees and costs $400,000 $400,000 $400,000

One-Time Implementation CostsCNET 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 YearNominal Benefits

Hard costs only $642,080 $513,087 $589,040All ROI benefits $1,343,434 $1,564,210 $1,770,611

Discounted Benefits at WACC

Hard costs only $499,535 $914,500 $1,399,886All ROI benefits $1,146,175 $2,411,249 $3,734,889Months Required to Implement 3

Conclusion

The bottom line is that CNET Channel DataSource provides online resellers with anattractive, cost-effective alternative to building and maintaining an internal productcatalog database. By greatly reducing or eliminating the costs associated withinternally building and maintaining this database, DataSource can drive tremendouscost savings for resellers.

Moreover, by providing customers with an improved shopping experience throughmore complete, normalized, and indexed product data, DataSource helps onlineresellers improve their overall e-commerce revenue stream. This uplift can comefrom improved cross-selling and upselling, decreased shopping cart abandonmentrates, and improved customer loyalty.

Additionally, DataSource can be applied to internal employee product search tools aswell, resulting in telesales efficiencies. Representatives can perform more accurateand efficient product searches, rapidly ramp up the training curve, and generatesales proposals more quickly and efficiently. And with customers better able to self-serve their needs on the resellers website, the overall number of inbound telesalescalls can be reduced as well.

After analyzing the ROI contributors associated with DataSource, Callan Consultingconcludes that typical online resellers who implement DataSource can realizesignificant contribution margin ROI benefits over a three-year periodboth whenconsidering all categories of ROI benefits and when looking only at the morequantifiable, hard benefits. Callan Consulting recently created a detailed ROImodel that describes these benefits and enables organizations to estimate thespecific returns they could accrue by implementing DataSource.

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For a custom ROI analysis tailored to your organization, contact your regional CNETChannel sales executive. He or she will be happy to discuss your situation andperform a comprehensive modeling exercise to help estimate your DataSource ROI.

Contact information:

Scott DanishVice President, Global MarketingCNET [email protected]

Ed CallanPrincipalCallan [email protected]

About Callan Consulting

Founded in October 2000, Callan Consulting is a marketing consultancy with specificemphasis on business modeling and ROI analysis. Ed Callan, Principal of CallanConsulting, leverages over 20 years experience in technology management andmarketing to help companies understand and articulate the economic business valueof 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 inthis paper:

Margin contribution. The model looks at the margin contribution associatedwith the DataSource solution, which generally corresponds to Earnings BeforeIncome and Taxes, or EBIT. EBIT impact is a standard for evaluatinginvestment decisions

Benchmark data. The ROI model comes pre-populated with benchmarkassumptions ranging from the cost of data entry operators to shopping cartabandonment rates. These data points can be used directly, or alternativelyany of the key inputs can be over-written to tailor the analysis to theorganization being analyzed. So, for example, while the model is preloadedwith an average hourly rate of $10 for a data entry operator, the user has theopportunity to insert the actual hourly rate for his or her organization

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

Pick categories appropriate for the analysis. The ROI model developedby Callan Consulting for CNET Channel is designed to quantify the economicreturns associated with implementing a DataSource solution. While itcaptures a broad range of economic benefits, not all categories of benefit arenecessarily applicable to all companies business models (for example,

companies that do not have an inbound telesales organization will not be ableto realize efficiencies in their telesales organization). Readers of this paperand users of the ROI model should select the benefits associated with theirparticular situations.

All benefits vs. hard benefits only. The model separates its benefitsanalysis into two categories: benefits associated with all ROI components andthose associated with hard ROI components only. Hard components arethose that have a direct, measurable bottom-line effect and include:

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

headcount efficiencies

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

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