Uncovering hidden profits: the ROI of digital experimentation in e-commerce
In light of digital transformation, Johnny Longden of Journey Further argues that the first problem with implementing experimentation in e-commerce is treating it as a marketing channel.
The world of digital experimentation often leaves e-commerce and finance leaders scratching their heads, wondering how to measure its true value, or even whether it has any value at all.
This is because the traditional field of conversion rate optimization (CRO) has been historically misunderstood, leading to misguided practices, missed revenue opportunities and significant confusion.
In this article, we’ll aim to clarify the financial benefits of digital experimentation for e-commerce leaders who control profit and loss (P&L) and finance practitioners seeking a deeper understanding of how experimentation cost drives value.
The e-commerce P&L conundrum
A typical e-commerce P&L consists of monthly channel or marketing costs which drive monthly revenue and therefore demonstrable ROI, and annual platform, hosting and development costs for the website.
While the former is expected to deliver monthly revenue benefits, the latter does not have the same pressure to produce measurable ROI. In many cases, ROI is not calculated at all. Where it is calculated, the total cost tends to be set against the overall revenue attributable to the website, often on an annual basis.
This distinction in expectations is the root cause of confusion when it comes to digital experimentation.
The underlying error: viewing experimentation as a marketing channel
Many misconceptions about digital experimentation stem from the incorrect assumption that it functions like a marketing channel, generating monthly revenue in a similar fashion. However, experimentation itself does not, in and of itself, create value.
Buying media generates revenue directly by actually bringing a customer into your funnel.
With experimentation, it tests a possible change to your website and understands how much incremental revenue it might be worth. However, in order to actually realize that revenue, you need to push that change to production. This means spending money from your web development budget, and it is that budget that is directly responsible for the value.
Experimentation is therefore a decision-making tool that helps businesses allocate resources effectively within their web development budget. Comparing experimentation to marketing channels in terms of cost, revenue and ROI is futile, as experimentation serves a fundamentally different purpose.
How experimentation delivers true value
Without experimentation, you would pay to fully develop and deploy many tests, but only a small handful would generate revenue. Some would harm your income, and others would have no effect. You would have no idea of any of this though, as it is impossible to measure without experimentation.
With experimentation, however, you would first develop all your changes as tests, which is more cost-effective and efficient than full-scale development. Then, you would only implement the ones proven to be effective. Digital experimentation, therefore, delivers value in three key ways.
Revenue protection: By only implementing changes that work, you safeguard your website from potentially harmful modifications that impact your revenue.
Resource efficiency: Experimentation allows for a more efficient use of web development resources as it is cheaper and quicker to build tests than to develop and deploy every change.
Valuable insights: Experimentation provides crucial data on customer behavior and preferences (even those tests that do not yield direct revenue benefits), serving as invaluable R&D and learning which allows continuous brand discovery.
The right treatment in the P&L
Digital experimentation facilitates better decision-making and more efficient resource allocation for improving digital experiences. As such, it should be included as a part of the web development investment in the budget.
The persistent question of ‘what is the ROI?’ for experimentation may seem daunting, but if you are not already calculating detailed ROI for web development investments, there is no need to single out experimentation for such scrutiny. Remember that experimentation is a form of web development that serves a specific purpose.
If you must understand the ROI of experimentation, simply consider your current web development investment and the fact that 90% of it does not drive revenue benefits. By incorporating experimentation into your strategy, you can improve this by:
- Shifting resources
Allocate more of the web development budget to experimentation, ensuring that a smaller production development budget is focused on changes that genuinely deliver revenue.
- Assigning new budget
Adding a new budget to the experimentation component will increase the overall value of your web development investment, as 100% of the existing budget will contribute to tangible improvements, rather than a mere 10%.
- The ROI of digital experimentation
Digital experimentation has long been misunderstood by eCommerce and finance leaders, leading to missed opportunities and misguided practices. By recognizing experimentation as a decision-making tool rather than a marketing channel, businesses can unlock their true financial value.
Experimentation allows for more efficient resource allocation, revenue protection and valuable customer insights, ultimately contributing to the optimization of digital experiences and driving sustainable growth for your business.
Digital experimentation is not just a trend; it is an indispensable approach for businesses looking to thrive in today’s fast-paced digital economy.