The economics of ecommerce (lecture 10)

Written by: Jonathan Briggs

December 5, 2006 [4137 views]

It is clear from your answers to the mock exam questions that some of you have little real idea of what things cost in the world. As we saw last week when we discussed profit margins on products it is important that you use common sense to work out the value of your time and the cost of having other people do work for you.

This lecture is a stripped down version of the one I gave last year at this time. You may be interested to look at the notes for that lecture too. It comes to the same conclusions but perhaps goes into too much detail. Here is a link to Costs of Ecommerce.

Some hard facts

• There are three levels of minimum wage, and the rates from 1st October 2006 are: £5.35 per hour for workers aged 22 years and older, a development rate of £4.45 per hour for workers aged 18 - 21 years inclusive and £3.30 per hour which applies to all workers under the age of 18 who are no longer of compulsory school age
• A plumber in London costs about £65 per hour
• Average London salary (all ages) is £33,000 (equals £165 per day)
• Salary.com reports an average designer salary in the US to be $42,000 pa.
• Kingston office space costs £19 per square foot per year. An employee needs about 15 square feet minimum. You may have to take a lease for 10-15 years at this price.
• Average charge out rates for ecommerce development are about £700 per staff day.

A “typical project”

Analysis and specification 10-15 days
Graphical design 10 days
Creation of special interactive elements 10-20 days
Template development 10 days
Implementation of site 15-20 days
Integration with backend systems 10-50 days
Project management 10-15 days
Total 75 – 140 days

Don’t forget hardware, hosting and software license fees (or VAT).

But sites can be built for a lot less if you do it yourself and use open source components

How to make money as a developer

1. Reuse work you have done before
2. Hire good rather than cheap people
3. Charge properly
4. Be clear about what you are going to build
5. Build a good reputation
6. Keep your costs low but treat staff well
7. Invest in keeping ahead of your competitors
8. Spend some money on marketing
9. Find partners to work with and outsource where the costs are lower
10. Alert your clients early if costs or timescales change

How to make money for your clients?

1. Think about your clients’ customers
2. Focus on saving them money by streamlining their processes
3. Analyse results and improve the site over time
4. Keep an eye on competitors
5. Provide decision support, great customer service, trusted branding and value for money (rather than simply compete on price)
6. Help them understand the real costs associated with information systems development and marketing
7. Experiment and show them what works

How much can an ecommerce site make?

This is so dependent on what you sell, how you do your marketing, your brand and your customer service but here are a few guidelines:

1. Many companies have seen ecommerce revenues double in the last 12 months
2. 2%-8% visitor to customer conversion rates are possible but the higher figures are more likely with high customer loyalty
3. Many sites take more than £1m a year but remember this is not profit (subtract the costs of doing business)
4. High value brands can make millions or more online (Tesco recently turned over £1billion online in a year)
5. As a rule of thumb companies should be spending at least 10-15% of their expected annual online turnover on building and running their web site. Some will need to invest significantly to improve a poor existing site.

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