Getting started
To achieve that level of online success, Mulryan and his colleagues have made a series of what he calls "cautiously aggressive" investments. In 1996 the company spent roughly $190,000 to design, develop, and launch the Web site. Though that's hardly petty cash, Roger Greene, the company's president, says that even if Ipswitch never saw a return on that investment, the company still would have been able to make payroll.
The $190,000 was spent in two main areas: $40,000 for systems, including computer hardware, third-party software, and development of E-commerce software; and $150,000 for additional software development, including front-end and E-mail marketing systems. That was just the beginning, of course. Now, with Ipswitch's site up and running, its annual operating costs are adding up.
For one, eight employees work on the Web site. Their total salaries, benefits, taxes, and other costs come to about $800,000 a year, or approximately $100,000 a person, says Mulryan.
Of those eight employees, three work directly on the site. Two of them focus on the site's front end, creating material for the support centers and the Knowledge Base section. The third maintains back-end functions, including credit-card processing.
Four employees process customer leads that come through the site, distributing qualified leads to Ipswitch's resellers. Those employees get their information from customers who download Ipswitch software from the site; to get the evaluation copies, customers must first provide information about themselves, including their E-mail address. The final employee maintains the site's discussion lists, where users can ask one another questions and share tips.
Ipswitch finds that distributing software over the Web isn't free, either. Customers whose computers crash, obliterating the Ipswitch software they've downloaded and purchased, usually ask for a replacement copy. The company doesn't charge customers for replacements but instead assumes the replacement costs, which come to about $110,000 annually.
Also, Ipswitch spends nearly $190,000 a year on licensing fees for its online credit-card-processing system. Furthermore, Ipswitch writes off about $105,000 in Web-based sales owing to credit-card charge-offs, which result from orders whose credit-card number has been declared nonexistent by the bank that issued the credit card.
To promote the site, Ipswitch holds trade-show exhibits and buys print advertising. Those promotions cost the company about $150,000 a year.
But wait, there's more. Ipswitch also needs hardware -- servers, PCs, and the like -- to support its Web site. Mulryan says Ipswitch's annual depreciation expense for the hardware needed to run the site is about $20,000. The company also spends about $15,000 annually on its T1 line.
This year Ipswitch redesigned its Web site at a cost of about $50,000. Although that cost was not a factor in the ROI calculations for 2000, Mulryan says that the company reworks the site about every two years to refresh its look and functionality.
More than a penny saved
As part of its online efforts, Ipswitch conducts E-mail-marketing campaigns, which it has found to be both cheaper and more effective than printed mailings. Last year the company sent some 8.5 million E-mail messages to customers who had opted to receive information. Although the sending of E-mail did not completely replace mailings of printed materials in 2000, it did reduce Ipswitch's direct-marketing expenses by about $585,000. The E-mail also achieved a response rate of at least 5% and in some cases as high as 40%; by comparison, Ipswitch's print mailings last year achieved an average response rate of 2%.
Operating the Web site has also allowed Ipswitch to avoid building a huge sales and customer-service staff. Mulryan estimates those avoided costs at about $2.3 million a year. While that doesn't get factored in to a strict ROI equation, by Mulryan's thinking, that's $2.3 million a year the company didn't need to spend. "We've realized that the Internet gives us the opportunity to sell software in the mass market without building a large sales force," he says.
Specifically, Mulryan figures that operating the site lets him limit the number of employees in three main groups: customer service, sales, and tech support. Since customers can now download the company's software on the Web, Ipswitch needs 27 fewer customer-service employees and 5 fewer salespeople than it otherwise would have needed, for an estimated annual savings of $2 million. Also, the Web site has precluded the hiring of 4 technical-support employees, says Mulryan. That's because customers use the Knowledge Base section of the Web site to learn about Ipswitch products or to discuss products with other engineers on the site's discussion boards instead of calling an Ipswitch help desk with questions. Mulryan estimates that those annual savings are roughly $325,000.
Now for the final tally. Ipswitch's total Web costs in 2000: $1.3 million, not including depreciation, write-offs, and other noncash expenses. Total Web-related revenues: $13 million. Total Web-related savings in direct mail: $585,000. Divide the roughly $13.6 million in revenues and savings by $1.3 million in costs to reveal a return of nearly 10.5 times investment. There's nothing "relatively modest" about that.
Karen M. Kroll is a freelance writer based in Minnetonka, Minn.
Copyright © 2001 Karen M. Kroll.
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