Net Present Value (NPV) calculations are common in financial circles, but something I discuss with prospects all the time is how investments on their sites and in their customer communities can also follow this concept.  The longer you wait, the more you’ll miss out on.  Let’s take a look at the time value of reviews…

Assume a few things:

1. You’ve got \$10m in online sales annually.
2. You’ve got \$2m in returns from online sales, resulting in \$8m total in net sales.  This makes your return rate 20% of annual sales.
3. You’ve got a conversion rate per session of 3% – meaning 3% of each session actually buys something.
4. You’ve got an average order value of \$100.
5. You’re processing 100,000 orders per year, or on average 8,333 per month.  Let’s smooth out the holiday spikes for now.
6. With 3% conversion resulting in 100,000 purchasing sessions, you’ve got roughly 3.3million total sessions a year.

Assume a few more things that we’ve learned at Bazaarvoice:

1. Reviews can raise conversion by 20% to 30%.  Let’s assume 20%, so your new conversion rate would be 3.6% instead of 3%.
2. Reviews can reduce returns by 10% to 20%.  Let’s assume 10%, so your new return rate would be 18% instead of 20%.
3. Conservatively it takes your organization 90 days after going live with reviews to promote and make your customers aware.  Most organizations hit this 90 day window easily, and some start day one with lots of content pre-collected.
4. For now, we’ll ignore the other benefits of having user generated content on your site.

Now to the benefits…

When the program is live and running:

1. You’ll be averaging 10,000 orders per month instead of 8,333.  This will gross you \$166,700 in revenue per month, or an additional \$2,000,400 annually.
2. You’ll reduce returns from 1,666 orders returned monthly to 1,500 orders returned monthly.  This will gross you an additional \$16,600 per month, or \$199,200 annually.

Now let’s look at the time value of reviews:

If you wait and only have reviews live and running for 3 months in 2009 you’ll increase your total gross sales by \$549,900, or 6.8% improvement of your previous \$8,000,000 net after returns.

If you move quickly and get reviews live and running for 6 months in 2009, you’ll increase your total gross sales by \$1,099,800, or 13.7% improvement of your previous \$8,000,000 net after returns.

If you move now and get reviews live and running for 9 months in 2009, you’ll increase your total gross sales by \$1,649,700, or 20.6% improvement of your previous \$8,000,000 net after returns.

If you already moved, and are running and live for all of 2009, you’ll increase your total gross sales by \$2,199,600, or 27.5% improvement of your previous \$8,000,000 net after returns.

I know this is a simple approach to a complex calculation – which is why we’ve got an entire set of spreadsheets to help refine these calculations specific to your business.  Email me at (osborne AT bazaarvoice DOT com) if you want our help in creating these spreadsheets for you – we’re happy to do it.  I’m the type that loves to know what I’m missing – and once you know, you won’t want to miss out anymore…

### 6 Responses to “Why Waiting Hurts – Net Present Value of Reviews”

1. Dear Michael,
Thanks for a brilliant article. Your way of breaking down data and presenting it in a manner that any CFO will approve; is admirable.

I’ll surely be taking cues from this when I have to present my next campaign to the Senior management.

Cheers.
Bhawna

2. Dear Michael,
Thanks for a brilliant article. Your way of breaking down data and presenting it in a manner that any CFO will approve; is admirable.

I’ll surely be taking cues from this when I have to present my next campaign to the Senior management.

Cheers.
Bhawna