Budgeting the Digital Transformation for my Office Products Business!

In the first part of the story of our Amarillo-based office products reseller, we completed a self-assessment of the current status of the business. In the second, we built a comprehensive set of performance goals necessary for accomplishing a digital business transformation. In this third section, we will develop a budget for estimating the cost of executing the digital transformation.

We will also estimate the potential returns on the investment and then learn if the required expenditures can be justified.

The Story (cont'd):

"Just to quickly recap. I felt like we came up with a pretty good set of targets on a broad set of components that we're going to need to work on. But, the biggest problem we're facing is what it's going to cost to execute a plan of this scope. Not only are there a whole bunch of requirements, but we don't have anyone on board who has the skills to do this kind of work.

Also, not only do we not have the skills, we don't have a deep understanding of what all the required skills are. If I have to interview, then I'm not really qualified to know if a candidate can do the work or not. This becomes a big risk - we could hire someone and, six months later, come to the conclusion that person can't do the work we need. Not only will this failure cost us money, perhaps just as importantly, it will cost us time.

To resolve this, I'll need to get a recruiter involved to reduce the hiring risk. That'll cost me more up front but probably less in the long-term.

For now, I'm going to assume all the work we scoped out is equivalent to one full-time employee. It may be unrealistic to expect one person to have all the skills but that's what I'm going to assume at this stage. Ballpark, I'm thinking that person is going to cost $60,000 a year. I know the recruiter fee is going to be around 33% of the salary - or $20,000! Then, on top of the salary, we'll have overhead expense that will be around 20% of the salary so, that will be another $12,000 a year.

I know we've got to fix the website which I reckon will cost at least $15,000. I think the site itself will probably cost less but it's the content we need - someone's going to have to draft it. So, I think 50% of the budget will be spent designing and building the site and the other 50% drafting content.

I know there isn't a lot of detail in the budget yet but, at least I have a ballpark estimate of the costs we'd be incurring and, at this stage, I'm not ready to invest more time preparing a detailed budget until I can see there's the likelihood of a healthy return on the investment. For now, I've summarized the costs we've identified in the following table.

Investment Required
ItemCost (one-time)Cost (Recurring)2-Year Cost
New Website$15,000 $15,000
New Hire$20,000$72,000$164,000


One hundred and eighty thousand dollars? I thought it was going to be expensive but, this is serious money! I'm going to have to be really confident in the projections before I can make an investment of this scale.

Bottom line, if all this ultimately makes sense, it's going to involve a trip to the bank to talk about some financing! For the moment, however, I'm going to park this financial problem and turn my attention to how much new business a digital strategy could help us win.

Web Traffic Conversion Rates and Sales Funnel
 Year 1Year 22-Yr. Total
Web Traffic9,41335,60045,013
Convert Visit to Lead (5%)4711,7802,251
Lead to Marketing Qualified Lead (MQL) (50%)2368901,126
MQL to Sales Qualified Lead (SQL) (50%)118445563
SQL to Opportunity (50%)59223282
Opportunity Closed (50%)30112142


As shown in the table above, if, over the two-year period, we can achieve the traffic and assumed conversion rates, then we'll win 142 new customers. I can tell you right away, that's way more than we've won in the last five years, maybe the last 10!

The next step is to figure out what a new customer is worth. So, we looked back at our numbers and this is what we found.

Our average order size is $400 and, on average, a customer buys six times a year. Based on our recent churn rates, I've calculated our average customer lifetime is down to three years.

For the ROI calculation, I'm going to assume there's no improvement in the average order size, frequency, or the customer lifetime. Although I think there's a lot of room for improvement in our business if we do a better job looking after customers with the help of an integrated information technology platform, I'm not going to count on these kinds of potential improvements as I calculate the ROI.

Customer Life Time Value
 Year 1Year 22-Year Total
Average Order Size$400$400 
Purchases per Year66 
Customer Life Time (Years)33 
Customer LTV (Sales)$7,200$7,200 
Customer LTV Gross Margin %30%30% 
Customer LTV Gross Margin $$2,160$2,160 
New Customers30112142
New Customer Life Time Value (Sales $)$216,000$806,400$1,022,400
New Customer Life Time Value (Margin $)$64,800$241,920$306,720
Required Investment$107,000$72,000$179,000
Return on Investment (ROI)  71%


The average gross margin we've historically earned on our sales is 30% so, if we can hit the traffic and conversion numbers, we'll earn just over $300,000 in margin from new customers. This represents a return of 71% on the $180,000 I've calculated we'll need to invest.

On the face of it, this looks like a decent return but, it's a lot of money and I'm worried about the risks.

  1. If a new hire doesn't perform I'll be paying the salary regardless. I don't know enough to manage the new hire and, if we under perform, on the traffic goals, what will the recovery plan be?
  2. What if we don't achieve the traffic and the conversion rates on the visits to customers? I know we've only assumed we convert 5% of visitors to leads and then ultimately, only around 6% of the leads to customers but, what if we don't hit these targets?
I did a quick sensitivity analysis on the numbers. If we only achieve 75% of the target traffic to our website, then the ROI drops to 28%. If we only achieve 50%, then it becomes minus 14%!
If we achieve the traffic numbers but only convert 4% from visits to leads, then the ROI is halved to 35%.
Worse case scenario, if we only hit 75% of the planned traffic number, only convert 4% to leads, and only convert 40% at each stage of the sales funnel, then the ROI is minus 60%!
There's not much room for error and this initiative could turn into a significant failure.
Here are the assumptions for the different cases for the summary presented in the following table.
Baseline - 5% conversion visits to leads and 50% conversion through funnel
Case 1 - 75% of traffic baseline, 5% conversion visits to leads, 50% conversion through funnel
Case 2 - 50% of traffic baseline, 5% conversion visits to lead, 50% conversion through funnel
Case 3 - 100% of traffic baseline, 4% conversion visits to leads, 40% conversion through funnel
Case 4 - 75% of traffic baseline, 4% conversion visits to leads, 40% conversion through funnel
Digital Marketing Plan - Sensitivity Analysis
 BaselineCase 1Case 2Case 3Case 4
Lead Conversion5%5%5%4%4%
Lead to MQL Conversion50%50%50%40%40%
MQL to SQL Conversion50%50%50%40%40%
SQL to Opportunity Conversion50%50%50%40%40%
Opportunity to Customer Conversion50%50%50%40%40%
New Customers1421067111334
New Customer Sales LTV$1,022,400$763,200$511,200$813,600$244,800
New Customer Margin LTV$306,720$228,960$153,360$244,080$73,440
Return on Investment (ROI)71%28%-14%36%-59%


Well, even though I was always worried about the investment that was going to be needed I was, nevertheless, still excited about the plan. However, thankfully, I worked on this sensitivity analysis. As you can see, it doesn't take much to turn the projection for a reasonable ROI into an outright loss.

Although I've learned enough to understand the potential benefits of implementing digital marketing, I'm just not knowledgeable enough to have sufficient confidence I'll be able to provide the leadership and vision to help a new hire execute the plan. Worse still, at what point would I know whether or not it was going badly wrong and whether I needed to pull the plug?

I'm really worried about how small a miss it appears to take and to risk ending up in a Case 4 scenario facing a heavy loss on a big investment. Bottom line, this plan and the investment it requires, seems too risky.

Having got to this point, however, I feel like we're caught between a rock and a hard place. I can't afford to sit around and do nothing and I can't afford to do more of the same because it just hasn't been working. The world is changing and the way my customers are doing business is changing. It's clear to me, we also must change and I think our best chance is going to be through the use of technology to modify the way we market to our customers and prospects. They, for sure, are not going to change back to the old ways of doing things!

But, again ... I just can't afford to invest this kind of money, risk falling short on a few of the key requirements, and then face a heavy loss. Nobody can guarantee the results we'll be striving for and, even if I do find the best suited and most capable candidate, they may still fail for reasons beyond their control.

So, if I can't lower the risk in the plan, then I must reduce the investment. Perhaps, in turn, this will mean having to scale back on some of the goals but, for now, that seems to be the key to figuring out a path to move forward.

If it wasn't so important I would have already given up and would revisit conventional options for reversing the current sales trend. However, I only started looking at the digital option for the very reason I couldn't figure out other viable, more conventional, options.

Because of the risk, I'm going to set a higher rate of return than I'd normally be satisfied with. So, unless I have a plan that projects a realistic chance to earn a 100% return, (based on the lifetime value of the gross margin earned on the new business), I'm going to abandon the digital approach and hunker down to try and protect our remaining customer base as best we can.

For now, then, my final approach is to assume the worse case [Case 4] scenario for setting my investment budget. This means, with a gross margin LTV of $75,000 or so, the maximum two-year investment I'm prepared to make is around $37,500.

Right away, this makes it clear we can't go out and hire a dedicated resource to execute our plan. To move forward, we must start to hunt for some outside help to achieve the goals within the budget I've now set.

I'm going to have to start calling some of my peers to see if they can help point me in the right direction."

This has been a disappointing outcome for our reseller, especially after finally realizing that a digital strategy and a focus on aftermarket office supplies was one of the last options for turning the business around. It may now seem obvious that the cost of implementing the plan would always be beyond his means and far too risky. But that's with hindsight, and there are many valuable lessons from this exercise that independent resellers facing similar circumstances can learn from.

The next and final piece in this series will conclude the story as our reseller searches for options within his sensibly established budget.

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