How Much Should You Spend Integrating E-Commerce Into Microsoft Dynamics AX, GP, or CRM?

Our clients often ask us whether they should integrate an e-commerce solution into their Microsoft Dynamics GP, AX, or CRM system. When we tell them it has become easier than ever, their next question is this: how much they should spend?

This last question requires a more involved answer. With all the many choices in the marketplace ranging from a few thousand dollars to a couple of million for a large enterprise solution, it is hard to know just how much you should be investing.

COST IS NOT THE ISSUE.  THE RETURN ON INVESTMENT IS.

Think about it this way: if I charged you $500,000 for an integrated e-commerce solution that could generate $2,000,000 in additional gross margin each year and save you another $1,000,000 in operating costs, then would the $500,000 investment be A LOT? The answer, of course, is no. 

Positive Cash Flow: $2,000,000 + $1,000,000 - $500,000 = $2,500,000

The point is simple: you've got to figure out how much money an e-commerce solution will make you before you draw a conclusion of whether or not the cost is too much. So how do you do that? It's actually pretty easy.

Here is a simple process for determining the Return on Investment (or ROI) of an e-commerce storefront. First, you've got to know how much profit you make on each sale. For instance, if you buy whatever it is you sell for $50 and you sell it for $80, your gross profit is $30. That's easy enough. Now take that calculation up a level and do the same thing for all of your products together. Hint: start with the Income Statement.

CALCULATING ROI: An Example

Here's a simple example to illustrate. Let's say ABC Company sold 200,000 widgets last year for $100 each. The cost for each one of these widgets was $40. Therefore, you would take 200,000 widgets x ($100 - $40) and get a total gross profit for ABC Company of $12,000,000 for all of last year.

Step 2 is to figure out how much you can save by streamlining the order-taking process and eliminating any wasted effort. (Note: It is important to remember that in order to achieve ANY cost savings, the e-commerce solution must integrate directly into your Dynamics ERP. Otherwise, you are actually going to increase the cost). To determine your cost savings, you have to figure out how much each one of these order entry resources costs the company. To do this, take their combined salaries, add in things like vacation pay, payroll taxes, benefits, etc., or simply multiply their gross salaries by about 150% to account for that good stuff. 

Let's say, for instance, that you have five branch offices and, in each office you have four people whose job it is to take customer orders and/or apply payments. You pay these resources, on average, about $30,000 per year. To get the total cost of order taking, you need to multiple $30,000 x 150% for overhead x 5 offices x 4 people per office. In this example, the calculation amounts to $900,000

There, the hardest part is over.

Step 3 is to plug all these great numbers into the table below to figure out your profit from e-commerce.

Here are the three steps again:

1. Figure out your gross profit from sales

2. Calculate the total personnel costs from your order-taking process

3. Work out the breakeven amount that you can spend on an e-commerce solution.

Increased Profits from Revenue

 

Total Revenue last year

$20,000,000

 

 

Subtract: Cost of Goods Sold

$8,000,000

 

 

Gross Profit

$12,000,000

 

 

Multiply by Expected Increase In Revenue From E-Commerce (keep it conservative, Cowboy!)

5%

 

Expected Increase In Profits From Revenue (1)

$600,000

Increased Profits from Cost Savings

 

Total Order Processing Costs

$900,000

 

 

Multiply by the amount of time you can save from not having to key in all those orders into your ERP system

30%

 

Expected Increase In Profits From Cost Savings (2)

$270,000

Total Increase In Profits from E-Commerce

Add: (1) + (2)

$870,000

         

 

And that's your breakeven figure! In this case, ABC Company could spend up to $870,000 on an e-commerce solution and still break even the first year. Then, in year two, three, four...100, this amount becomes pure profit. Imagine that!

Once you have this information, you can figure out what you will make over the next five years, like this:

 

Increase in sales ($000)

Yr 1

Yr 2

Yr 3

Yr 4

Yr 5

5 Yr Total

% Increase in Sales

5%

7%

9%

11%

13%

 

 

 

 

 

 

 

 

Increased Profits from Sales

$600

$840

$1,080

$1,320

$1,560

$5,400

Increased Profits from Savings

$270

$270

$270

$270

$270

$1,350

Initial Cost of Solution

($250)

-

-

-

-

($250)

Annual Software Maintenance

($30)

($30)

($30)

($30)

($30)

($150)

Net Profit

$590

$1,080

$1,320

$1,560

$1,800

$6,350

Now, did you get that? That's over $6,000,000 in pure positive cash flow over the next five years for an investment that paid for itself in Year 1.   Not bad!

About Jamie Lippay

Jamie Lippay is the Chief Executive Officer and co-Founder of Keyora Inc., makers of Webfoot® Integrated E-Commerce for Microsoft Dynamics AX and Dynamics GP. Prior to starting Keyora Inc, Jamie implemented Microsoft Dynamics GP for over ten years as a Solution Architect and Project Manager with a leading value-added reseller in Toronto, Canada. Jamie holds an M.B.A. from the Schulich School of Business in Toronto and is a Certified Management Accountant.

Read full bio...

Contemporary electronic

Contemporary electronic commerce involves everything from ordering "digital" content for immediate online consumption, to ordering conventional goods and services, to "meta" services to facilitate other types of electronic commerce.

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