Giga Analysis Shows Internet-Enabled Sales Channels Provide Significant Return on Investment; First Study Of Its Kind Finds Three-Year Model For Virtual Sales Channel Produces 10 Percent Revenue Increase

Business Wire, Sept 17, 1996

MOUNTAIN VIEW, Calif.--(BUSINESS WIRE)--Sept. 17, 1996--A Giga Information Group analysis published today shows a potential for significant return on investment for companies implementing a Virtual Sales Channel to conduct sales on the Internet.

The Giga analysis explores the impact on companies which take an incremental approach to Internet-based sales by implementing a Virtual Sales Channel as a supplement to other important distribution channels, such as catalogs, direct sales, and distribution.

Giga's analysis of the "seller," using a hypothetical company with sales of $750 million and a base of 2,000 customers, shows that an Internet-based online selling channel can produce a cumulative 10 percent revenue increase over three years. This equates to $22 million in additional revenue over the three year period. This increase in revenue is accomplished through decreased out-of-contract, or "renegade" purchasing, improved customer retention, and an increased rate of customer acquisition.

Overall costs are reduced by four percent, or $8.1 million over the same time period due to decreases in customer service expenses, inventory carrying costs, product returns, and print catalog costs. Gross profits were estimated to increase by 58.4 percent, or $37 million.

The analysis also reviewed the "buyer's" perspective and based outcomes on a hypothetical manufacturing company with 5,000 employees, spending $150 million per year on non-production goods. The Giga report found that an online ordering application reduces operating costs by 15 percent, or $1.3 million, by decreasing both purchase order processing and renegade purchasing costs, and by improving purchasing department productivity and contract pricing.

"The big question in the market lately has been, `Are any companies making money on the Internet?'," said Tom Kehler, president and CEO, CONNECT, Inc. (NASDAQ: CNKT). "We've found that there are companies conducting real business and making money on the Internet -- delivering incremental revenues directly to their bottom line via a Virtual Sales Channel. Applications that can deliver on this model will deliver the real payback in Internet-based Interactive commerce."

"Companies using a business-to-business Internet application solution, like those provided by CONNECT, would have the ability to share a 50% cost savings with their customers and typically experience an immediate return on investment," said Tom Elliott, industry analyst, Giga Information Group. "In fact, a CONNECT OrderStream interactive commerce application will literally pay for itself in one year, with impactful revenue generation in years two and three."

About the Study

Giga based its analysis on the business-to-business purchasing process for non-production goods and services such as electronic parts, office furniture, office equipment, office supplies, computers, and peripherals -- products often referred to as maintenance, repair, and operations (MRO). The report includes conservative three-year projections for buyer and seller side models and summarizes bottom line results for a hypothetical seller with revenues at $2.25 million.

Utilizing information from interviews with leading manufacturers, resellers, and distributors in conjunction with secondary research from IBM, the Center for Advanced Purchasing Studies, and a 1996 Purchasing Magazine survey, Giga found that Fortune 1000 companies typically spend more than 5 percent of revenue on MRO products, making this sector a $300 billion market. In addition to the purchases themselves, the overhead involved is also significant, with the average company spending one to two cents per every dollar spent on supplies. Some companies spend substantially more, making the clerical and administrative effort needed to purchase these goods a multi-billion-dollar enterprise.

The Giga analysis shows that the Virtual Sales Channel model can eliminate many of the problems of conventional sales systems, by enabling all requisitioners in a customer company access to a supplier's catalog via a Web browser and allowing direct contact purchases. An incremental Internet-based solution can also be implemented quickly, putting selection and ordering at the end requisitioner's desk, and reducing paper handling for both purchaser and supplier.

Giga refined the model by conducting interviews with leading industry suppliers and purchasers to develop models that could be customized to fit the range of individual situations of various suppliers.

"Giga's analysis and its projections are no surprise to us," said Paul Gustafson, senior partner, Computer Sciences Corporation (CSC). "Having developed industrial strength Internet-based online applications with CONNECT, we know that the incremental Virtual Sales Channel model is the most practical, intelligent approach to sales online."

Obtaining the Giga ROI Report or a Custom ROI Analysis

The Giga report was prepared for CONNECT and CSC. Copies of the report may be obtained by contacting CONNECT at 1-800-262-2638 ext. 4038. CONNECT will also provide a free custom ROI analysis to any qualified company seeking to evaluate new Internet-based methods of increasing its revenue.