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The Total Economic Impact Of The Mobile Channel With PayPal For Online Merchants In The Netherlands
The Mobile Channel And PayPal Drive New Revenues For Online Merchants In The Netherlands Project Director: Jan ten Sythoff Contributor: Sebastian Selhorst May 2013
Forrester Consulting
The Total Economic Impact Of The Mobile Channel With PayPal For Online Merchants In The Netherlands
TABLE OF CONTENTS
Executive Summary................................................................................................................................................................................. 2 The Mobile Channel With PayPal Generates Truly Incremental Sales................................................................................... 2 Factors Affecting Benefits And Costs............................................................................................................................................. 5 Disclosures........................................................................................................................................................................................... 6 TEI Framework And Methodology...................................................................................................................................................... 7 Analysis...................................................................................................................................................................................................... 8 Interview Highlights .......................................................................................................................................................................... 8 Costs....................................................................................................................................................................................................11 Benefits ...............................................................................................................................................................................................12 Flexibility............................................................................................................................................................................................14 Risk......................................................................................................................................................................................................14 Financial Summary................................................................................................................................................................................16 PayPal: Overview ...................................................................................................................................................................................17 Appendix A: Composite Organization Description .......................................................................................................................18 Appendix B: Total Economic Impact Overview............................................................................................................................18 Appendix C: Glossary ...........................................................................................................................................................................19 Appendix D: Supplemental Material .................................................................................................................................................20 Appendix E: Endnotes ..........................................................................................................................................................................20
2013, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. For additional information, go to www.forrester.com. About Forrester Consulting Forrester Consulting provides independent and objective research-based consulting to help leaders succeed in their organizations. Ranging in scope from a short strategy session to custom projects, Forresters Consulting services connect you directly with research analysts who apply expert insight to your specific business challenges. For more information, visit www.forrester.com/consulting.
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Forrester Consulting
The Total Economic Impact Of The Mobile Channel With PayPal For Online Merchants In The Netherlands
Executive Summary
Mobile commerce is a dynamic area of growth and development in Europe, including the Netherlands. Forrester foresees that mobile commerce will grow from 2.7 billion to 19.2 billion between 2012 and 2017 in Western Europe.1 In the Netherlands, mobile commerce revenues will grow from 112 million at the end of 2012 to 1.1 billion by the end of 2017, growing at a compound annual growth rate of 57% during the period, one of the highest in Europe.2 Part of the growth will be linked to the increasing adoption and use of smartphones: The percentage of the Dutch population using a smartphone will grow from 54% in 2012 to 80% in 2017.3 In addition, and beyond direct mobile transactions, mobile will play a key and increasing role in influencing sales across multiple channels thanks to its ability to bridge the physical and online worlds. Currently, the Netherlands lags behind the European average in mobile commerce adoption. While the Dutch eCommerce market is relatively mature, adoption of mobile commerce is slower. This is partly because of the very high levels of broadband household penetration in the Netherlands. While the use of smartphones and mobile Internet is relatively high in the Netherlands, there is a lower tendency to use them for researching or purchasing products and services. Today, 25% of Dutch online consumers owning a smartphone use it at least once a month to research products and services for purchase, whereas the EU average is 27%; 10% actually buy products or services, slightly behind the EU average of 13%. In December 2012, PayPal commissioned Forrester Consulting to examine the total economic impact and potential return on investment (ROI) online merchants may realize by deploying a mobile channel with PayPal as a payment option. The purpose of this study is to provide readers with a framework to evaluate the potential financial impact of introducing a mobile channel with PayPal on their organizations.
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The Total Economic Impact Of The Mobile Channel With PayPal For Online Merchants In The Netherlands
Our findings are based on interviews and surveys with six existing merchants based in the Netherlands, part of a broader pan-European project of 35 merchants. The merchants that participated in this study represent a broad variety of verticals including travel bookings, clothing, gifts, and digital content. While we discussed the mobile channel including smartphones and tablets, most of the interviewed merchants are unclear on whether tablets are mobile devices or PC substitutes; some simply cant track mobile sales by device. The assumptions of our financial model, which therefore only include sales on smartphones, are in line with what we think can be reasonably achieved by the composite organization and similar types of merchants in the Netherlands.
Benefits. The organization used in this analysis is a composite based on multiple interviews that Forrester
conducted to delve more deeply into the financial impact of a mobile channel using PayPal as a payment option; a mobile-optimized website was launched initially, which was followed two years later with the launch of a mobile app. The majority of merchants told us that it made more sense for them to start with a mobile website and add apps later; this is particularly the case for small to medium-size merchants. The first two points below could be quantified for the ROI analysis portion of the study; the third could not be quantified but is an important benefit that all the merchants we spoke to highlighted, and it should be taken into consideration when evaluating the potential value of a mobile channel. The key benefits include: o Truly incremental revenues, regardless of the industry. Regardless of the vertical, the vast majority of the interviewed merchants reported truly incremental sales through the mobile channel. Mobile sales make up an increasing share of total online sales; for our composite organization in the Netherlands, these increase from 6.5% in the first year to 10% in the second year and 15% in the third. The majority of these would have taken place anyway through the website, but a portion of 10% is truly incremental in the first year, increasing to 12% in the second year and 15% in the third in the case of the composite online generalist store described here. This incremental revenue, which amounts to 2.6 million over the three years of the analysis, comes in large part from new customers who find the site and/or download the app, but also from existing online customers who are increasing their spending with the composite organization through their mobile device, typically with lower average order values but higher frequencies. These incremental values increase over time as the Dutch mobile market matures and merchants continue to optimize the mobile channel, enabling them to provide more-targeted offers, easier navigation, and a smoother checkout process, as well as complementing the mobile site with a mobile app. PayPal-boosted mobile sales. The presence of PayPal as a payment option helps drive the scale of mobile direct sales primarily by providing access to a new audience, and in turn, incremental mobile sales. PayPal users are more likely to make purchases on their smartphones than non-PayPal users. The presence of PayPal on the mobile channel also eases security concerns because users dont need to take out their payment cards in public places. It reassures users that a mobile site is trustworthy and facilitates the payment process by reducing user input requirements. All these elements help to drive mobile channel conversion rates. We estimate that about 30% of PayPal mobile sales are truly incremental. This means that in the case of the composite organization, which has a PayPal share of mobile checkout of 12%, approximately 706,000, or 27% of the incremental mobile sales described above, are driven by the presence of PayPal. Increased traffic and customer engagement. The addition of a mobile site and mobile app increase total online traffic, attracting new customers and providing new ways to interact with existing customers. Mobile marketing channels offer cost advantages of customer acquisition. A mobile channel enhances the brand,
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and customers can find and browse the site even when they dont have access to a PC. In particular, this helps to increase conversion rates on the website, with the mobile and online channels complementing each other in the case of multichannel clients, thus accelerating total online revenues. We have not been able to quantify these benefits, and they are therefore not included in this financial analysis.
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The Total Economic Impact Of The Mobile Channel With PayPal For Online Merchants In The Netherlands
Costs. To introduce, maintain, and promote the mobile channel, the composite organization experienced the
following costs: o Mobile site and app development, maintenance, and marketing costs. The creation, maintenance, and promotion of the mobile site and app are the most significant costs incurred. In the case of the composite organization, these costs have a three-year risk-adjusted PV of approximately 189,000. Note that extending the PayPal payment option from the Web to the mobile site comes at nearly no additional costs. Incremental transaction and support costs. Additional sales incur additional costs associated with transactions and customer support. Here, these transaction and support costs have a three-year risk-adjusted PV of just under 31,000. Part of these costs are the higher commission costs PayPal charges per transaction compared with the usual debit/credit card fees.
impact on the ROI of the mobile channel. In general, the larger the existing site, the greater the scale of the mobile channel. The size of the margins also directly affects the benefits to be gained; the higher the margins, the higher the mobile channel benefits.
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The Total Economic Impact Of The Mobile Channel With PayPal For Online Merchants In The Netherlands
Type of goods or services sold. All the merchants interviewed in the Netherlands benefit from the mobile
channel, although not to the same extent; on average, they believe that truly incremental mobile sales are around 20% for all mobile sales, with a range of 5% to 35%, depending on the industry. Products such as digital content, digital tickets, and financial services, which dont involve any physical goods, are well-suited to online and mobile sales. Furthermore, time and location sensitivity can come into play, such as clothing sites with limited edition offers, or purchases that tend to be more impulsive. Conversely, other products are less prone to mobile purchase, which tend to be high value and nonimpulsive, such as family holidays, groceries, and furniture.
Target audience. A customer mix with a lower propensity for using mobile devices could result in lower benefits.
The adoption of smartphones and a mobile Internet connection tends to be lower in certain customer segments, such as those with a lower income and higher ages. Conversely, younger age groups tend to make higher use of sophisticated mobile devices and may also prefer to buy over mobile rather than online.
Quality of implementation. Its essential that the mobile site and app developed be of high quality, enabling an
excellent customer experience; they must be reliable, stable, and easy-to-use. Should the site be difficult to use or badly integrated to back-end systems, for instance, the merchant may incur additional costs in fixing these problems. In general, the more experienced an organization is with online sales, the better it will be at developing a mobile channel. The quality of the integration with PayPal and its visibility on the mobile channel might also have an impact on the sales uplift. Generally speaking, mobile sites and apps that are user-friendly and that enable quick and easy ordering and payment enjoy higher conversion rates.
Disclosures
The reader should be aware of the following:
The study is commissioned by PayPal and delivered by the Forrester Consulting group. Forrester makes no assumptions as to the potential return on investment that other organizations will receive.
Forrester strongly advises that readers use their own estimates within the framework provided in the report to determine the appropriateness of an investment in the mobile channel and in PayPal mobile solutions.
PayPal reviewed and provided feedback to Forrester, but Forrester maintains editorial control over the study and
its findings and does not accept changes to the study that contradict Forresters findings or obscure the meaning of the study.
The customer names for the interviews were provided by PayPal.
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obtain data with respect to costs, benefits, and risks during Q1 2013. The Netherlands was one of seven countries where this research was undertaken, which involved a total of 35 merchants, providing additional cross-country benchmarks and comparisons.
Designed a composite organization based on characteristics of the interviewed organizations (see Appendix A). Constructed a financial model representative of the interviews using the TEI methodology. The financial model is
populated with the cost and benefit data obtained from the interviews as applied to the composite organization.
Given the increasing sophistication that enterprises have regarding ROI analyses related to IT investments, Forresters TEI methodology serves the purpose of providing a complete picture of the total economic impact of purchase decisions. Please see Appendix B for additional information on the TEI methodology.
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Analysis
Interview Highlights
A total of six merchants were contacted in the Netherlands for this study, involving representatives from the following companies (PayPal customers based in the Netherlands): 1. A specialist clothing retailer. This specialist clothing retailer operates hundreds of stores in many countries across Europe and has had an online presence for a decade. It launched its mobile site 1.5 years ago, followed by loyalty apps for Android and iOS devices. Today, 5% of online revenues are generated through smartphones and another 10% through tablets. PayPal was added as a payment option on the mobile site in mid-2012, and already a higher portion of sales go through PayPal on mobile than through online channels. A provider of digital content. This is a social entertainment company with tens of millions of users in more than 40 countries. Fifty percent of its mobile sales take place through PayPal; it also works closely with many telecom operators. An online greeting card and gift merchant: This pure-play online merchant provides customized greeting cards as well as gifts such as flowers and chocolates. It launched its mobile channel less than two years ago, and today, smartphones account for 6% of sales and tablets 9%. PayPal accounts for 5% of its mobile channel sales. A provider of social gaming. This company, set up in 2004, provides interactive games to millions of users around the world. It offers a mobile site and apps, which generate around 5% of total sales, the vast majority of which is paid through PayPal. An online clothing and fashion merchant. This is a large international group with hundreds of stores in tens of countries around the world selling clothing and fashion. It launched its mobile site less than a year ago, and today, 10% of online sales are conducted on smartphone and tablet devices. Four percent of mobile sales are paid through PayPal, slightly higher than through the online shop. A large provider of transport services. This is a very large international transport service provider generating billions of euros in revenue. It first launched its mobile channel 2.5 years ago, which at the time was primarily used to drive traffic; however, since then, the provider has added the ability to book and pay through its various mobile channels, which include tablet and smartphone apps and sites. In the Netherlands, around 50% of sales are online, and of this, around 10% is through mobile channels, with a significant portion paid through PayPal.
2.
3.
4.
5.
6.
We believe that 80% of mobile sales would come in without a mobile channel and 20% is from new customers. (Head of online payments, provider of transport services)
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It was expected that we should offer mobile from the market; otherwise customers may go elsewhere. I think revenues have increased from the mobile channel; our audience fashion lovers are directed to the mobile site from within the app, then perhaps look for a store with the offer. (Operations and IT manager eCommerce, specialist clothing retailer)
The provision of PayPal as a payment option, by providing a secure and trusted mobile payment channel, drives
incremental sales; furthermore, by facilitating the purchase process, the perceived quality of the app improves. Key benefits of PayPal are convenience, especially on mobile much easier and quicker its hassle free. PayPal is a Web 2.0 organization its possible to offer it globally it was quite easy to switch it on for multiple countries. (Operations and IT manager eCommerce, specialist clothing retailer) Some customers are reluctant to put credit card details on mobile they have a better feeling paying with PayPal. Some people dont have a credit card, but they do have a PayPal account so these can now pay when previously they were not able. (Head of online payments, provider of transport services)
The mobile channel drives customer engagement, thus increasing total site traffic and in-store sales.
We also want to draw people into the stores using mobile, while on Saturdays when it gets busy they want to understand how they may use mobile as a payment channel to ease queues. (Operations and IT manager eCommerce, specialist clothing retailer)
Composite Organization
Based on the feedback and insights from six existing customers provided by PayPal, Forrester constructed a TEI framework, a composite company, and an associated ROI analysis that illustrates the areas financially affected. The composite organization that Forrester synthesized from these results represents a medium-size Dutch-based generalist online merchant that invested in a mobile-optimized version of its website one year ago that included PayPal as a payment option. The site was developed primarily to drive new revenues, but also to enhance the brand; the organization was also concerned about customer churn, should it not offer a mobile channel. Then it invested in the development and integration of a mobile app, which was then launched in the third year of our analysis.
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The Total Economic Impact Of The Mobile Channel With PayPal For Online Merchants In The Netherlands
Framework Assumptions
Table 2 provides the model assumptions that Forrester used in this analysis.
The discount rate used in the PV and NPV calculations is 10% and time horizon used for the financial modeling is three years. Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult with their respective companys finance department to determine the most appropriate discount rate to use within their own organizations. In addition to the financial assumptions used to construct the cash flow analysis, Table 3 provides channel sales assumptions that are used in this analysis.
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Costs
Forrester identified two main incremental cost elements that merchants incur when deploying and running a mobile channel alongside their web store. These are the cost of creating, marketing, and running the mobile website and app and incremental support and transaction costs.
Total Costs
Table 4 summarizes the incremental non-risk-adjusted costs incurred by the composite organization for setting up and maintaining a mobile channel with PayPal. In total, the composite organization spent just over256,000 over three years.
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Benefits
The key benefit identified by all participants in the research was the increase in sales. Nearly all the interviewees across Europe told us that adding a mobile channel increases revenues over and above those that come from the main online website. These benefits alone provide compelling returns on investment, even for merchants that sell products and services that are not time- or location-dependent or that have other characteristics that make them well-suited to the mobile channel. In some industries, however, a mobile channel is even more compelling, particularly those that have an important location element, those wherein offers are time-based, and those that are digital and so can be delivered directly to the device itself, such as music or financial services. The benefits associated with these incremental sales have been included in our financial analysis, but there are also additional benefits over and above these which we have not been able to quantify, including increased customer engagement, higher traffic, improved brand image, and better customer satisfaction, all of which help to increase sales on the website. In particular, some interviewees highlighted the importance of these multichannel customers. Its also important to mention that many interviewees stated that had they not created a mobile channel, some of their customers would have churned to competitors that had one.
Incremental Revenue
The success of the mobile channel varies in different industries. In the case of the generalist, as per our composite organization, sales through the mobile channel take time to grow and develop: In the first year, 6.5% of online sales are through mobile, in the second, it is 10%, and in the third, 15%. Of these, we estimate that 10% is truly incremental in the first year, which increases to 12% in the second year and 15% in the third as the mobile app is launched and the merchant
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optimizes the mobile channel by improving navigation and making the checkout process smoother and easier. The nonincremental sales would have taken place anyway through the Web. The provision of PayPal as a payment mechanism on the mobile channel supports these numbers. According to the merchants we interviewed in the Netherlands, the portion of checkout through PayPal is often slightly higher on mobile compared with PC or web sales. Furthermore, PayPal users in the Netherlands are nearly 50% more likely to use their smartphones for mobile purchases than non-PayPal users, and many of those who do use it dont use other payment methods.5 Given these points and comparing to the feedback from across the different countries, we estimate that 30% of PayPal mobile sales are truly incremental, resulting in more than 705,000 of incremental sales for the composite organization. Total incremental mobile sales amount to just under 2.6M, with 357,500 in the first year, 726,000 in the second, and more than 1,497,000 in the third. With a gross margin on sales of 20%, the net benefit for the company amounts to slightly more than 516,000 over the three years of the analysis.
D3c D3d D4 Dt
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device. Several merchants report that mobile marketing costs are lower than traditional online marketing costs, offering additional benefits of lower customer acquisition costs. There are also different ways to attract users to a mobile site, such as barcodes, newsletters, and text campaigns. While this may not result in an actual sale through the mobile channel, it enables merchants to interact with clients more, and therefore drive other sales, whether online or in-store.
discounts, as a trigger or reminder. This is generally most useful in association with brick-and-mortar stores.
Loyalty cards: A mobile app can be used as a loyalty card to provide special discounts, deals, and targeted offers. Additional services: In the case of travel services, an app can be used to check-in, check travel times, and manage
other elements of a booking, or in the case of financial services, provide the latest relevant news and information. Mobile apps are often used to compare prices in-store, which can also lead to additional purchases.
Flexibility
Flexibility, as defined by TEI, represents an investment in additional capacity or capability that could be turned into business benefit for some future additional investment. This provides an organization with the right or the ability to engage in future initiatives but not the obligation to do so. There are multiple scenarios in which a customer might choose to implement a mobile channel and later realize additional uses and business opportunities. Flexibility would also be quantified when evaluated as part of a specific project (described in more detail in Appendix B). A good understanding of the mobile channel is likely to help merchants in certain industries where mobile provides additional benefits such as for physical (i.e., in-store) payments and virtual ticketing. These potential additional benefits are impossible to quantify but should act as an additional driver for some merchants to increase their focus on the opportunities in mobile with a longer-term view.
Risk
Forrester defines two types of risk associated with this analysis: implementation risk and impact risk. Implementation risk is the risk that a proposed investment in a mobile channel may deviate from the original or expected requirements, resulting in higher costs than anticipated. Impact risk refers to the risk that the business or technology needs of the organization may not be met by the investment in a mobile channel, resulting in lower overall total benefits. The greater the uncertainty, the wider the potential range of outcomes for cost and benefit estimates. Quantitatively capturing implementation and impact risk by directly adjusting the financial estimates results in more meaningful and accurate estimates and a more accurate projection of the ROI. In general, risks affect costs by raising
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the original estimates, and they affect benefits by reducing the original estimates. The risk-adjusted numbers should be taken as realistic expectations since they represent the expected values considering risk. The following implementation risks that affect costs are identified as part of this analysis:
Its essential that the mobile channel be reliable, stable, and easy-to-use. Merchants must be diligent in choosing
partners to design, develop, integrate, and maintain their mobile site and app. Failure to do so could result in the need to invest additionally to fix the site or app and repair customer relationships.
Its possible that marketing or transaction and support costs will be higher if, for example, refund rates are higher
or marketing campaigns run over budget. The following impact risk that affects benefits is identified as part of the analysis:
The main risk on the benefits side is that the customer base will be less inclined to use the mobile channel. This
might be the case because a lower portion has a smartphone or makes use of its data capabilities or because a different product or service is less prone to mobile purchase. Furthermore, certain customer segments or types may be less inclined to make purchases on a mobile device. Table 6 shows the values used to adjust for risk and uncertainty in the cost and benefit estimates. The TEI model uses a triangular distribution method to calculate risk-adjusted values. To construct the distribution, its necessary to first estimate the low, most likely, and high values that could occur within the current environment. The risk-adjusted value is the mean of the distribution of those points. Readers are urged to apply their own risk ranges based on their own degree of confidence in the cost and benefit estimates.
Low
High
Mean
90%
105%
98%
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Financial Summary
The financial results calculated in the Costs and Benefits sections can be used to determine the return on investment, net present value, and payback period for the organizations investment in a mobile channel with PayPal as a payment option. These are shown in Table 7 below.
Table 8 below shows the risk-adjusted ROI, NPV, and payback period values. These values are determined by applying the risk-adjustment values from Table 6 in the Risk section to the cost and benefits numbers in Tables 4 and 5.
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PayPal: Overview
PayPal is a leading provider of online payment and checkout systems that enable customers to pay online and not provide their credit card number, billing address, or other sensitive information on the Internet. PayPal is becoming more essential for online and mobile purchases, with growing penetration on the consumer and merchant sides. This penetration is very much driven by growing customer preference for PayPal (primarily for security and convenience reasons) but also by product innovations that enable merchants to monetize their offers in new, more efficient ways. Because of this model, where PayPal handles both merchant and customer payment data, PayPal can bring more value to its customers with relevant and targeted products, services, and marketing activities. PayPal provides customers with a quick, easy-to-use checkout and payment system. Customers who check out using PayPal avoid having to provide credit card numbers, billing addresses, or other sensitive information over the Internet. It is optimized for mobile devices. Users log in with their email and password (or mobile # and PIN) and can easily and securely check out on mobile devices. All pertinent details, including shipping and payment information, are stored in the users PayPal digital wallet, thus avoiding typing in data on a small screen. PayPal is present in 190 countries and processes payments in 25 different currencies. PayPal has about 123 million active users worldwide, thus offering merchants access to a large pool of new customers and potential spending power. In 2007, PayPal was granted a banking license for the European Union. PayPal promotes retail partners to its consumer base through their online shopping portals, email newsletters, and other marketing efforts. In addition, PayPal may partner with some retail clients on a variety of cooperative marketing programs throughout the year. Successful implementation of PayPal includes use of best practice messaging at the merchants point of sale (website) to ensure that consumers are aware of the availability and benefits of these options.
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Benefits
Benefits represent the value delivered to the user organization IT and/or business units by the proposed product or project. Often product or project justification exercises focus just on IT cost and cost reduction, leaving little room to analyze the effect of the technology on the entire organization. The TEI methodology and the resulting financial model place equal weight on the measure of benefits and the measure of costs, allowing for a full examination of the effect of the technology on the entire organization. Calculation of benefit estimates involves a clear dialogue with the user organization to understand the specific value that is created. In addition, Forrester also requires that there be a clear line of accountability established between the measurement and justification of benefit estimates after the project has been completed. This ensures that benefit estimates tie back directly to the bottom line.
Costs
Costs represent the investment necessary to capture the value, or benefits, of the proposed project. IT or the business units may incur costs in the form of fully burdened labor, subcontractors, or materials. Costs consider all the investments and expenses necessary to deliver the proposed value. In addition, the cost category within TEI captures any incremental costs over the existing environment for ongoing costs associated with the solution. All costs must be tied to the benefits that are created.
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Risk
Risk measures the uncertainty of benefit and cost estimates contained within the investment. Uncertainty is measured in two ways: 1) the likelihood that the cost and benefit estimates will meet the original projections, and 2) the likelihood that the estimates will be measured and tracked over time. TEI applies a probability density function known as triangular distribution to the values entered. At minimum, three values are calculated to estimate the underlying range around each cost and benefit.
Flexibility
Within the TEI methodology, direct benefits represent one part of the investment value. While direct benefits can typically be the primary way to justify a project, Forrester believes that organizations should be able to measure the strategic value of an investment. Flexibility represents the value that can be obtained for some future additional investment building on top of the initial investment already made. For instance, an investment in an enterprisewide upgrade of an office productivity suite can potentially increase standardization (to increase efficiency) and reduce licensing costs. However, an embedded collaboration feature may translate to greater worker productivity if activated. The collaboration can only be used with additional investment in training at some future point in time. However, having the ability to capture that benefit has a present value that can be estimated. The flexibility component of TEI captures that value.
Appendix C: Glossary
Discount rate: The interest rate used in cash flow analysis to take into account the time value of money. Although the Federal Reserve Bank sets a discount rate, companies often set a discount rate based on their business and investment environment. Forrester assumes a yearly discount rate of 10% for this analysis. Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult their respective organization to determine the most appropriate discount rate to use in their own environment. Net present value (NPV): The present or current value of (discounted) future net cash flows given an interest rate (the discount rate). A positive project NPV normally indicates that the investment should be made, unless other projects have higher NPVs. Present value (PV): The present or current value of (discounted) cost and benefit estimates given at an interest rate (the discount rate). The PV of costs and benefits feed into the total net present value of cash flows. Payback period: The breakeven point for an investment. The point in time at which net benefits (benefits minus costs) equal initial investment or cost. Return on investment (ROI): A measure of a projects expected return in percentage terms. ROI is calculated by dividing net benefits (benefits minus costs) by costs.
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flows in Years 1 through 3 are discounted using the discount rate (shown in Framework Assumptions section) at the end of the year. Present value (PV) calculations are calculated for each total cost and benefit estimate. Net present value (NPV) calculations are not calculated until the summary tables and are the sum of the initial investment and the discounted cash flows in each year.
Appendix E: Endnotes
1
In this case, Forresters definition of mobile commerce includes all purchases on a mobile phone by EU-7 citizens for retail goods, holiday services (air, hotel, rail, and car-hire), private sale, and coupons. Categories such as cars, prescription drugs, food and drink sales at a restaurant or fast food chain, consumer-to-consumer commerce, and gasoline sales are excluded. Excludes music and video downloads as well as app downloads for games, etc. It also excludes tablets.
2
Source: EU Mobile Commerce Forecast, 2012 To 2017, Forrester Research, Inc., July 11, 2012.
Source: Forrester Research Smartphone Adoption Forecast, 2012 To 2017 (Western Europe), Forrester Research, Inc., February 13, 2013.
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See Appendix A for a description of the composite organization. Source: European Technographics Online Benchmark Survey, Q3 2012, Forrester Research, Inc.
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