If you’re a business owner and haven’t yet started using analytics, a natural question will be: How do I know if this is something I should pursue? Here I’ll provide you some thoughts on how to evaluate the costs and benefits of investing in analytics. While the specific monetary amounts will vary, I think you’ll find this general enough to give any business a starting point for weighing the costs and benefits.
The cost of analytics can vary significantly, however there are a few different places these costs can come from when you’re getting started with analytics.
1: Free (But Not Really Free)
The first option is to upskill yourself or one of your existing employees. While this can be viewed as a “free” option, there are costs associated with this. This cost mainly comes from the time to do this. If you or an existing employee already has some background in data and analytics, the cost of this may be low. However, if you’re starting from scratch, the cost to upskill on analytics can be incredibly time intensive.
If you’re the owner of the business and already have an analytics background, its unlikely you haven’t already taken steps to integrate analytics into your company. Its more likely that this situation comes up when you have an existing employee who also has an interest/background in data and analytics. When you have this type of employee, it can be a cost effective and also timely solution. The majority of leveraging analytics is understanding the business questions and challenges, so an existing employee with an analytics skillset will likely be able to make quick progress on where analytics can be leveraged first.
However, if you don’t have any existing employees who are into data and analytics, the cost of upskilling them will take a long time. This will also take them away from their “day job”, which may have impacts to the business.
2: External Help
Hiring an employee to do analytics can be a significant cost commitment. It can also be a risky one when you’re unsure how/if you’re going to see value from analytics. The next cost option is hiring external help from a consulting company (like Simplified Analytics😊). Using an external company provides you immediate access to analytics expertise with a fixed and short-term cost commitment. Especially in the early stages of proving value with analytics, this approach reduces risk by limiting your costs to a specific engagement. If you begin seeing the value of analytics and continue investing, you will likely see this benefit until your analytics work reaches a point where it becomes a full-time job that could be hired into your company. Hiring an external company is likely cheaper until this threshold is reached because you’re not either paying an employee a full salary when there isn’t a full analytics workload or you’re not trying to hire for someone who knows both analytics AND how to do something else within your business.
The major negative to this approach is hiring an external company means there will be some learning curve for the consultants to understand the specifics of your business. This will take some time, but much less than upskilling an existing employee with no analytics experience. As mentioned above, another negative can be the long-term costs of using an external company. If your analytics work reaches a full-time job workload, then its likely more cost effective to hire a full-time employee with a data and analytics skillset.
This is the most flexible option from a cost side and reduces long term commitments should analytics not prove valuable to your business.
3: Full-Time Employee
This is mentioned in the “External Help” section above, but will touch on this in a bit more detail. As mentioned above, it makes the most sense to hire a data and analytics person once you have enough analytics work for a full-time job.
My rationale for waiting to hire a full-time analytics person vs. hire someone who does analytics and something else in the business is related to the work and the typical analytics person. Analytics work requires a disproportionate amount of heads down time compared to many other functions in a company. Additionally, the typically analytics person isn’t going to be interested in working in other parts of the business (like customer service). While it is possible to find a situation within your business that you could make work, it will make hiring for the role much more challenging.
This is the least flexible option from a cost perspective, as you’re committing to a full-time employee. However, once you have enough analytics work, this ends up being a more cost-effective option than relying exclusively on an external company.
Once your business has enough analytics work for a full-time employee, does that mean you don’t need an external company to assist? It really depends on your goals and budget for analytics within your business.
The value of having both a full-time employee an external support resides within specialization. There are many different specializations within the analytics space. The full-time employee you hired for analytics may have a specific specialization in which they’re an expert at (and you hired them because that’s the specialization you need most). However, if another project comes about that requires a different specialization, there can be value in leaning on an external analytics company for that specialization.
Once you have enough analytics work for a full-time employee, this ends up being a flexible and cost-effective option. You’ve hired an analytics person full-time to do what you know is most common. You’re then able to leverage the flexibility of an external company for additional expertise when needed.
In summary, if you have an existing employee who is interested and knowledgeable with data and analytics, start with them. That’ll likely be a cost effective and timely solution. If you don’t have that knowledge with an existing employee, hire an external company to start testing out analytics. Once you have proven out the value of analytics and have enough for a full-time job, hire a full-time employee to run your analytics. If your analytics investment continues to grow, leverage a blend of your full-time employee for your “common” analytics needs and an external company for new or less common analytics work outside your employee’s expertise.
Analytics ends up being a nice service to sell because its benefits can be both immediate and long-term. The benefits for each company will vary drastically, so you’ll find this section quite generalized in an effort to be relevant across businesses.
The consultative approach we use at Simplified Analytics highlights the short term benefits you could expect from leveraging analytics. This focuses on the specific situation for the analytics work. If the goal is to optimize the marketing budget of your business, then we’ll aim to measure the increase in sales. If the goal is to reduce costs within the business, then we’ll measure the decrease in costs. These immediate benefits are measurable as long as there is forethought and intention around what to measure and how to measure it.
When analytics is measured in this way, its easy to weigh the benefits and costs. If the cost of hiring an external analytics company is $1000, but the expected increase in sales is $2000, that’s a 100% return on investment (and hopefully an easy decision)!
The benefits of analytics on a business in the long term and much more abstract. In general, a culture that values analytics makes more informed and better decisions on a daily basis. However, how do you measure the value of all these decisions? The time and effort of doing so would be a significant expense by itself!
Using conservative estimates in these situations are often the best way of quantifying the potential value in the long run. If your business does $300,000 is sales each year, can you expect a more data driven culture to increase sales by 1%? If that is the case, then that’s only $3000 of increased sales each year. However, what if you can expect data driven decision to increase sales by 10%? The expected return of $30,000 seems a bit more attractive.
Using the long-term benefits to justify an analytics investment is much more challenging, however should be part of the consideration.
If you just focus on the cost of analytics, it can look to be an unnecessary expense. However, if you bring together the cost and benefits of analytics, you can start seeing where sizable expected returns can come from integrating analytics into your business.
The largest and most successful businesses in the world place a high value on testing and learning, so I hope the thoughts on how to minimize your costs based where you’re at in your analytics journey allows you to feel more comfortable with experimenting with analytics to get to the short and long term benefits of analytics within your business.