Doing the Math on Conversion Optimization
One common misperception in the world of eCommerce goes something like this: “To double our online revenues, we need to double the traffic to our website”.
In fact, doubling the traffic to your website may not be the most cost effective way to achieve online growth. It may be far more effective to focus on optimizing the conversion of visitors once they reach your website, especially if there is low hanging fruit. By this we mean, areas in your online funnel where some modest investment could achieve a meaningful increase in performance. Let’s consider an example and examine the math.
Let’s say that the conversion rate of your eCommerce website is 3%, that is, 3 of every 100 visits to your site results in an online sale. Most sources, such as the Monetate eCommerce Quarterly (www.monetate.com ), put industry averages for B2C online retailers in this ballpark.
Are higher conversion rates possible? Certainly. According to a recent eCommerce benchmark study published by Marketing Sherpa (www.marketingsherpa.com ), the majority of eCommerce conversion rates range from less than one percent up to 10%, with a small number of players achieving greater than 10%. But you are faced with the critical questions of how to increase conversion, what will it cost and what return will you get on your investment. If you were to invest in upgrading every aspect of your online funnel, you could be making a large investment, and even a significant increase in revenue may not provide a very good ROI.
An alternate approach is to identify and address the underperforming areas that would have the highest payback, i.e. the low hanging fruit. In this way, you might achieve a significant increase in performance, but at a minimal cost, and with a much higher return on investment.
What is the value of improving conversion rates?
Let’s do the math on a specific (if hypothetical) example.
Let’s say that your eCommerce website gets 1000 visits a month and generates 30 sales per month – a 3% conversion rate. And let’s say that a little digging into analytics reveals the data shown in the Base Case in the table below.
|Enter the Site||300|
|Enter the Shopping Cart||100|
|Complete a Purchase||30|
In this scenario, of every 1000 visits to the website, 300 entered the site (the remaining 70%, bounce). Of the 300 visits that didn’t bounce, 100 (33%) placed something in the shopping cart (the remaining 67% did not). Of these, 70 (70%) abandoned the shopping cart without buying and only the remaining 30 (30%) completed a purchase. The overall conversion rate was 30 of 1000 visits, or 3%.
So in this scenario, there are three critical drop-off points:
- Bouncing from the website: 70%
- Failing to enter the shopping cart: 67%
- Abandoning the shopping cart: 70%
If we are able to reduce each of these drop-off rates from their current level to 60%, by removing barriers and implementing cost-effective fixes, we get a very different picture, as shown in the Optimized Case in the table below.
|Stage||Base Case||Optimized Case||Improvement|
|Enter the Site||300||400||100|
|Enter the Shopping Cart||100||160||60|
|Complete a Purchase||30||64||34|
In this scenario, of every 1000 visits to the website, 400 (40%) enter the site (the remaining 60% bounce). Of the 400 visits that don’t bounce, 160 (40%) place something in the shopping cart (the other 60% do not). Of these, 96 (60%) abandon the shopping cart without buying and the remaining 64 (40%) complete a purchase. The overall conversion rate in this case is 64 of 1000 visits, or 6.4%.
And so by focusing on three specific areas where there were opportunities to make incremental improvements, overall performance was increased significantly. This example also demonstrates the power of compounding multiple small performance improvement to achieve a big overall effect.
Conversion optimization – a too well kept secret?
Now you are right to ask, if it is this easy, why isn’t everybody doing it. The answer is that the low hanging fruit isn’t always readily apparent. These opportunities are best detected through the use of detailed analytical models and most companies are only beginning to move down this path.
Also, the eCommerce industry has a long history of focusing on traffic instead of conversion. One source (econsultancy.com ) suggests that for every $92 a brand spends acquiring visitors, only $1 is spent converting them.
However, the benefits of conversion optimization are gaining more attention, as companies realize that it provides a very appealing alternative to buying traffic as a source of revenue growth, as well as providing a very attractive ROI. For more on the use of analytics to improve conversion performance, we invite you to explore the other resources available on our website.