What is a conversion rate and what is the value of increasing it?

Posted in: Marketing

Potential Return on Investment Increase resulting from a 1 percent Increase in Conversion Rate

As an Internet marketing consultant, when conversion rates first come up with a client, I generally see blank faces staring back at me and I probably should, unless I am speaking with the CMO or someone in the marketing department. At its core, a conversion rate is nothing more than a potential customer/viewer achieving a previously established goal and then counting the goal as complete, compared as a percentage against the entire customer/viewer base. These goals can be anything that is measurable—and measure is the key. For example, we set a goal of enticing visitors to sign up for our email newsletter. So if we have 100 visitors and 1 visitor completes the sign-up, we have a conversion rate of 1%.

Goals (Conversions) can include:

  • Interacting with an element on a page, such as an animated info-graphic
  • Signing up for a newsletter subscription
  • Engaging with and liking or sharing content socially
  • Visiting specific pages
  • Completing purchases in the case of e-commerce stores

These elements are just a few of the goals one could monitor, and how each is monitored and weighed will vary depending on the organization and business model as well as the overall desired outcome. By monitoring these, one is able to determine the Key Performance Indicators (KPIs), which can be used as predictors as to the success and growth of a business. These goals will be set up and monitored through the chosen analytics package. Then, by monitoring these goals, the business can accurately calculate what is working and driving the company or organization forward and what is either underperforming or just a waste of time and capital.

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 Remember that what was a great tactic last year or month might begin to lose its affect on the consumer and the only way to really stay on top of the changing currents in customer trends is to actively monitor the progress of business's online presence through analytics.

So what is the value of increasing your conversion rate?

To explain this, we are going to use a before and after comparison, completing sales conversions in an e-commerce store, because it is easiest for newcomers to generally wrap their head around, money in vs. money out. There will be a little math but I promise it won’t hurt too much! (visitors X cost per visit) = cost of all visits (conversion rate X visitors) = total conversions (revenue per conversion X conversions) = total revenue ((1 - non-marketing profit margin %) X total revenue) = non-marketing costs (visitors X cost per visit) = marketing costs (total revenue – (non-marketing costs + cost of all visits)) = total profit (total profit / marketing costs) = total marketing return on investment (ROI) Now let's look at a plausible before and after example of a company with a 1% increase in conversion rate:  

Visitors 100,000 100,000
Cost per visit $0.40 $0.40
Cost of all visits visitors * cost per visit $40,000 $40,000
Conversion rate 2% 3%
Total conversions conversion rate * visitors 2000 3000
Revenue per conversion revenue per conversion * conversions $50 $50
Total Revenue $100,000 $150,000
Non-marketing profit 50% 50%
Non-marketing costs (1 - non-marketing profit margin %) * total revenue $50,000 $75,000
Marketing costs visitors * cost per visit $40,000 $40,000
Total profit total revenue – (non-marketing costs + cost of all visits) $10,000 $35,000
Total Marketing ROI total profit / marketing costs 25% 88%

  As all other aspects remain the same except for the increase of the conversion rate by 1%, this single digit increase has the overall effect of increasing the marketing ROI from 25% to 88%. Instead of generating $10,000 in profits, the company in the example would generate $35,000 in profit. This is why it is critically important for any online enterprise to continually review and update both their inbound and outbound marketing to ensure they are maximizing the return on investment of each marketing dollar.