One of the questions entrepreneurs and marketers ask me the most concerns conversion rates. Looking for benchmarks, they ask, “What’s the optimal conversion rate we should aim for?” The idea behind the question is flawless – they want to measure the efficiency of your product (website). The challenge is that this is not the right question to ask – there is a number of reasons why.
The main challenge is that the conversion rate is not just a function of your product, but also of the quality of traffic. As an illustration of this, think about a visitor to a fashion store in a mall. The likelihood of him buying a pair of jeans is not as much a function of how neatly the jeans are displayed (equivalent to the quality of your website) as of his intention when he enters the store or even the mall in the first place (your traffic). He may be on the lookout for a new pair of jeans or just browsing. The same goes for your traffic. Few changes in your website will be as impactful as the overall changes in traffic your site will experience over time.
Pull channels, where the customer is looking for you, usually have considerably higher conversion rates than push channels, where you are looking to find the customers
The challenge arises as your marketing mix changes. Different channels have different conversion rates. Nothing predicts conversion rate as well as intentions do. Pull channels, where the customer is looking for you, usually have considerably higher conversion rates than push channels, where you are looking to find the customers. Examples of pull channels are search engines and comparison sites versus push channels like social media marketing and other display marketing. Someone searching for e.g. “buy ray-ban sunglasses” on Google has a very different intention than someone you pulled out of whatever else they did online when they saw your banner with sunglasses.
When you increase the relative proportion of traffic from push channels to that of pull channels, you will inevitably see differences in your overall conversion rate. In most markets, your proportions will change as you scale. You may exhaust the inventory available from pull channels and have to scale using the almost unlimited amount of inventory available on push channels.
Changes in conversion rates from changes in marketing mix are neither a positive nor a negative thing in itself. Lower traffic prices may justify going for lower quality traffic– that should purely be a financial decision based on your expected return.
In building an e-commerce company in the past, we relatively hit the ceiling for inventory available on search engines. It was a young market, so the population wasn’t used to searching yet. We could still tweak our ads to do improve click-through rates (CTR) and thereby get more traffic from search engines, but it was not enough to move the needle as much as we needed to sustain our growth. We started focusing more on display traffic, and particularly Facebook turned out to be a great channel in some markets. The conversion rates were significantly lower, but so were the CPC (cost per click). Ultimately, we were able to drive the same volume of conversions from Facebook as we were from search engines at the same cost efficiency (the basket sizes were lower, but so were the CPO (cost per order)).
Another implication of this thinking is that you cannot judge the performance of your product optimization based on the conversion rate alone. We have found that the best way to evaluate the performance is to fix certain groups of traffic with stable purchase intents that also have significant volume (so that fluctuations aren’t due to small sample sizes). Choosing a group of keywords from a search engine for example will allow you to monitor conversion rates over time for a fixed sample audience.
Whether the conversion rate is good or bad comes down to your ability to, profitably, drive traffic. A good rule of thumb is that if your competition can afford to buy traffic that you cannot afford, then there is only one of three options:
- Your competitor overpays for traffic,
- Your competitor earns more money per customer than you, or
- Your competitor is better at converting than you (and hence lower acquisition cost per user)
Very few companies face option a, so the issue is most likely b or c. In other words, if you can’t afford traffic that your competition can, then you are most likely performing below the market average either on monetization or conversion rates. The great thing is that optimizing your conversion rates is a never-ending game. If you can’t afford the traffic today, analyze your competitors and find out how they can convert the traffic profitably when you can’t. What do they do differently and what can you learn about your users from that?
Photo: Karim Nafatni