So, you’ve set up an e-shop to make some money but them visitors ain’t buying nothing. Perhaps, it’s time to work on your e-commerce conversion rate!
Now, before we go on talking about conversion, I wanted to ponder about why people need to use numbers, do calculations, and track results of whatever they do.
The Lack of Analytical Approach to Business These Days
A lot of times people (not just general public but marketers, entrepreneurs, and businessmen) are running their online businesses in a very relaxed and unstressed manner. They think «Well, I’ve got some stuff to sell, there sure are folks out there who’d wanna buy it. Just need to set me up some advertising, and it’s done!»
And sometimes it is true – there are folks (customers, that is) out there who want to buy stuff, and they do it after clicking on some ad. If there are no such folks, the business is in trouble and most likely will close soon. Reasons for closing? Bad environment, lack of promotion, stupid customers – whatever else. It’s never the entrepreneur, by the way.
However, in most cases the reason is quite simple: the owners didn’t pay enough attention to the numbers and stats. Sure, they did count profits and losses but that was pretty much about it. But how about:
- the number of visitors daily (by sources)
- the distribution of these visitors by pages (main, product page etc.)
- how many visitors actually make it to the checkout page (and on what pages they bounce)
What Is Conversion?
As you may know, conversion is «the proportion of visitors to a website who take action to go beyond a casual content view or website visit, as a result of subtle or direct requests from marketers, advertisers, and content creators.» (thanks, Wiki)
For more general information about the conversion rate and its calculation formula, please refer to this article – “What Is Conversion Rate Optimization and Where Can It Take You?“. For now, we’re moving on.
Why Is It Important to Track Everything?
If my business is OK and I’m making money (not much but enough to cover for expenses), why pay attention to these metrics regularly, and measure conversion?
The answer is quite philosophical: because knowing where the current situation’s at allows you to take control of it and direct it exactly where you want it to go. Business is about making the rules, not conforming to them (that doesn’t mean breaking the law, by the way).
If you’re going with the flow, there’s now way you can get ahold of the situation and turn it into your favor. The only way to do it would be finding out:
- where you are now (your current metrics)
- where you want to be (your target metrics)
- how you will get there (your marketing plan)
All businesses do it – metrics and analytics have become industry standards, set by major retail companies like Amazon and Ebay, and social networks like Facebook and Instagram in the USA and Canada.
Enough with the theory, let’s do a little practical example here.
E-commerce Conversion Rate in Action: Example
Let’s say, you have 100 visitors to your e-commerce website daily who make 5 purchases worth $10 each (on average). This amounts to:
- 5 items sold per day x $10 = $50 daily revenue
- $50 daily revenue x 30 days = $1,500 monthly revenue
In this example, your total visitor-to-purchase conversion is 5% (5 purchases/100 visitors).
Now, let’s see what your costs are. The purchasing price for your products is none because you’re selling your exclusive Photoshop design teaching course (just for the sake of this example) written all by yourself – a nice read, by the way; I would definitely recommend it to everyone. 😉
Your other costs include website hosting and maintenance ($10 a month) + miscellaneous variable costs (another $40 a month) + paid advertising (how many people who clicked on the PPC ad have purchased something).
Let’s say, your average price per click is $0.5 and you have around 70 clicks daily (the remaining 30 comes from organic search without you having to pay for it). That brings us to $35 spent on PPC advertising daily = $1,050 monthly.
Now, let’s put it all in a table (monthly data).
- 5 purchases * $10 price * 30 days = $1,500
- Advertising (70 clicks * $0.5 per click * 30 days = $1,050)
- Website maintenance costs = $10
- Variable costs = 40$
Your monthly revenue (before tax) is $400, which is what it is. Remember this value – we’ll refer to it later.
Now, let’s make some manipulations here and see where each of these four and a half scenarios can take us.
1. What If We Threw More Money on PPC Monthly
Say, we started spending more money on advertising while all the other metrics remained the same. Now, we’re spending $70 on PPC daily ($2,100 monthly) and getting two times more clicks and, therefore visitors (140 visitors a day from Google AdWords campaign).
Let’s see how our revenue and revenues will change.
- (140 paid visitors + 30 organic visitors) * 5% conversion = 8.5 purchases daily
- 8.5 purchases daily * 30 days * $10 price = $2,550
See – that’s a lot of money right there!
How have our costs changed in this case? Well, we have $2,100 PPC costs + $10 + $40 = $2,150
Our revenue now is $2,550 – $2,150 = $400. Now that’s magic – it’s the same as before like we haven’t done anything! But we have – in fact, we’ve spent an extra $1,050 and got nothing in return.
You don’t need to go to financial school to figure out that this kind of strategy sucks.
2. What if We Lowered the Costs
The variable costs are already quite low so we’ll leave them alone and turn to advertising costs. Through some known and unknown manipulations, we were able to decrease the price per click from $0.5 per click to $0.4 per click while the rest of metrics remain the same.
This will inevitably lead to worse traffic as lower PPC rates usually mean less competitive traffic, which may lead to the decrease in the overall visitor-customer conversion rate. Let’s say, the conversion will drop from 5% to 4.5%.
How will things change this way?
- (70 paid visitors + 30 organic visitors) * 4.5% conversion = 4.5 purchases daily
- 4.5 purchases daily * 30 days * $10 price = $1,350
Considering the fact that we’ve lowered the price per click from $0.5 to $0.4, our advertising costs will equal 70 clicks * $0.4 per click * 30 days = $840). Other costs are still $50.
Our revenue now is $1,350 – $890 = $460. Now, that’s better! We’ve got ourselves a $60 increase in profits, which is OK.
3. What if We Raised the Prices
Really, why not? Sometimes it works. However, the law of supply and demand suggests (regardless of the other incoming factors), that the demand will inevitably decrease once the price is increased.
Let’s raise the price by 30% – to $13 per item on average. This will potentially lead to fewer sales – e.g., from 5 to 4 purchases per day.
- (70 paid visitors + 30 organic visitors) * 4% conversion = 4 purchases daily
- 4 purchases daily * 30 days * $13 price = $1,560
The revenue will slightly grow.
The costs will remain the same as in the initial setting – $1,100.
Our revenue now is $1,560 – $1,100 = $460. We see a $60 increase from the initial $400. Moderate at best.
4. What If We Increased the Conversion
Finally, let’s do something about the conversion. In our setting, we have one main conversion: those who purchased an item/those who visited the website.
This conversion can be split into two separate conversion rates – for paid traffic and for organic traffic. Paid traffic usually shows better conversion as these people have higher motivation and potential interest in your product – otherwise, they wouldn’t have clicked on the ad in the first place. For the sake of simplicity, we will treat all of our incoming traffic the same.
The website conversion rate (CVR) is 5%, as we mentioned before.
Scenario 4.1. What if we increased website CVR from 5% to 6%
One percent increase in the conversion rate is not a big deal these days if you’re equipped with the proper knowledge.
- (70 paid visitors + 30 organic visitors) * 6% conversion = 6 purchases daily
- 6 purchases daily * 30 days * $10 price = $1,800
Conversion rate optimization rarely requires any other investment other than time and patience. Therefore, the costs will remain the same as in the initial setting – $1,100.
Our revenue now is $1,800 – $1,100 = $700. Not bad, huh? $300 increase from the initial $400.
Scenario 4.2. What if we increased website CVR from 5% to 7%
Take a wild guess – would the revenue be $2,000 or more?
- (70 paid visitors + 30 organic visitors) * 7% conversion = 7 purchases daily
- 7 purchases daily * 30 days * $10 price = $2,100
As we said before, the costs will remain the same as in the initial setting – $1,100.
Our revenue now is $2,100 – $1,100 = $1,000. One thousand dollars, CARL! 😉
NOW you understand the importance of improving the conversion rate for your e-commerce website. Let’s put all of our scenarios in one place for better visualization.
Scenario 0 – Initial
- Revenue – $1 500
- Costs – $1 100
- Profit – $400
Scenario 1 – Increase PPC costs
- Revenue – $2 550
- Costs – $2 150
- Profit – $400
Scenario 2 – Lower all costs
- Revenue – $1 350
- Costs – $890
- Profit – $460
Scenario 3 – Increase the price
- Revenue – $1 560
- Costs – $1 100
- Profit – $460
Scenario 4.1 – Increase the CVR from 5% to 6%
- Revenue – $1 800
- Costs – $1 100
- Profit – $700
Scenario 4.2 – Increase the CVR from 5% to 7%
- Revenue – $2 100
- Costs – $1 100
- Profit – $1 000
Of course, things aren’t that easy in the real life where we have to deal with multiple factors at a time, each having some influence on the outcome.
One thing is true, though – conversion rate optimization can bring a lot to the table if done right.
Increasing your conversion from 5% to 7% isn’t an easy task – it can be done by professionals who knows where to strike. All in all, it will still be cheaper than running another PPC campaign or playing unpredictable games with pricing.
The right thing to do would be share this article with your friends on the social networks – just click on one of the icons of social media, it’s that easy.
If you have further questions on the subject, please write them in comments – I’ll be glad to answer.
To learn more about how to increase the conversion rate, read these articles of mine: