You get shown the light
In the strangest of places
If you look at it right.
If Archimedes were alive today, he likely would be working for an Internet company (isn't everyone?) and be focused on finding a highly leveraged way to do things better.
For those of you who don't know, Archimedes was a Greek inventor born in 287 B.C. who is accredited with inventing the lever and the pulley. The reason these tools are relevant is that both give the user the ability to multiply the force exerted through the tool to the object to be moved. Using a lever, for example, a human can move a boulder or lift a car engine; both would be impossible without the leverage of the tool.
When analyzing an Internet business, there is a single metric, or tool, that represents a leveraged power similar to that of the lever or pulley. This metric, conversion rate, measures the number of visitors who come to a particular Web site within a particular period divided into the number of people who take action on that site (purchase, register and so on). Though this number may seem rudimentary or simplistic, a deeper analysis will reveal that conversion rate measures many aspects of a Web site, and that a strong conversion rate offers true leverage to the site owner. Archimedes would be proud.
Let's begin with some basic math to highlight the power of conversion rate. To give a broad sense of perspective, average conversion rates are in the 3 percent to 5 percent range; below 2 percent is considered poor; and 10 percent and above is awesome. This means that if one in 10 visitors to your site ends up transacting, you are doing an amazing job.
Let's assume you spend $10,000 to drive 5,000 people to your site, and your conversion rate is 2 percent. This means that 100 transactions cost you $10,000, or $100 per transaction. Now let's assume your conversion rate rises to 4 percent. The same $10,000 buys you 200 transactions at a cost of $50 per transaction. An 8 percent rate gives you 400 transactions at a cost of $25 per transaction. As conversion rate goes up, not only does revenue rise, but so do marketing costs as a percentage of sales fall, representing true leverage (see chart).
Conversion rate's leverage power
As conversion rates rise, revenues rise and marketing costs fall.
|Source: J. William Gurley|
User interface: Sites that are easy to use have high conversion rates. The contrast is also true: Sites that are confusing, where it's not obvious to the user how to proceed, have horrible conversion rates. If your site requires a how-to manual, you have failed on this one, as users will simply give up.
Performance: Sites that are extremely slow, or those that exhibit errors or time-outs, will always have low conversion rates. No magic here--customers simply will not tolerate poorly performing or buggy sites. This leads to abandonment, which leads to lower conversion rates.
Convenience: Some users want to get in and out as fast as possible. These frequent users value convenient sites, and frequent users drive up conversion rates. Perhaps the best example of a convenience feature is Amazon's "one-click" service, in which a user finds a book or product, presses one button, and waits for the order. All other information (username, address, credit card) is automatically filled in from a previous registration. Convenience unquestionably enhances conversion rate.
Effective advertising: It is one thing to have clever advertising and another to have effective advertising. People will click on clever ads but may not have an incentive to purchase or interest in buying once they arrive at your site. Visitors driven by these ads will have high click-through rates (CTRs) but low conversion rates. Conversely, ads that properly identify and entice customers in the right demographic that are poised to purchase will have extremely high conversion rates. The goal is to purchase, not to distract.
Word of mouth: Almost everyone will agree that word of mouth advertising, where one customer tells another about a site or product, is the most powerful and cheapest form of advertising. Such referred customers have a high conversion rate, and therefore the blended conversion rate rises as word of mouth awareness rises. Recognizing further leverage, sites with good user interfaces that are fast, convenient and have great customer service are much more likely to capture one's attention and therefore be mentioned via word of mouth. Success begets success.
No other single metric captures so many aspects of a high-quality Web site in a single number. Some people focus on advertising CTRs, or cost-per-lead, but these numbers are inconclusive. As they say, you can bring a horse to water, but you can't make it drink. It's easier to advertise effectively for a Web site with a great conversion rate than to effectively convert a customer who happens to have viewed an interesting ad. This is because conversion rate incorporates the total user experience, and advertising metrics alone do not.
Are there any problems with conversion rates? There are a few, but nothing that should preclude you from making this the No. 1 metric in your company. First, keep in mind that conversion rates for new customers are different than those for returning customers (which are much higher). Watch them both, as well as the blended rate. Second, remember that seasonality affects conversion. Most retailers saw conversion rates double during the Christmas season as determined shoppers went online. Lastly, keep an eye on profitability. Anyone can drive conversion by cutting price, but this customer relationship is temporary (also known as renting customers).
Any serious company on the Internet should have an absolute awareness of conversion rate. Small gains on low conversion rates can have unbelievably powerful effects on a company's performance. What's more, focusing on conversion rate will help improve all elements of a company's business, including performance, convenience, customer service, advertising effectiveness and word of mouth advertising as a percentage of sales. Always be afraid of one thing: employees who fail to embrace this powerful measure.
J. William Gurley, 2000. All rights reserved. Above the Crowd is a monthly publication focusing on the evolution and economics of high-technology business and strategy. This column can also be found on CNET online and in Fortune magazine. To be placed on the email distribution list, please send an email to firstname.lastname@example.org. To be removed from the email distribution list, please send an email to email@example.com. The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete, and its accuracy cannot be guaranteed. Any opinions expressed herein are subject to change without notice. The author is a general partner of Benchmark Capital, a venture capital firm in Menlo Park, Calif. Benchmark Capital and its affiliated companies and/or individuals may, from time to time, have positions in the securities discussed herein. ABOVE THE CROWD is a service mark of J. William Gurley.