Above the Crowd

Conversion: The Most Important Internet Metric of All (Revisited)

October 2, 2013:

Over 13 years ago, in March of 2000, I wrote a blog post titled “The Most Powerful Internet Metric of All.” The key thesis was this: if an Internet company could obsess about only one metric, it should be conversion. No other metric so holistically captures as many critical aspects of a web site – user design, usability, performance, convenience, ad effectiveness, net promoter score, customer satisfaction – all in a single measurement. Yet despite the remarkable power of this metric, it is alarming how few companies today truly understand conversion and how to optimize it. As such, it is time to pound the table again – conversion is by far the most powerful Internet metric of all.

Internet analytics can be roughly broken down into two simple activities – customer acquisition and customer optimization. Nearly every Internet company on the planet has invested in some form of the first activity, customer acquisition. The most obvious form of this, and by far the easiest to implement, is Google AdWords. As a result, AdWords boasts over one million customers and over $30B in annual revenue. I rarely meet a company that hasn’t experimented with AdWords in some way, and most of those that do understand the basic math around the cost of customer acquisition. Customer acquisition efforts are pervasive in our industry.

There are two reasons why customer acquisition alone is a poor place to establish your company’s competitive advantage. First, the sheer intensity of the competition for effective AdWord inventory reduces the likelihood of a sustainably high ROI. Second, ad spending does not provide leverage. Each year, your company will want to grow by a higher absolute dollar amount than the previous year, and as a result you will need to buy even more traffic. This is the piece that the LTV-zealots always miss: the spending will never stop.

The second activity, which I believe should be the obsession of all analytical startups, is customer optimization. Think of this as understanding how to optimize the performance of the customers you already have. This is the art of conversion: improve your site’s conversion and you simultaneously increase operating leverage AND increase competitive differentiation – a truly powerful combination.

Basic conversion is easy to understand. In its most simplistic form, it is the ratio of customers that achieve some desired action or activity divided by the total number of visitors to your web site. Your web site likely has a single overall conversion rate (the table below highlights one firm’s view of industry-by-industry “overall” conversion rates). However, in order to truly master conversion you have to understand that there is not just one conversion rate, but numerous conversion rates throughout your site. You need to understand the rate for each and every landing page. You need to understand it for each and every source of traffic. You want to understand it in each section of your website. You want to know what it is for each and every outreach campaign. You want to know and understand bounce rates for each and every page. “Conversion Rate” is a misleading term. To truly understand conversion you need a “conversion matrix” for every path through your site.

average-conversion-rate-by-industry-survey-2012

Even this does not tell the whole story. In 2013, we are in the midst of a critical platform transition from the browser-based Internet to mobile applications platforms like iOS and Android. This transition adds even more complexity to the conversion puzzle, as you now need to track and understand conversion on mobile as well. The bad news is that the tools for doing mobile conversion measurement are immature at best. The good news is that if you can master them at this early stage, you will have a significant competitive advantage.

The best place to focus your efforts to improve conversion are within the product itself. Conversion at its essence is a proxy for usability and convenience. Compare Amazon’s one-click experience with an e-commerce site that requires five pages of information input in order to affect a sale. Which do you think will have a higher conversion? Conversion is also influenced by effective personalization. If a site is designed to respond to my particular needs, I will obviously be more inclined to transact there. This is the dream of “big data” – to harness the information you already have to deliver a personalized experience for each user.

Conversion is also highly correlated with a site’s speed and performance. No one likes to wait around for page loads. Once again, this is something that needs to be measured all over your site and not just in one place. You home page may load plenty fast, but your shopping cart may take way too long to load. You have to attack performance everywhere. There are also many who believe that site speed positively impacts SEO, and as a result, you have multiple reasons to care about this.

Unfortunately, conversion improvements typically are the aggregate gain of 100 tiny improvements, not one silver bullet. Rarely will you find one single change that is going to have a 5% lift in conversion (you might if you have never tried, but this type of win will go away quickly). Rather you will find 30 things on a page that all have a tiny impact, and the overall impact, after months of work might be 5%. You have to be willing to toil in the minutia knowing that the impact on the overall system will be the combined result of many tiny little changes.

Despite the huge potential for gain, conversion improvements are fleeting for many organizations. Many product teams view web-site design as more art than science. Highly paid designers are employed to create beautiful web pages and mobile applications, and their opinions are coddled as divine wisdom. Measuring the efficacy of their divine wisdom at 100 different places in your customer flow funnel can often prove to be controversial, and it can produce friction between the marketing department, who often owns customer optimization, and product development, which owns design. Not all organizations can operate with the proper amount of transparency and self-awareness, or have the patience to try a number of different approaches to produce very small incremental gains. The companies I have seen that are most successful with optimization are assiduous in their approach.

So, given how hard it is to improve conversion, why bother? Because improving conversion, even a little bit, can produce insane economic leverage for your business. The table inserted below looks at five leading consumer Internet companies – Blue Nile, TheKnot, C-Trip, Trip Advisor, and Priceline – and models what would happen if they improved conversion 10%. Just to make this clear, we are talking about moving from say a 6% overall conversion rate to 6.6%, or simply a 60 basis point increase in absolute conversion. Because conversion improvements impact the customer flow you already have, they lead to a direct increase in revenue, offset solely by the cost of running the conversion improvement effort. In this case we used $1mm/year cost for the smaller companies, and up to $10mm/year for Priceline.

excel table

If you look across the group you will see impressive increases in operating income, and net income margin percentage. Additionally, the ROI on the conversion costs range from 650% to 4000%! Even if you only achieved a 5% increase (versus the 10% we modeled), you would still see ROI in the 275%-1940% range. And for a 6% converting site, we are once again talking about a 30 basis point improvement in absolute conversion rate. Tiny moves have huge financial consequences which almost seem magical or unfair. You can build a similar model for your own business, and put in the inputs as you see fit, but you will not find another single area in your business where small improvements will have such a powerful impact.

Furthermore, the larger your company, the more you should increase your focus on conversion. With a large customer base, you are able to leverage any improvement against a much broader audience. You can see this in the model – bigger companies get a bigger advantage, even when we estimate a 10X larger budget for conversion improvement. Investing in a conversion improvement effort is a no brainer for these larger companies.

All companies should prioritize customer optimization ahead of scaling customer acquisition. Think about customer acquisition as buying fuel, and customer optimization as measuring the fuel efficiency of your engine. Ironically, many more companies focus on buying fuel in volume than they do improving fuel efficiency. The whole world has it ass-backwards. You should focus on fuel efficiency first, and when you know that it is solid, then you can start buying fuel in volume. Yet 90% of the companies I meet are buying and buying customers (acquisition) without any sophistication around understanding conversion (optimization).

Unless you are fairly certain you have a high conversion rate versus your peer group, you can be at an extreme disadvantage buying high volume advertising. Conversion rate directly impacts how much you can affordably spend on advertising. If you have 2X the conversion rate on your competitor, than you can spend twice as much and get the same outcome. Likewise, if you have a poor conversion rate versus your competition, than you are bringing a knife to a gun-fight. Ever been a room where an entire team all agrees that your competitor must be an idiot because they are spending so much at such high rates on Google? The answer may be that they have a much higher conversion rate, and that you are eligible for the role of the idiot. Don’t push the gas pedal if you don’t know your fuel efficiency. Likewise, if you know you have a conversion advantage, you also have an ad buying advantage.

Benchmark has such conviction about the amazing power of conversion that we have made two investments in the past year in companies whose products help drive material conversion lift for their customers.

Optimizely

The first company, Optimizely, has the market’s leading product for A/B testing, the fundamental technique used in improving customer optimization. Optimizely’s impressive SAAS service allows marketers to A/B test using a simple WYSIWYG editor on any page in your site, with zero impact on your engineering team or resources. It’s such a strong value proposition that they have over 4,500 happy customers, including CBS, Disney, Starbucks, and many more. Optimizely’s product should be the fundamental building block for anyone that has any interest in conversion optimization. The product is designed with a clear understanding that optimization is about experimentation, and it greatly lowers the cost and complexity of that experimentation.

Sailthru

The second company, Sailthru, uses its unique personalization technology to help their customers improve conversion. More specifically, clients aggregate all of their customer data points under one roof to provide truly personalized experiences across all platforms and devices (specifically including mobile). Using Sailthru, companies build 360-degree profiles of each and every user that can then be used to personalize emails, site and in-app experiences, search results, and more. Online publishers have seen 10-35% improvements in click through rates that regularly yield 30+% lifts in page views, resulting in substantial incremental ad revenue and profitability. Commerce players have driven 6-10% lifts in average order values, 15%+ improvements in purchase frequency and major improvements in overall customer retention. Most importantly, Sailthru makes personalization achievable and scalable; a near-term reality versus a multi-year project that will never see the light of day.

Looking forward, you should expect customer optimization and conversion analysis to move to the forefront of analytical marketing work. We are likely moving into an “age of enlightenment” where the scientific method is available to all, and ideas win (and are tested) on their empirical results. With improved tools and techniques, and innovative products like Optimizely and Sailthru, highly optimized sites will redefine the new fitness level required to stay afloat in online businesses. Darwin will take care of the rest.

Other resources:

  1. Try out Optimizely today
  2. Video: Learn more about Sailthru
  3. 71 Things to A/B Test
  4. 53 Ways To Increase Conversion Rate
  5. 40 Checkout Page Strategies to Improve Conversion Rates
  6. 100 Conversion Optimization Case Studies
  7. A “Meta-list” on Startup Management (Thx:William Mougayar)
  8. (send me more and I will add them to the list)

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