Conversion Rates are Relative – Costs are Hard, Cold Facts

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A question I am asked frequently is “what is the average conversion rate?”  Initially, I resisted responding to this question because comparing to an average is potentially misleading.  Every web business is fundamentally different in how it operates, markets, and merchandises.  Comparisons ultimately attempt to match apples to oranges. Nevertheless, clients are eager to get an answer.

A recent e-commerce study conducted by Forrester that I found in an article from the August 2007 edition of Target Marketing Magazine stated, “Forrester research indicates that the average conversion rate – that is the ratio of orders to overall site visits – is 2.9 percent.”

Based on my experience, the average conversion rate among small to mid-sized e-commerce businesses (ones probably not well-represented in Forrester’s study) is closer to 2.0%.   Conversion rates on non e-commerce sites vary greatly. I have not found reliable average conversion rates, but I assume that subscription sites could experience similar to slightly higher rates (around 2.9% – 6%), lead generation may reach levels of 6% to over 12%, and “contact us” request forms on B2B sites are all over the board.

The problems with citing and comparing average conversion rates are immense.  Variables – such as B2B versus B2C; the type of offer; the quality/relevancy of the attracted customers (targeted vs. shotgun-like advertising channels); incentivized vs. not incentivized; brand awareness/equity vs. no recognition; quality/relevance of creative; technology efficiency; and other design, usability, and influence factors – all combine to create a better or worse conversion rate.  Even how an individual business calculates conversion and the input variables they use can create variances.

In essence, comparing your business to an average within your market or – even worse – across industries is worthless.  Too many variables affect conversion rate measures to draw any useful comparisons.

More important than conversion rate, however, volume and profitability measures are the metrics that really matter for running a web business.  Every business understands that cash flow is king.  Therefore, it is a better practice to set an internal conversion rate objective related to achieving greater sales volume and/or higher profits.  It is not a matter of whether you are above or below an “industry conversion rate average” – it is whether your internal conversion rate is achieving the sales volume and profit required to grow and sustain your business.

For example, an industry average sales conversion rate of 2.9% can actually be detrimental.  If a business spent $10,000 on advertising to generate 5,000 visitors to their website and their average order size was $50, they would earn roughly $7,250 in gross revenue. This represents an operating loss of $2,750!  In this instance, the business would need an average sales conversion rate of 4% (way above the industry average) to break even on their initial $10,000 advertising expense.

Conversion rates measured in isolation from other metrics – such as sales volume, profit margin, and cost per sale – fail to capture a real measure of performance.  For example, certain advertising channels, such as second-tier pay-per-click search engines, may generate an exceptional conversion rate and positive return on advertising investment; however, the sales volume generated could be so low that it does not offset the labor required to achieve it.  The high conversion rate suggests success, but the low sales volume indicates a potential waste of time and resources.

Try improving your conversion rate with an eye on your financial metrics, primarily cost per sale, sales volume, and profit margin.  Do not fall prey to tunnel vision and concentrate on improving conversion rates alone, when financial sustainability and growth are ultimately more important for your business.

About the Author

Kevin Gold is Director of Internet Marketing at iNET Interactive, a social media company operating prominent online communities for technology professionals and technology enthusiasts. Kevin is a frequent contributing author to multiple publications including Search Marketing Standard, Practical eCommerce, DIRECT, Entrepreneur.com, ConversionChronicles.com, About.com, and On Target (Yahoo! Search Marketing newsletter).

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