About Conversion & ROI [Archive] - Search Engine Watch Forums

Jazajay

10-21-2007, 10:25 AM

Hi tpraja
Conversion
This is the percentage of your visitors who do the action you want them to take.
It's pretty easy to work this out.

You divide the number of visitors a month by 100, this will give you the value of 1% of your site visitors. You then times this by the number of people who took the action you want - a sale,contact us etc... This will give you your conversion rate.

So for example
you have 100 visitors a month and 10 take the action you want them to take.
100/100 = 1. (visitors/100 = the average visitor percentage)
1*10 = (the customer percentage * the amount of customers who took the desired action)This would give you a conversion rate of 10%.

If you are getting this you are pretty much a god :D

The average conversion rate for a website is 6%.
e-commerce websites is around 2.4% and an electronics website is around 1.2% just to give you soon ideas. Most sites do a crap job at conversion.

Getting more traffic doesn't grantee your conversion rate will increase it just means you are failing to convert more people from a greater source of people. I would rather have 1000 visitors less a month and convert 10 20% of them than have a 1000 visitors more a month and only convert 2.4% as I will make more money.

I have 7 conversion rates I measure.
1. How many people make a sale.
2. How many people sign up to my newsletter.
3. How many people sign up to my newsletter then make a sale.
4. Each individual page's conversion rate for passing on traffic to other internal pages. IE: If a page has a large bounce rate, how many people leave my site, on a particular page has means it has a low conversion rate for keeping people in the conversion system. By increasing, or should I say decreasing my bounce rate, my main conversion rate should in turn increase as more people stay to convert to my main conversion, the sale.
5. How many people go from my blog to my shop. I want this to be high.
6. How many people go from my shop to my blog. I want this to be low.
7. How many people stay on my site after using my search engine. If the search engine page has a high bounce rate then people aren't finding what they want so I need to see why to get more people to stay in the conversion process and for more people to make a sale.

ROI
This is your return on investment. This has a lot of different uses, will the software I buy generate me more profit than the cost of the softwarefor example. This is a lot harder to measure.
Basically it is how much profit you return off an investment.

If we take PPC as an example as I could imagine a lot of people here can relate. You can work out if your ROI is good, breaking even or bad by doing the following equation.

If your average sale is worth £10. You minus the overhead of each item - P&P, Cost of the item(s) and any other factors. We'll keep it easy.
Your average sale is £10
You buy/make the item(s) for £2 and the P&P is £2.
Total profit per sale is £6
(£10 - £2 = £8 - £2=£6)

This is where you need to know your conversion rate for this to be any use.

You already know that you have a 1 in 10 chance of a sale, 10% conversion rate, and your profit per sale is £6.

You then divide £6 by 10, average profit/how many people convert, this will give you 0.60p.

This gives you the maximum number you can spend on PPC before you turn a loss.

So if you are only spending .20p per click to your site you are in a really good situation and will be earning money from your PPC. As in you will be earning more in sales then you are paying in clicks. Pretty good ROI

If you are paying .60p per click you are breaking even not making money not losing money. As in what you convert from PPC you are paying back in clicks. No ROI.

If you are paying over .60p per click you are losing money, as in you are paying out more in clicks than it is generating you in sales. Minus ROI.

However there are exceptions to this and it is not always as black and white as - we are losing money so lets get rid of the PPC.

This is where you probably don't not what the average yearly value of an average customer is, as most sites don't. This is were people like me know when to spend more than breaking even price for the click and still return a profit.

So how do I know when I should spend more than what I have worked out above?

This is where you have to know how much the average customer is worth to your site.

It's 0.60p/click or £6/sale you told me before - wrong!

It would be 0.60p/click or £6/sale if every customer only buys from you once.

However what about repeat customers?

If you factor in repeat customers you can increase your ROI and thus return a higher per click price, as in every click to your site that leads to a conversion actually leads to more over the year.

To work this out you need precise data. Wrong data here will cost you a lot of money.

So if you know a customer buys from you, 3 items on 3 separate occasions in 1 year you can look at it like this -
(10-4)*3 (Overall price of the sale - overhead(£10-£2-£2))* 3 sales a year.

Your yearly customer value is not £6 but £6*3 so £18. You can therefore increase your PPC rate as you can work out the average yearly value of a customer.

But how do I know what the average yearly value is?

If you have 100 customers a year and you know 10 sales where repeat buys your AYV = 10/100 = 10% so 10% of your yearly sales on average are second or more sales.

However I will leave you to work that out as I have to keep something for my self :)

If you know your customer life time value this number can be increased even further as long as this number works out to be higher than your AYV of an average customer. But unless you have major customer statistics stick with the basic example.

Hope this helps

Jaza