Most business websites are developed for a specific purpose. They are focused on achieving a desired outcome from a particular audience. A website conversion happens when a visitor to your site takes the desired action, and likely represents a measurable value to your business.
Calculating the value of a conversion can go a long way in justifying an ongoing landing page optimization strategy. While most online marketers would agree that increasing conversion rates is critical, determining the actual financial impact of increased conversion rates can help you make the case to others in your organization.
One simple formula that can be used to measure the impact of conversion improvement is:
R x CIP x (1-VCP) = Profit increase
Read on to learn how to apply this formula to your website.
In determining revenue, take into account only the revenue that is generated through the landing pages and traffic sources that you are considering for the test. Do not include revenues that pass through other pages or that result from other traffic sources.
For example, let’s assume that the immediate conversion action is a $20 sale, that an average initial sale leads to an additional revenue of $30 over the course of your three-year ongoing relationship with the typical client, that 10,000 clients per year convert through your pay-per-click campaign, and that all of the traffic is directed to the landing page in question. The revenue in this case would be ($20 + $30) x 10,000, or $500,000.
Variable Cost Percentage (VCP)
Variable cost percentage (VCP) is the total of variable costs on an incremental sale as a percentage of revenue. Include your cost of goods sold (COGS), affiliate commissions, customer service, shipping, credit card charges, return and allowances, front-line staff salaries (sales, product production, service delivery, and customer service), and other variable costs as a percentage of the total revenue.
Do not include your fixed costs such as rent, utilities, administrative expenses, and non-front-line salaries. Also exclude current online media spending because this will remain unchanged even if your conversion rate improves. Normally this would be considered a variable expense. But your online marketing media buys are in effect part of fixed costs because they are not required to produce an incremental conversion action. Only costs directly associated with the incremental conversion action should be included.
If we continue our earlier example, let’s assume that the cost of the product and upsells over three years is $15, and the credit card fees and customer service cost another $5. The VCP would be [($15 + $5) x 10,000]/$500,000, or 40 percent.
Conversion Improvement Percentage (CIP)
The conversion improvement percentage is based on the measurement criteria used to compare the new (challenger) landing page versus the original (baseline) landing page. The exact criterion measured depends on your stated conversion goal. It can include average time spent on site (for educational goals), number of page views (for advertising supported websites), or revenue per visitor (for e-commerce).
If you are prospectively developing a case for a landing page optimization effort, your calculations might include a range of possible improvement percentages, so you can get a sense of the possible financial impact and the appropriate resources to apply to the effort.
Let’s assume that in our example we expect at least a 20 percent potential improvement in revenue per visitor over our original landing page. Our CIP would then be 0.2.
Applying the Conversion Rate Profit Impact Formula
To conclude our earlier example, the estimated minimum profit increase would be $500,000 x 0.2 x (1 – 0.4), or $60,000.
Once you have calculated the revenue and variable cost percentage values, you can use this free online calculator to produce a table of profit increases across a range of possible conversion rate improvement percentages.
You may find that certain peculiarities in your business make it difficult to construct a perfect financial model. Don’t let this paralyze your effort. Focus instead on understanding the high-level economics of your business well enough to determine the value and impact of conversion testing, even making conservative assumptions when real data is unavailable. The closer you can get to a correct model, the more strongly you will be able to make the financial case for conversion testing and tuning.
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