Why You Shouldn’t Only Focus on Conversion Rate

Keeping track of your conversion rate is important, but before you make it your end-all-be-all of success metrics, you’ll want to read this post.

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Experimentation is one of the key trends dominating the ecommerce landscape today. Marketers now have unprecedented power to experiment on just about any part of their website, from replacing banners to tweaking copy. And as conventional marketing departments realize the limitations of Pay-Per-Click (PPC) advertising, Conversion Rate Optimization (CRO) is taking off. In fact, it’s sailing full steam ahead.

Sounds good, except for one big problem.

Optimizing for conversion rate doesn’t optimize for business performance. Instead, a myopic focus on conversion rate comes at the expense of improving profit and can lead to very poor business decisions. When evaluating the results of a campaign, opt instead to take a holistic view of your business.

 

Case study: Fashion apparel retailer

A fashion apparel ecommerce storefront runs a marketing campaign with coupons to attract new customers.

  • This resulted in a large spike in traffic, and significantly improved conversion rates for the duration of the campaign.
  • However, the coupons priced the clothing below Manufacturer’s Suggested Retail Price (MSRP) and the retailer took a small loss for each transaction.
  • To determine whether the campaign was successful, the retailer must make an assessment as to whether Customer Acquisition Cost (CAC) < Customer Lifetime Value (CLV). That is, whether the loss due to the coupon is offset by the future value of new customers the marketing campaign was able to reach.

Ultimately, some of the coupons will be red (customer has little to no future value) and some will be black (customer has significant future value). Over the long term, the red coupons lose money and the black coupons make money.

 

Case study: Luxury travel ecommerce website

A luxury travel ecommerce website has room to experiment with pricing, so they increase the prices of some of their most popular destinations for two weeks.

  • This leads to a reduced conversion rate, as less visitors are willing to pay the higher price.
  • Although conversion rate is reduced, the higher price leads to significantly higher profit over the life of the campaign.

Despite the decline in conversion rates, this situation is a very positive outcome for the company. Maintaining a high price not only increases short term profit, but supports the company’s brand status for the long term. This likely also has a positive effect on CLV, as the visitors that did not buy due to price concerns are unlikely to become long-term customers anyway.

 

Case study: Health food subscription commerce website

A health food subscription commerce website test launches a new branding campaign to target a younger demographic, in addition to the older one that it already targets.

  • The branding campaign attracts a large number of new users and fans to the website. This influx in website traffic and conversions is attributed to the younger demographic.
  • However, this shift in brand messaging leads to a lower conversion rate for the older demographic. Therefore, the increase in conversion rate from the young demographic is offset by a corresponding decrease in conversion rate from the older demographic.
  • Conversion rate alone fails to inform the company about campaign success. Rather, success or failure ultimately depends on which of the younger vs. older demographic is more valuable to the subscription business.

To evaluate this, the company compares purchasing behavior for each demographic. From examining this data, the company can make an estimation of CLV and decide whether or not broadening its customer base is a sound strategy.

 

In the case studies above, each company was able to successfully evaluate its campaign on criteria other than conversion rate. This was possible because they understood conversion rate as only one factor within the context of overall business performance.

While useful in many cases, optimizing for conversion rate is not guaranteed to improve business performance. Instead, today’s ecommerce businesses should adopt a holistic point of view for decision making. So don’t optimize for conversion rate; optimize for business performance.

 

Marty Hu is a Co-founder at Predictive Edge. He is passionate about tech, food, ecommerce, and all things.

Predictive Edge offers personalization as a service for smart ecommerce businesses. For more information, shoot them an email.

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