Your conversion rates may be too high.
Lowering them might just be the secret to scaling your revenue.
Now, before you start penning that angry email, I want to tell you a story.
A few years back, my friend Stacy lost her parents in an accident and received a substantial inheritance. She wasn’t fulfilled by her day job and wanted to travel. Spurred on by her ambition and new-found resources, she decided to buy an ecommerce business.
Her broker brought two companies to the table.
The first ecommerce store had an average conversion rate of 10%. The second, 1.25%.
At the time, Stacy had a background in sales and a degree in business, but she asked me for some advice because I had worked in ecommerce.
In the end, I advised her to choose the second.
The question is ...
Why would I recommend my friend purchase a business with a ~900% lower conversion rate?
Beyond a Conversion Rate: How to Think Critically About Context
My immediate questions to Stacy were:
- “What is the Average Order Value (AOV) for each business?”
- “What is the Customer Lifetime Value (CLV)?”
The first business (with a conversion rate of 10%) sold a patented design for an ergonomic computer mouse with a 10 year warranty. Its average order value was $10.
The second business (with a conversion rate of 1.25%) was a hygiene subscription company. Its average order value was $99 and the average customer subscribed for 8 months a year - $800/year on average per customer.
Stacy and I came to the conclusion that in the short term, the second business would generate more Revenue Per Visitor (RPV). One hundred thousand visitors on the first site would expect to generate $100,000 whereas 100,000 visitors on the second site would expect to generate $125,000.
In the long term, since the 2nd business’ CLV was so high, we could invest much more in customer acquisition. There were other deciding factors like gross margins on each product, cost of shipping, relationship with the supplier etc.
But in the end, the business with the lowest conversion rate won.
At a quick glance, this was the process of determining which business had the highest RPV. I calculate this by either dividing revenue by the number of visitors, or multiplying conversion rate by average order value.
This number gives much more context because it considers your business’s average order value along with the conversion rate. Which, as you can see, makes a world of difference.
After making her decision to buy business number two, Stacy also asked me for some guidance on what to do after taking over.
She did a lot of research in digital marketing. The business already had employees who managed operations, supply chain, and customer service. She decided she’d take a crack at growing the company herself before hiring an agency or CMO.
The broker who sold her this business shared his parting words:
“You had better increase that conversion rate of yours if you’d like to stay in business.”
My recommendation was precisely the opposite. It was an abstract way of looking at things, but as I explained my theory to Stacy, she saw the value in it and invested her budget in what I had advised.
So what did I tell Stacy, and how did she effectively lower her conversion rate while still making more revenue?
How Decreasing Conversion Rates Led To Increased Revenue
Stacy had a goal.
The company made $1,980,000 the year before she purchased it, all in ecommerce revenue, and she wanted to bring it to $5,000,000 within two years.
We first dug deep into her analytics and mapped out her sales funnel.
We noticed that the 1.25% conversion rate didn’t properly reflect their business.
Her email conversion rate was 5.4%, her search engine conversion rate for branded search (people typing in her brands name) was 3.9%, her direct traffic had a 2.2% conversion rate and the paid social traffic (from Facebook, Instagram and Pinterest) had a conversion rate of 0.5%.
There were many other conversion rates from different traffic sources, but this was the gist of it. The customer acquisition efforts were lowering the overall conversion rates. She could have cut off all paid advertising, and her conversion rate would have doubled.
Stacy’s cost per acquisition across all paid channels was $80.
This may seem high, and we eventually lowered it, but my recommendation was to keep investing in this avenue. In fact, we tripled her investment in social advertising. It was scalable, reliable and still actually profitable. We realized after three billing periods she would break even and after eight she would have profited around $400 per customer.
To people on the outside, without context, this may have seemed foolish to invest in a traffic source that had a $80 cost per acquisition and a 0.5% conversion rate. But to Stacy, it made perfect sense.
After tripling her investment in acquiring customers, her average conversion rate dropped below 1%.
But after 12 months of this — continually increasing the budget, making the offer more compelling with a free trial, and focusing on really appreciating her subscribers with content and loyalty rewards — Stacy increased the average billing period to 13 months and hit her goal of $5 million in revenue within 15 months of buying her business.
Why Industry Conversion Rate Standards Don’t Matter
The point of this story is to offer a new perspective on this idea of conversion rate industry standards.
I hear so often that “2% conversion rate is the industry standard.”
A 2% conversion rate is terrible, if your average order is $15. A 2% conversion rate is extremely high if your average order value is $995.
If your conversion rate is too high, it means you can invest more in customer acquisition, assuming you want to grow.
In no way am I saying that you shouldn’t invest a great deal of effort into optimizing your site so it converts at a higher percentage. It would be silly not to do this, but I want to acknowledge that your overall ecommerce conversion rate is not the most important number in your business.
A 10% conversion rate on 1,000 visitors brings in less revenue than a 2% conversion rate on 1,000,000 visitors. I also want to acknowledge that in almost every business I’ve seen, customer acquisition will have a lower conversion rate than your abandoned checkout emails. If this is the case, then investing in customer acquisition will lower your average conversion rate.
It’s just the way that math works.
I’ll end with this analogy of Revenue Per Visitor (RPV) being a speedometer. Remember, RPV is a summary of your conversion rate and your average order value.
Your RPV will be on the high end if you want stability and profitability. It will be on the low end if you’re interested in long term revenue growth and customer acquisition.
It’s up to you to choose where you rev the engine that is your marketing operations.
Stop treating conversion rates as a goal, and start seeing it as a reflection of what you’re trying to achieve.
And of course, there’s more to conversion rates than where your traffic is coming from, but we can leave that for another time.
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