The Two Levers of E-commerce
With Black Friday and Cyber Monday behind us, a looming recession, and 2009 just around the corner, I thought it might be a good time to get back to some e-commerce basics. When it comes to our business websites, what do we really have control over? I think we can ultimately pull one of two levers, as illustrated below:
To be more successful at e-commerce, we can either: (1) drive more traffic, (2) convert that traffic, or both. Sounds simple enough, but the implications are important and easy to overlook. Let's say that we have a site that gets 1,000 visitors/month, converts 2% of those visitors into sales and makes $10 (gross) per sale. Our revenue equation looks something like:
Lever 1 - Traffic
So, what if we pull the traffic lever (offline advertising, SEO, PPC, etc.) and manage to double our traffic? Great - if everything else stays the same (granted, it's a big if, but let's keep things simple), we've doubled our revenue:
Lever 2 - Conversion
Alternatively, let's say that we work to improve our conversion rate (usability, design, testing, copywriting, etc.) and manage to double it. Similar to traffic, we've doubled our bottom-line to $8,000/month:
Why 2 + 2 = 4X the $
So, what happens if you combine these two doubling effects? The end result is multiplicative, generating four times the original revenue:
Why is this significant? Because to achieve the same result you get from a 100% traffic increase and 100% conversion increase combined, you need to increase either one alone by 300%. Especially when you consider that initial increases are the easiest and the going only gets tougher as you improve, doubling both traffic and conversion may be much easier than pouring all of your resources into just driving traffic. If you're only pulling one lever or another, you may be missing out on real money. As you plan for 2009, ask yourself what you can do to both drive quality traffic and convert that traffic into sales.
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Olivia Nalen
· Tuesday, December 2I didn't know you needed to fail third grade math to become a SEO!
Dr. Pete
· Wednesday, December 3@Olivia - The numbers are easy, but it's also easy to forget the implications. We all have a bad habit, despite knowing better, of getting so caught up in a single metric or pulling on only one lever that we forget the big picture. Sometimes, in my experience, we need to go back to basics to break that rut.
MikeTek
· Tuesday, December 9I can't say how many times a client with an eCommerce site has come to me and asked how they can "build traffic" to their site when upon just a quick look it is immediately clear to me they have conversion problems.
Sure, if you're getting a low conversion rate increasing traffic is still going to increase sales - but why not increase both? Especially in cases where increasing traffic means a direct increase in ad spending. Neglecting to improve the conversion rate is the best way to sabotage your ROI.
This post illustrates the point perfectly.
Jeff in Hawaii
· Sunday, December 28Yes, I agree. You first need to get your conversions up or you are wasting your time, energy and money to more traffic to your site. One of the best ways I found to track conversions is Google analytics. You can set up simple goals. It allows you to also see what the source was that converted. Great to know what is converting before you just take a shotgun approach.
Jon in Charlotte
· Monday, March 30Dr. Pete - great stuff. The basics can never be overstated. Your post does a great job of illustrating the basic model here for conversions. In fact, same model for lead generation, just the revenue numbers may be a bit fuzzier at first. Well done. Simple. Beautiful.
Internet Strategist
· Thursday, April 2Mike Tekula at UnstuckDigital shared this post with my blog readers. I just added it to an existing blog post on the importance of conversion rates because your example is so obvious. I included an encouragement that my readers study it until it is crystal clear.
I usually advise ecommerce clients to focus on increasing conversions until they get them over one percent at the very minimum and ideally over two percent. This is especially true if they are paying for traffic.
I've used the post I added this to as the link from this comment. I hope you'll drop by, visit and comment. It is too late now (sometimes even we must sleep) so I'll come back another time and see what other nuggets I can share with my readers.
Dr. Pete
· Thursday, April 2@Strategist - Thanks... it is one of those things that seems obvious, and yet we as specialists get our head so buried in what we're doing that we tend to focus on one side or the other and forget to pull both levers. Focusing narrowly on traffic, without regard for quality or the effect of that traffic can often actually decrease overall conversion rates, wasting a lot of time, effort, and money.
I enjoyed your article - linked below:
Why Conversion Rates are Vastly More Important Than Increasing Traffic