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You are here: Home » Interactive Optimization and Analytics » Mastering Online Conversion » Conversion Benchmarking Hell, Part #2

February 8, 2007

Conversion Benchmarking Hell, Part #2

In Part 1 of Conversion Benchmarking Hell we went from a single-dimensional conversion rate (CR) comparison between two websites to a two-dimensional display that broke-down their conversions by traffic source type.

As we could see, the overall CR of the two websites is in fact the end result of the CRs the websites are achieving from each traffic source type.

Since their traffic sources structure differs, it is immediately more difficult to compare their conversion rates side by side, making benchmarking highly unreliable, even as an indication. The question we left off at was whether the data we have is enough to at least benchmark their internet marketing efficiency.

Round #3: Adding Traffic Source Data

While the CR can be a so-so indication of their efficiency, it does not provide nearly enough data to come to any reasonable conclusions.

The next logical step is adding their traffic source data to the comparison table.

  Website #1 Website #2
  CR Traffic Customers CR Traffic Customers
Overall 4% 586,500 23,455 8% 82,300 6,588
Direct Traffic 10% 15,000 1,500 3% 15,000 450
SEM 12% 165,000 19,800 8% 15,000 1,200
SEO 3% 4,500 135 6% 7,300 438
E-mail 1% 2,000 20 10% 45,000 4,500
Banner Advertising 0.5% 400,000 2,000 / 0 0

Now we can finally see the tremendous differences between the websites and how they are marketed. Website #1 receives app. 7 times more traffic than Website #2 and has 3,5 more customers than Website #2, although it has a much lower conversion rate.

Unfortunately this hasn't really solved our mystery, but only reinforced the questions we started with.

Which of the websites is more efficient? The one with higher traffic and more customers, or the one with lower traffic, less customers, but a higher conversion rate?

The one thing that is clear is that Website #1 needs twice more traffic to generate the same number of customers as Website #2 ... if we look just at the overall conversion rate.

But what happens if we remove banner advertising from Website #1 from the equation?

  Website #1 Website #2
  CR Traffic Customers CR Traffic Customers
Overall 11,5% 186,500 21,455 8% 82,300 6,588
Direct Traffic 10% 15,000 1,500 3% 15,000 450
SEM 12% 165,000 19,800 8% 15,000 1,200
SEO 3% 4,500 135 6% 7,300 438
E-mail 1% 2,000 20 10% 45,000 4,500
Banner Advertising / 0 0 / 0 0

With banner advertising out of the picture, Website #1 is now clearly the winner, strongly outperforming Website #2 in terms of CR, traffic and customers.

Just removing one traffic source from our strategy utterly changes the overall CR.

It's the same when you try to benchmark your website and internet marketing against the industry standards. You are comparing your unique mix of traffic traffic sources with hundreds of other websites with their own unique mixes of traffic sources. Change just one on your side and the story changes completely.

Is it clear now that industry conversion benchmarking is a hoax?

OK, if you don't believe me yet ...

Round #4: Adding Monetary Data

The key reason we are in the internet business is to make profits, making it impossible to benchmark without also knowing the monetary values behind the % and the traffic numbers.

Let's bring back banner advertising to Website #1 and also add the needed monetary data to bring the case home.

  Website #1
  CR Traffic Customers Costs /visitor Revenues /customer Total revenues CPO
Overall 4% 586,500 23,455 0,2 31 718,950 16,89%
Direct Traffic 10% 15,000 1,500 0 40 60,000 0%
SEM 12% 165,000 19,800 0,6 30 594,000 16,67%
SEO 3% 4,500 135 0,1 30 4,050 11,11%
E-mail 1% 2,000 20 1 45 900 222,22%
Banner Advertising 0.5% 400,000 2,000 0,05 30 60,000 33,33%
  Website #2
  CR Traffic Customers Costs /visitor Revenues /customer Total revenues CPO
Overall 8% 82,300 6,588 0,132 44 291,030 3,73%
Direct Traffic 3% 15,000 450 0 45 20,250 0,00%
SEM 8% 15,000 1,200 0,4 35 42,000 14,29%
SEO 6% 7,300 438 0,05 60 26,280 1,39%
E-mail 10% 45,000 4,500 0,1 45 202,500 2,22%
Banner Advertising / 0 0 0 0 0 /

Now things really became interesting, and we can finally start seeing the big picture.

  • Website #1 is generating 2,5 times more revenues than Website #2
  • Website #1 has a CPO (cost-per-order) of 16,89% against a CPO of 3,73% for Website #2, meaning that it spends much more money to make a $ than Website #2
  • Website #2 generates much higher revenues per customer, indicating either that it is selling more expensive products or has a better cross-selling mechanism in place [another element that the CR does not take into account]

What's the conclusion?

  • Website #1 is more efficient overall in terms of conversion, since it seems that only its banner advertising is driving conversion down
  • Website #2 is spending its advertising money much more wisely, since its CPO is a fraction of the CPO of Website #1
  • Website #1 is spending much more money on advertising

Based solely on all of this data, is there any way we can conclude which website (and marketing) is performing better?

By any means no.

Round #5: Profitability

To get the final answer, we need to look at actual profitability of both of the websites. Without going into much detail, here's the new comparison table:

  Website #1 Website #2
Total Revenues 718,950 291,030
Direct Advertising Costs -121,450 -10,865
Total 597,500 280,165

Just looking at their revenues and advertising costs, Website #1 is still doing much better than Website #2, although it is not spending its money efficiently if compared with Website #2.

But to get the answer, we still need to look at their other costs.

  Website #1 Website #2
Total Revenues 718,950 291,030
Direct Advertising Costs -121,450 -10,865
Overhead -70,000 -20,000
Cost of Goods Sold -611,107
(15% margin)
-197,900
(20% margin)
Profits -83,607 62,265

Just by also taking into account their overhead and cost of goods sold the picture is now entirely different. Website #1 is now actually unprofitable, while Website #2 is showing a good profit.

Again, just by looking at the numbers it now seems that Website #2 is much more successful than Website #1.

Round #6: Figuring in Business Goals

We could leave it at that. Website #2 is more successful, since it's more profitable.

Now, to complete this game, let's also figure in their individual business goals.

  • Website #1 is contending to become the market leader and is so investing alot more money right now into capturing market share. They understand that short-term losses will transform into long-term profits.
  • Website #2 is struggling in its market and is only hoping to keep its current market share, and they do not have enough financing to make the move towards market leadership.

In this regard, the final winner would be Website #1.

Going from start to finish, it should now be apparent that is doesn't make any sense whatsoever to benchmark your conversion rates against any industry standards, because:

  • Each website employs different sources of traffic
  • Each traffic source is converting at different levels
  • Each website is paying different amounts per visitor
  • Each website is achieving different revenues per visitors, either due to initial product value or due to the differences in their cross-selling approaches
  • Each website has a different CPO
  • Each website operates under different costs
  • Each website generates different profits
  • Each website has different goals

And I could go on and on and on.

All of these elements, and many others, make it impossible to compare websites side by side.

Stop benchmarking your conversion rates against industry standards. It doesn't work and it doesn't tell you anything. It only either puts you in a good or bad mood, but makes you ignore all the other factors that really impact your overall marketing success.

Comments

Hey Rok:

Good article. I do agree that it makes no sense to compare overall conversion rates.

However, if you get down to more granular data. It can make a lot of sense: For instance, if you compare a macro process conversion rates for a Google campaign between two competitive websites, that is very meaningful. It would tell you how well you are doing at that macroprocess.

A website is a big black box and unless you are able to break down the black box into smaller components, it iwill be very difficult to understand where is the problem and where should I focus my efforts.

Let me know your thoughts...

Posted by: Antony Awaida at March 26, 2007 9:28 PM

Antony, I 100% agree with you, as you will also see from the other articles in the conversion series.

Thanks for the comment!

Posted by: Rok at March 26, 2007 10:34 PM

Is there an average conversion ratio, overall for the web. How about for business opportunity sales (web based businesses)?

Posted by: wade Matteson at May 27, 2007 5:27 PM

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Posted by: Elizabeth Talor at July 26, 2007 4:39 PM

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