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Tim Peter

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July 31, 2012

What is "conversion rate," anyway? (Math for Marketers)

July 31, 2012 | By | One Comment

Defining conversion rateA couple weeks ago, I got into a friendly debate about the whether it’s better to optimize conversion rate or the total number of conversion. I argued that conversion rate optimization is better. Twice.

But I got a couple emails from people asking a fundamental question: What is “conversion rate,” anyway?

Now, don’t worry if you’re among those people asking the question. There’s a relatively simple answer. However, “conversion rate” can mean different things to different people in different contexts.

The simplest possible answer is this:

Actions Taken ÷ Potential Customers = Conversion Rate

The challenge, of course, is in defining “Actions Taken” and “Potential Customers.” So let’s take a minute and do just that.

Calculating Conversion Rate

To have a conversion rate, first you need an action. That action is usually called a conversion. So, what’s an example of a conversion? Most typically when people talk about “conversions,” they’re talking about sales or orders. As we’ll see in a bit, if that’s all they’re looking at, they’re being a bit short-sighted, but we’ll come back to that in a minute or two. For the moment, let’s stick with convention and just look at sales.

Imagine you sell widgets. Every time a customer orders a widget, you’ve got yourself a conversion. Your conversion rate in this case is the number of orders (conversions) divided by your “Potential Customers.”

So, how do you know who your “Potential Customers” are?

Potential Customers

The easiest way to think of “Potential Customers” is to think about how many people you exposed to your message. And you’d think counting the number of people exposed to your message would be relatively easy. After all, online marketing lends itself to analytics, right? Well, yes.

But…

There are at least 6 common ways of counting “people” that I know about:

  1. Unique visitors to your site.
  2. Visits to your site (sometimes called “sessions”).
  3. Unique visitors or visits that enter your shopping cart.
  4. Logged-in visitors to your site.
  5. Unique visitors or visits to a specific landing page.
  6. Unique visitors or visits from a specific marketing message (e.g., an ad or an email).

I’ve used all of these at one time or another. Hell, I’ve often used all of these at the same time depending on what I wanted to know about my customers’ behavior. I’m not going to debate the pros and cons of each today (I’ve looked at how to measure traffic as part of my “Web Analytics Fundamentals” series and I’ve reviewed the pros and cons between unique visitors and visits before as well — drop me a line if you want to talk about what’s right for your business). But the basic idea is that each tells you about which customers you’re reaching.

For instance, I often work with hotel companies on their e-commerce and marketing. And they’re mostly interested in selling hotel reservations. In one company’s case, the vast majority of their customers only reserved a few times per year and booked their stay on the first or second visit to the site. So we calculated conversion rate by dividing unique visitors with a 30-day cookie into reservations sold (you can check out a glossary of web analytics terms if any of this is unfamiliar to you).

By contrast, another company I worked with sells inexpensive replacement parts for machinery. Because their customers can visit multiple times per month and may make multiple purchases per month, we calculated conversion by dividing visits into orders.

Which leads to a key point: There’s no one perfect way to measure conversion rate. What matters is how well your measures model your customers’ behavior. In the first case, unique visitors were a better indicator of how well the site performed at converting an individual prospect (each visitor typically only ever made one purchase), while in the second we measured how effectively the site converted prospects each time they visited.

What About Other Conversions

So, as I’d mentioned above, there are other types of conversion besides just sales. If you remember, I started my definition by saying it’s “Actions Taken.” Not sales. Not orders. Not leads generated. Actions.

In fact, it’s a best practice to measure any activity you want your customers to take. For instance, newsletter subscriptions, account registrations, loyalty program enrollment, whitepaper downloads, form submissions and so on all represent conversions. They just represent ones with highly divergent economic values.

Anything that helps you connect more deeply with your customers provides a conversion opportunity. Spend some time looking at all the calls-to-action on your site or in your marketing and include those in your overall conversion reporting.

Speaking of which…

Reporting Conversion Rate

One key point to note here: If you track conversions other than sales (and you should), make sure you’re clear on what actions you’re reporting when you talk about “conversion rate.”

For instance, let’s imagine a business that sells athletic shoes. It offers on its site a shopping cart for customers interested in purchasing its shoes, an email opt-in form offering weekly specials and a white paper on how to improve your running technique.

Now assume the company sells 30 pairs of its running shoes online, enrolls 50 people in its email list and gets 75 downloads of its white paper for every 1,000 visits to its site. What’s their conversion rate? Well, their site manager could report conversion rate as 15.5% [(30+50+75)/1,000 = 15.5%].

But is that the fairest representation of what’s happening?

I’d say “no.”

In fact, I’d report each conversion separately, noting it something like this:

Sales Conversion 3%
Email Opt-in 5%
White Paper Downloads 7.5%

A solid online marketing dashboard makes it clear to your audience what your goals are and how well you’ve met them. Senior managers live for clear answers. Don’t try to baffle ’em with bullsh… um, stuff. Just show them what’s really going on.

A Final Conversion Rate Definition

Now we’re back to where we started. Conversion rate is:

Actions Taken ÷ Potential Customers = Conversion Rate

To calculate it for your business

  1. Define “Actions Taken” appropriately for your marketing and e-commerce activities.
  2. Determine the metric that best represents “Potential Customers” for your specific activities.
  3. Divide your “Actions Taken” by your “Potential Customers” for each action.
  4. Report Conversion Rate by Action.

Follow those four steps regularly and you’ll never have to wonder about what your conversion rate is again.


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Comments

  1. Good facts and interesting posts

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