The Business Case for Conversion Rate Optimization (CRO)

Conversion Rate Optimization (CRO) is being talked about as next “big thing” in online marketing. Should you care? How much revenue upside is there? What will it cost? How does this stack up against the twelve other projects you are working on right now?

The short answer to the questions above, in a nutshell, is: exponential ROI, accumulation of additional value from your already-existing web assets, and strategic market knowledge.

Background

Currently, it seems that online marketing practitioners have preconceived notions about which aspect(s) of online marketing deliver the most value. In fact, they tend to fall into two camps whose viewpoints are 180° apart.

Let’s call the first camp “traffic generators.” They tend to dominate the business agenda today. They believe exclusively in the value of pay-per-click (PPC) marketing and/or search engine optimization (SEO). It’s easy to understand why. PPC and SEO are in great demand by clients and the ROI in comparison to traditional marketing channels is both measurable and phenomenal. Frequently, it seems, this group doesn’t understand why it’s necessary “to bother” with CRO.

And then there’s the second camp -”optimization experts” who believe the correct way to go is to focus on optimizing web pages for high conversion rates. These experts are in a specialized niche that relies heavily on consulting services and statistical models to deliver business value. CRO provides an even higher ROI than the “traffic generators” can get, and there are many other business benefits, too. These have been well-documented and won’t be enumerated here. But they’re hard to get, and require a significant commitment to a statistically-led business evolution – pretty rare in most companies.

The truth is that these two camps’ techniques, used in concert, is the best answer. Both are essential to success in the online world. However, the problem is that companies are spending their marketing dollars on traffic generation almost exclusively, with little regard for the tremendous business value that can be achieved through CRO.

The Dollars and Cents of CRO – The Tale of Truly Exponential ROI

The digital age is driving the corporate marketing function to become accountable for spending in a far more rigorous way than the old “reach, awareness and frequency” metric days.

Finding an opportunity for extraordinary ROI in e-commerce projects is rare, particularly when that ROI is achieved with a minimum of risk. CRO creates one such extraordinary opportunity.

To help you better understand a power of the CRO’s ROI model, let’s explore a real-life example. Suppose a small e-commerce organization is evaluating how to spend its next $5,000 for its yearly Marketing investment – quite an investment for a small business. Should it invest in SEO/PPC, or CRO?

Examine the data below:

CRO: ROI Calculation

Key Terms Used in the Model

Current Ad Spend

• For the purpose of this analysis, assume that the primary source of traffic is PPC advertisement. In real life, this could be a mix of PPC and cost of SEO consulting services.

New Investment:

• CRO investment: $ 5,000 represents enough money to optimize the 1-3 most critical pages on an eCommerce website.
• Additional Ad spend: assume that this will produce the same quality traffic, converting at the same rate, as current spend.

Investment Impact

• CRO: assume a 20% increase in conversion rate; this is the average, in our experience, at the low end of the 20%-30% increases that most eCommerce sites see.
• Ad Spend: additional traffic of 9,091 visitors.

Sales and Cost of Operations

• Assume that the average sale is $65 – this seems a reasonable price for an online commodity – and that the cost of goods sold is 45% of the average sale, a reasonable margin.
• Assume that fixed cost of operations (sales, operations, admin, …) stays the same and does not increase with increased volume of business.

Results

• Top line growth: the investment in CRO is producing 10x more in gross revenues

CRO: Top Line Growth

• Bottom line growth: similar 10x ratio remains

CRO: Bottom Line Growth

• ROI: CRO gets you 15x more for your money than Ad Spend

CRO vs Adspend Comparison

Clearly, a 160% ROI for Ad Spend is nothing to sneeze at – it’s a great return by any accounting standards. However, additional investment in advertisement quickly becomes a game of diminishing returns, since lower quality traffic that converts less and less as the volume of your web traffic increases.

On the other hand, the investment of that money in CRO produces massive top/bottom line growth numbers. And, unlike ad spend, where the expense is ongoing, a one-time investment in CRO has long-term lasting effects.

It’s important to note that this was a revenue-based example. In businesses where subscription or opt-in is the conversion goal, a similar calculation can be employed – more opt-ins means better business. The scenario is similar for a lead generation business – more leads, more value.

It is doubtful that any SEO, PPC, or other Marketing projects would be able to demonstrate an ROI that approaches this level. Used in concert with traffic generation programs, CRO can truly drive exponential returns for virtually any business – a rare opportunity in today’s list of business improvement projects.

Discover hidden website value – “sweat” assets

How many times have businesses, unsatisfied by the performance of their websites, completely re-designed them? How many times has a “new business website launch” been swept up into a re-branding effort?

The answer is: too many. It’s frequently a business’ revenue engine that is being risked.

Risky jumps are not something businesses typically do comfortably. Designing a new website is fraught with risk. Cases of customers pining for the “old” website to come back are numerous. Could releasing a new website, even after using focus groups and asking the opinions of some of your stakeholders, backfire in revenue/lead generation/opt-in terms?

The short answer is yes!

And every time a website is changed, remember that in addition to hard dollar costs, the opportunity cost associated with use of valuable marketing and engineering resources that could be doing something else is impacting business, too.

The most important question is, why take that risk? In other words, is there a way to sweat your current assets (i.e., your website) more?

CRO actually allows a large number of small adjustments to any site , improving its performance in the eyes of current, actual customers in real-time. This customer-led, real-time, iterative approach to “website redesign” is exactly what virtually every company espouses – “customer-centricity.” As result, some small investment in CRO can save a big amount of money associated with new website development, while at the same time giving key internal marketing and technical resources an opportunity to focus their energy on other strategic business issues.

Lower risk, a customer-led website redesign, and resources freed up to work on other critical projects sounds like a better plan.

Empower Marketing and Put Customer Feedback First

In many companies, Marketing is seen as a loosely-correlated budget to revenue. Because it can rely on other departments, such as Sales, Technology / e-Commerce Operations, and outside agencies, to deliver on its activities, it can frequently be seen as a cost center. And, with metrics like “brand awareness” mystically tying to revenue, it’s not hard to see why Marketing needs additional tools to feel more empowered to deliver top-line revenue that is directly ascribed to its activities.

With a “test everything” mentality, Marketing can be empowered to drive the experimentation – and deliver the success – that CRO uses to achieve the extraordinary ROI described above.

Test outputs will reveal many unique aspects of web traffic behaviors, enabling the use of that as feedback to enhance advertisement campaigns or overall product and business strategy. This knowledge about any company’s current offerings can only be gained through tools used by CRO practitioners.

It’s true that, in the past, such tools were relatively expensive and difficult to use. Today, however, a new generation of CRO is breaking the adoption barriers. CRO is now ready to be a powerful Marketing enabler that puts the Voice of the Customer front and center in the strategic debate of any company.

Conclusion, Links, References

With CRO’s emergence as a key discipline in the ongoing evolution (see diagram below) of e-Commerce and website management, this new frontier is being rapidly adopted by the market. Outstanding ROI, leveraging existing corporate assets such as web traffic and the website, and a customer-centric tool to bring to the organization’s strategy process are the important aspects that CRO delivers.