Why Conversion Rate Is a Bad Metric (In Isolation)

Conversion Rate is the obsession of digital retailers and marketers everywhere. Right or wrong, it’s the number we’re all obsessed with. Perhaps it’s because it is the first thing we see on our Google Analytics dashboards? Perhaps its just the lowest hanging number in terms of ease of understanding?

Whatever your reason, it’s easy to get tunnel vision when thinking about growing your eCommerce business and strictly narrow in on conversion rate as the key measure of success. I strongly recommend you spend a bit of time and get these other metrics easily accessible as you embark on your conversion optimization strategies in 2015. The goal should never be conversion optimization. You should be aiming for revenue optimization.

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Beware the bottom line!

why conversion rate is a bad metric in isolation

Very few companies can do what Amazon does and get away with it. I’m talking about a 100% focus on top line revenue growth with a (seemingly) total disregard for the bottom line. If you are anything like the merchants I work with daily, the bottom line is all that matters.

That said, because conversion rate is the focal point metric of choice, we sometimes forget that a lot of the strategies for improving conversion rate can come at the sacrifice of your bottom line.

What are these ‘bottom line eating’ conversion improving strategies?

Here are my tactics that will boost conversion rate but most likely eat away at your bottom line:

  1. Site-Wide / Catalog Wide / No Limits Free Shipping
  2. Heavy Use of Coupons, Discounts, Offers
  3. Spending money optimizing the wrong things
  4. Spending money optimizing only one thing (cart abandonment anybody?)
  5. Loss-leader product pushing. Focusing your merchandising and marketing on products that convert well but have terrible margins.

Related: The Ultimate Guide to Product Detail Page Design

What about rate of returns?

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If you’re an apparel retailer then you know this number all too well. The rate of return can pretty much destroy a business if it’s not managed closely. What’s the point in acquiring and converting all of those new customers if your average rate of return is 20%?

Every business is different, but almost all have to deal with some level of returns. Knowing your sweet spot ROR is going to help you ensure you are getting good business growth.

Average Lifetime Value (LTV) of a Customer

Knowing your average LTV sounds like such a simple number to get, but so many merchants still struggle with this one. If this is you, I honestly don’t blame you. There are so many conflicting theories on how to properly calculate customer lifetime value that I don’t even have a straight answer on the best method for your business.

I think the key word in this is value. What makes a customer valuable to you? For most merchants you are focused on repeat purchase, so in many cases LTV is simply a measure of how much money a customer spends with you. Average this out across all your customers and you have your metric.

If you are embarking on increasing conversion rate, keep your LTV visible to ensure that any tactic you are deploying to increase conversion rate isn’t also decreasing your LTV (i.e. – acquiring customers who buy on markdown only).

Related: Infographic: A Visual Introduction to Customer Lifetime Value

Margin per Customer?

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This one often goes completely unseen. I think it’s incredibly valuable to not only know your LTV (as stated above) but to also know your average margin per customer. Such an easy concept, but I often find retailers don’t know their gross margin per customer.

If you are like most retailers, you know your margin by product and category inside out and backwards. I think it’s time you also know your margin per customer and customer segment.

If you’re deploying tactics that improve conversion rate but shrink your margin per customer, then you aren’t doing a very good job growing your business. That is, unless you like growth for the sake of growth.

Average Order Value?

If you spend any amount of time in Google Analytics this is another metric that sort of stares you in the face every time you look at that eCommerce dashboard.

I’m always a little surprised when a client calls me to talk about how great their conversion rate is doing when their AOV is down 20% as a result of their efforts in conversion optimization.

This is a tricky one. Depending on your business goals, you might be willing to sacrifice AOV to increase the rate of customer acquisition. The thinking here being that you will work on longer term customer retention (LTV) to achieve margin per customer instead of margin per order.

Related: eCommerce First Steps: How Many Products is Enough?

Revenue Growth

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That said, I’m hoping you now see that conversion rate is a terrible metric in isolation. Every business is so much more complicated than any one thing. These are all dials for you to play with in your growth efforts. While not all of these numbers can directly impact one another, there are so many that can and do without you even knowing it. The next time someone starts selling you conversion optimization services, make sure you ask about revenue optimization.

Your goals for your business probably have nothing to do with conversion rate and everything to do with good revenue growth.

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Related: Next Practices vs. Best Practices – Winning in Retail