Red Gate software runs an annual challenge where they buy a small software company for a million dollars. They list a number of requirements that the software company must fulfill. One of the requirements that stood out was about conversion rate. They said:
If you’re selling your product then it must have at least a 10% conversion rate.
This requirement actually made me say “Wow, that’s insane”. Let me elaborate why.
What’s wrong with worrying about conversion rate?
Conversion rate is percentage of visitors who actually bought something on your website. Let’s imagine there are two websites: one sells product X with 5% conversion rate and the other one sells product Y with 10% conversion rate. Now, here is a million dollar question:
Is 10% conversion rate of product Y better than 5% conversion rate of product X?
It’s foolish to even begin answering above question without considering following factors:
- How much do these products sell for? If product X sells for 10 times the price of product Y, clearly average sales price of product X is much better in spite of having 5% conversion rate.
- What is the total traffic on the websites? If product X gets 10,000 visitors a day while product Y only gets 100 visitors, guess which one is minting more money?
- What is the lifetime value of customers? This factor is the biggest reason why comparing conversion rate of different websites/products is a useless exercise. Let’s imagine that product X and Y sell for similar price and get similar amount of traffic. Does that make product Y more valuable (since it has higher conversion rate)? Not necessarily. What if company that makes product X has expert salesman that up-sell and cross-sell tremendously and hence derive much more money from a customer in his lifetime.
In nutshell, conversion rate by itself doesn’t tell much (unless you have extra information like traffic, sales price, lifetime value, traffic mix, etc.) So a website with 1% conversion rate may not necessarily be worse as compared to a website with 10% conversion rate. Conversion rate in isolation is a useless metric.
Increase (or decrease) in conversion rate: that’s what should keep you worried
Conversion rates are not entirely useless. In fact, they are very useful when seen on a temporal scale. In other words:
If your conversion rate is 5% today, aim should be to increase it to 7% (using A/B testing, etc,) or at least not let it fall to 3%.
So, comparing conversion rate over time makes a lot of sense (but for the same website). Unless you have a lot of other information about your competitors, you should NOT obsess over comparing your conversion rate to their conversion rate and whether it is lower/higher. Instead, you should obsess on how you can increase your conversion rate (since that’s one of the easiest things to make your bank balance fatter).
Note: if you go through our library of A/B testing case studies, you will note that we always talk about increase in conversion rate and not conversion rate per se.