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Why obsessing over conversion rate is a waste of time

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.

Founder and Chairman of Wingify.

Comments (6)

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  1. Your suggestion is equally insane. (Or equally sane.)

    If you have insider knowledge of a category, you can get a better idea of what’s good, bad and indifferent performance. 3% may be excellent in one domain; 15% may be poor in another.

    So I’d translate the sentence you quote as, “We sell software products. We know our market, and in our experience converting below 10% of downloads into sales is a sign there’s something wrong. So if you’re not doing at least that well, we probably won’t be interested. Sorry.”

    And I’d translate your approach as, “The only thing we know is our performance. So let’s look for improvements.”

    The weakness of their approach is that they may neglect valuable opportunities that are differently shaped to their core business. The weakness of yours is that it’s possible to get into a rut improving incrementally and never making the step change that better total market knowledge would have indicated.

    1. @Adam: I don’t understand. How would knowing competition conversion rate help in a step increase in a company’s own conversion rate? If you are just hinting at do whatever your competition is doing, then you can simply get good ideas from their website irrespective of knowing or caring about their conversion rate.

  2. @Paras: I think we’re at cross purposes. I’m thinking not primarily about the competition but about customers. If I know that my product has significantly low conversion compared to my target market’s general willingness to buy, I’ll adopt a different strategy – to hunt out changes that might produce a far more significant result.

    In these ‘hunt’ phases, my concern is to maximise learning across a number of tests. Because I know the result I’m looking for, I’m more concerned to locate the areas where there’s a strong customer response, even if it’s negative. The learning will let me target meaningful improvements, which in due course I’ll naturally be A/B testing!

  3. There’s another element to this. Increasing conversion rate is quite simple: eliminate low converting traffic from marketing channels that cost little.

    Mechanically, your conversion rate will go up. But overall, your brand awareness may fall which may affect word-of-mouth and thus natural search traffic.

    Traffic can be valuable for advertising and affiliation too. Of course eliminating very low value traffic (popunders that nobody asked for that generate artificial traffic, etc) but you can never be sure just how low value traffic is over a customer’s lifetime. Conversion is often only measured per daily unique visitor, so browsers that buy occasionally may make conversion drop but be worth keeping.


  4. Good post. However, sometimes even increase/decrease in conversion rate also cannot be trusted to reflect your real situation.

    One obvious example, you may see a sudden drop in conversion rate, but it might be just a brief mention of your site on a popular blog/site that people clicked through to your site are totally different kind of people than your average potential customers, but it probably doesn’t mean your normal conversion rate actually drops.

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