What do we mean by conversion rate?
Conversion rate is a business metric that represents the percentage of users who take the desired action such as making a purchase from your site or signing up for your newsletter. It is calculated by simply taking the number of conversions and dividing that by the number of visitors.
Suppose a marketer launched an ad campaign on a channel that is viewed by 10000 visitors of which 400 visitors clicked on the ad. Then the conversion rate of the campaign would be 0.4%. It is computed as:
- The number of users who clicked on a campaign/The number of visitors that saw the campaign
After obtaining the conversion rate of 0.4% from the campaign the marketer can use this as a baseline and can build campaigns in the future that can result in a conversion rate higher than the baseline.
Why is conversion rate important?
Conversion rates have been a reliable indicator for marketers to measure how well they are engaging consumers through their campaigns. By measuring performance in terms of conversion rate they can effectively compare which campaign is performing superior over the other.
When used correctly, conversion rate analysis can reveal some great insights in various scenarios-
- Spotting effective channels for campaigns – Helping an advertiser determine the effectiveness of their copy and use it to guide strategic decisions.
- Spotting bugs – If your data shows that the conversion rate is lower than expected, then there could be an issue in the app which is leading to low signups.
- Spotting high-potential segments – Are a certain set of users showing a strong interest in the campaign as compared to the rest? An increased conversion rate in a certain segment is a strong testament to a better engagement.
An improved conversion rate can lead to higher revenue at the same operational cost leading to higher profits.
What is a good conversion rate?
What’s considered a good conversion rate can vary by industry, and depend on product type, average order value, and where your website visitors come from. For example, an online store selling high-priced products will have a lower conversion rate than one selling inexpensive products.
You can improve your conversion rate through effective use of landing pages and better targeting in your advertising. Through A/B testing you can determine what strategy/variant works well for your target audience. This approach will ensure that you are –
- reaching the right customers,
- showing content that resonates well so they convert (whether you want them to buy, sign up for a newsletter, or take another specific action).
You can refer to our in-depth guide on conversion rate optimization where we have covered several strategies that marketers can use in their respective industries to increase conversion rate and improve their business growth further. You can also start a 30 day free trial with VWO to A/B test your way to better conversion rates.
What if the conversions are delayed?
Although the computation of conversion rate is mathematically trivial, it can be challenging to get a correct sense of conversion rate when conversions take place after a delay of several weeks/months. These delays are common in the purchase event of expensive products. When the conversion is delayed, visits are labelled as non-conversions early on as sufficient observation isn’t allocated to them. You can refer to our blog post where we have explained how you can compute conversion rate in delayed conversion scenarios.
How does VWO compute conversion rate?
At VWO, we use a Bayesian methodology to compute the conversion rate. The conversion rate is modelled using a beta distribution. Suppose after running for a while a campaign obtains 10 hits and 7 conversions. By using a Bayesian update rule we obtain the posterior as Beta(1+ Conversions, 1 + Non-conversions) therefore we get Beta(8, 3).
We use the median of the obtained beta distribution to compute the expected conversion rate. o understand the rationale for using this approach to model conversion rate, please refer to the VWO Whitepaper.