Chapter 4
Conversion rate
- Why: To better understand customer acquisition
- What: To measure how well you are converting prospects into actual customers
- When: When customer acquisition is a key priority
- The question this indicator helps you to answer: to what extent are we able to convert potential customers into actual customers?
Why does this KPI matter?
The conversion rate basically looks at the success rate of turning leads or potential customers into actual customers. For example, once you have attracted visitors or potential customers (be this into your physical shop or to your website), your next challenge is to convert the visitors (or potential customers) into actual customers.
What constitutes a conversion can depend a little on your object-ives. In a physical environment it might mean a visitor entering a shop and then purchasing a good or requesting a quote. In the online sphere a conversion could constitute the ordering of a product or it may refer to an online visitor making a phone call, signing up for membership, subscribing to a newsletter, downloading software, or other activity based on subtle or direct requests from marketers, advertisers and content creators.
Understanding the conversion rate will give companies an insight into how well their marketing and sales strategies and their oper-ations are aligned. For example, if you attract 500 people into your shop or to your website and all of them leave without purchasing anything, then this is obviously cause for concern. It might mean that what you offer on your website or in your shop is not what the potential customer was expecting, the visitors could not easily find what they were after, it was too expensive, etc.
Conversion rate stands as an umbrella term for many different types of conversion rate that companies might want to measure to gain more specific insights, such as:
- visitor sales conversion rates
- lead generation conversion rates
- click-through rates
- tender or quote conversion rates.
How do I measure it?
How do I collect the data?
The data collection method will depend on whether the conversion rate is being calculated for physical shops or for websites. Online, free-to-use web analytics tools allow you to track conversion rates along the so-called conversion funnel – the path visitors take from the initial prompt to the targeted action (e.g. a purchase). In the physical world, retailers often use simple counting mechanisms that count the number of people who entered the shop and compare this with the number of sales transactions. However, more sophisticated tools are now available that allow shops to track customers using camera technology and software that will automatically report conversion rates.
What formula do I use?
In its simplest form, the conversion rate is calculated by dividing the number of goal achievements by the number of visitors:
The goal achievements can be broken down into the different steps of the conversion funnel: for example, conversion from page view or ad view to visit – also called click-through rate (CTR); from click through to filled shopping basket; from shopping basket to order, etc.
How often do I measure it?
Conversion rate is an indicator that is best monitored continuously.
Where do I find the data?
The source of data will depend on the area of measurement. For websites, the data will come from an online tracking system or from web analytics tools. For shops and physical locations, the data will come from the visitor counting and tracking system and the sales data.
How difficult or costly is it to measure?
The costs for measuring conversion rates will depend on whether the conversion rate is calculated for websites or for physical shops and spaces. Online, the costs are minimal as analytics tools allow you to specify goals and track them automatically, providing you with the conversion rate.
In physical locations such as shops, shopping centres and airports, counting systems have to be installed, such as tracking cameras and software. This will push the costs of measuring conversion rates up considerably.
How do I set targets for this KPI?
Setting targets for conversion rates depends a lot on the products and the fact of whether it is online or physical. Frequently mentioned numbers for online conversion rates are between 2 and 3%. However, according to ClickZ, retailers such as Amazon and eBay have a conversion rate of around 10% and higher. In the physical world you would expect conversion rates to go up significantly.
Practical example
Take an online retailer that is generating traffic from banner ads on Facebook. The company can get an insight into how many people visit the sites with the ad on and therefore get an idea of how many people see the ad – in this case, 1 million.
The click-through rate (the rate of people who then click on the banner and get directed to the company’s website) is 2%, meaning that 20,000 people have clicked on the ad:
Of those 20,000 visitors, 3,000 put goods into their shopping basket, a conversion rate of:
Of those 3,000 people who have goods in their shopping basket, 2,300 end up purchasing goods. For the shopping basket to sale stage there is a conversion rate of:
The company measures its overall conversion rate from the time people reach its website to making a sale, which is therefore:
Another example comes from a leading retailer that wanted to track conversion in its physical shop network in order to get some comparative conversion figures. It installed counting technology that uses cameras at the store entrance to count the number of customers entering and leaving each store. The retailer then uses sales data to track the number of sales transactions that have taken place:
| Store | Number of visitors in period t | Number of sales transactions in period t | Conversion rate |
| London | 10,000 | 4,800 | 48% |
| Paris | 12,000 | 3,200 | 26% |
| New York | 11,000 | 5,800 | 52% |
| Shanghai | 15,000 | 7,600 | 50% |
Some tips and traps to consider
When calculating online conversion rates it is important to be aware of the fact that the web logs register many ‘visitors’ who are in fact not real visitors. For example, search engines use so-called robots (‘bots’, in short) or spiders to search the web. These and other factors mean that between 10 and 30% of traffic to your website is not caused by ‘real visitors’. This is why it is important to count the number of ‘unique visitors’ – data that most web analytics tools will give you – as opposed to raw traffic data.
Further reading and references
www.clickz.com/clickz/column/1718099/the-average-conversion-rate-is-it-myth
www.kaushik.net/avinash/excellent-analytics-tip-8-measure-the-real-conversion-rate-opportunity-pie/