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How to: Calculate the ROI of Conversion Rate Optimization

Julian, thinking about ROI on his last day @Spinnakr.

This post is about calculating the return on dollars invested in conversion rate optimization.

Two of the things that digital marketers focus on during campaigns are attracting people to websites and, once they arrive, having them take a particular action (commonly  purchasing, signing-up, registering, page and video viewing, or downloading).

When a website visitor takes the intended action, they “convert” from a website visitor into something special. [BJ's Note: Since the most commonly sought conversion action is a sale, I call the converted people leads in this post].

For all retail companies, the conversion rate is an average of 2 to 3 percent. This means that every time 100 people come to the website, 97 or 98 leave without converting into a lead.

There are a few ways digital marketers think about getting more leads. One way is to do more of the thing that brought traffic to the website in the first place, reasoning that if the prior effort brought 100 people to the website, and earned 2 leads, twice the effort should earn 4 leads.

Lets say the traffic comes from click-through advertising. If the marketer had a $100 budget for click-through advertising in one week and spent $1 per click to bring 100 people to the website and 2 converted to leads, then the cost per lead was $50. The formula for calculating cost per lead for is as follows

Marketer’s Initial Effort
Cost per lead = cost of traffic/number of conversions from traffic, therefore
Cost per lead = $100/2, so
Cost per lead = $50

If the marketer wants more leads, one way to get them would be to increase traffic volume by doing more of the same things that drove traffic to the website in the first place. Let’s say the traffic comes from click-through ads. If the marketer doubles the spend to $200 and that brings 200 people to the website earning 4 leads, they’ve doubled the number of leads. That’s great! But, the cost per lead is still $50,

Marketer’s Second Effort
Cost per lead = cost of traffic/number of conversions from traffic, therefore
Cost per lead = $200/4, so
Cost per lead (still) = $50

Another approach the marketer could try would be to improve the chances of conversion once the visitor arrived on the website. If the budget is $100 for click-through ads, and the marketer spends an additional $20 on conversion rate optimization, then they can increase the number of leads. If the number of leads increases from 2 to 3, the marketers cost per lead goes down, to $40. Using the same cost per lead formula,

Marketer’s Conversion Rate Optimization Effort
CPL = (cost of traffic + the cost of CRO)/number of conversions from traffic, so
Cost per lead  = $100 + $20/3
Cost per lead = $120/3
Cost per lead = $40

That ten-dollar decrease is a 20% reduction in the cost of acquiring a lead, calculated as a percent change in spending,

Marketer’s Spending (Percentage Change)
Marketer’s spending change = ((CRO cost per lead – initial cost per lead)/initial cost per lead) * 100
Marketer’s spending = (($40 – $50)/40) * 100
Marketer’s spending = – 20%

So in this case, the expected return on investment is a twenty percent reduction in the marketer’s cost per lead.

Of course, the best time to calculate return on investment is after the campaign, when the number of leads captured and the number of dollars spent are no longer hypothetical.

The exact measures required to improve conversion rates are company- and campaign-specific. That been said, across the board, the most effective CRO strategies are copy improvement and A/B testing of pages and page elements.

A 50% increase in conversions (from 2 to 3 in this scenario) requires thought and diligence, but the result is a big reward. If you’re wondering what to try first, research shows that the most effective CRO strategies are copy improvement and A/B and multi-variate testing. Certain CRO-related activities can result in a significant lift even when used alone. For example, Omniture reports a 25% lift following the addition of campaign-specific landing pages. Some companies report 34% + conversions by incorporating testimonials. Unbounce reports conversion lift of up to 216%.

 

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