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Tuesday, Apr. 20, 2010 at 9:15 am

The Power of Compounding Conversion Rate Increases

By Brendan Regan
April 20th, 2010

After reading my colleague Melissa Burdon’s last two posts about impressive testing wins with a client, I thought it would be fun to discuss the amazing financial gains that come to businesses that keep testing instead of assuming they’ve gotten their “win” and should move on to other things.  I hope to illustrate that in conversion rate optimization, persistence pays off in real financial value.

I also want to help illustrate the power of “compounding conversion optimization,” meaning that, like compounding interest on a bank account, continuing to make small, incremental increases to conversion rate adds up to big ROI over time.  This is especially true in a competitive environment where you decide to be more disciplined about conversion rate optimization than your competitor(s).

To illustrate this concept, let’s take a hypothetical site’s KPIs, and then check out some visual aids.  Let’s say you have a website set up to market and sell Devo “Energy Dome” hats.  You know, the red hats the 80s band, Devo, wore/wear that look like red flowerpots?  OK, you can act like you don’t know what I’m talking about…whatever ;) .  Here’s Paris rocking one.

1Paris Hilton on Flickr - Photo Sharing-1

Your Energy Dome site gets 5,000 unique visitors a month.  It converts at 1% historically.  The Average Order Value of a sale/conversion is $25.  So, that’s a $1,250 per month business.

You have a competitor whose site also gets 5,000 uniques a month, converts at 1%, and has an AOV of $25.  So, you’re in a dead heat, making the same amount of money, while competing to acquire the same prospective customers.

Then, you run a test and have a very successful outcome.  The variation beats the control by 100%, so you make the variation the new default, and now your conversion rate has doubled, and you have a $2,500 per month business.

Your competitor runs a miraculously similar test, and gets identical results.  Double the conversion rate; double the business.  Your competitor heads down to the local bar to celebrate and brag about how he doubled his business overnight.

1CRcompoundingBut you keep going, and run a series of four additional tests, all resulting in much smaller gains. Let’s say your next four wins increase conversion rate by 50%, then 20%, then only 10%, then a mere 5%.  In the chart [click to enlarge], the blue trend line shows you starting out  making large gains, then eventually reach a point nearing “diminishing returns.”  The red line is your lazy competitor, who stopped optimizing and headed to the local pub.

While the progression of conversion rate increases gets less and less impressive (2% to 3% to 3.6% to 3.96% to 4.16%) after that first big “win,” think about the financial impact of the smaller, incremental improvements.  You’re now a $5,200 per month business instead of the $2,500 your competitor stopped at, or the $1,250 business you both started out at.

1compoundingdollarsTake another look at the chart [click to enlarge].  Your competitor’s area of profit stayed static, and maybe is starting to shrink because your site is so well improved.  You both doubled your business overnight, but you more than doubled your business again by running a few more tests!

And now that you’re making $2,700 a month more than your competitor, what should you do? You can now invest in more marketing and site improvements that will take more market share from your already ailing foe.

In the highly competitive and budget-constrained world of online marketing, can you afford NOT to get on a program of continuous improvement?  We’re not talking about simply running a few basic tests…we’re talking about a slow-and-steady disciplined approach to relatively small improvements over time.

If you’ve done some testing, and are getting bored, I hope this encourages you to stick with it.  If you haven’t started testing, I hope this illustrates a relatively straightforward way to beat your competition.  What say you?  Do you want to slay the dragon slowly?

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Comments (29)

  1. Gains you make optimizing your website pay off month after month and keep on paying.

  2. I find it difficult to keep my business colleagues focussed on optimising the same site process again and again.

    They have a tendency to get bored and always want to jump to looking at the navigation or another cool new feature that just got launched.

    This post has made me think and the mathematics should be pretty compelling. I will endeavour to stick to my guns in future but any tips on keeping conversion rate optimisation on track and focussed where it can have maximum impact would be gratefully received.

    Jim.

  3. Very cool stuff. It is amazing how only a few percentage increases means thousands of dollars more to your bottom line!

  4. A really convincing article! Thanks so much for sharing this. A little is better than none and small things really do matter.

  5. The big players in mortgage and EDU lead gen have been doing this for years… their funnels are as slick as they get, yet they are still always testing!

  6. @Brendan,

    Here’s a related question.

    How to get clients to try new variants of the same thing – for example to keep on trying new headlines.

    Clients get bored with testing one element and want to wander off and test some different part of the site.

    Any tips?

  7. Great stuff guys. It like I have always said about SEO, don’t be satisfied with ranking a certain number and getting traffic. Just think what you would get with a few percentage point increases!

  8. @John (York UK): To get clients to keep testing the same element ongoing, we use the “always challenge the winner” approach. Whatever wins the test becomes the default, and you immediately challenge the winner again.

    Prioritization is key as well. Sometimes it’s better to go off and test something else. Or, sometimes it’s better to cycle multiple rounds of testing on the same thing. Whenever possible, have multiple tests running at the same time.

  9. Spokane is right about this matters – players in the mortgage industry have tried this for years.

  10. @Brendan,

    Thanks for your answer.

  11. Optimization is very important although it’s a tough and boring job it usually increased my revenue a lot so I keep doing it for every site.

  12. I need to look into this. My conversion could use some improvement for sure. I have a niche site that gets a steady 150 visitors per day with very few conversions. I probably need to be building an email list so I can convert my list rather than raw visitors.

  13. Any articles on multivariate testing in the future?

  14. You are correct, conversion is the most powerful form of leverage in marketing. That’s why we began using audio in 2002 and video in 2003 because we saw up to a 50% improvement in conversion rates. Now everything we do is a combination of text for seo and video for conversion!

  15. I am guilty of sitting back and hoping for miracles once a site is up and running but I find it really interesting how such seemingly small changes can have such a big impact. It’s so easy to overlook these things which can in practice make a world of difference!

  16. Never stop optimizing and seeking better results. First, you learn more and can apply that knowledge to future endeavors. Second, it is more profitable as pointed out. I’ve continued to optimize some online ads and the finished CTR is so much higher than where I started. Persistence pays off.

  17. I agree with you jason, although boring we have to keep working hard to keep the site. perhaps we do the same thing

  18. A significant factor in making a good investment is considering the time that you will be able to invest for, optimization is important and increases revenue if done well.

  19. We do not otherwise calculate to such details. Will use it in future. Increasing the conversion rate is not an easy job and with these calculations I guess we can make the bottomline profit better.

  20. Fantastic article. Yeah I’ll definitely keep this in mind. I think a lot of time people try to test and get frustrated with lack of results or do not know how to accurately test variations and wind up quitting.

  21. Optimization is very important although it’s a tough and boring job it usually increased my revenue a lot so I keep doing it for every site.

  22. [...] [...]

  23. Spot on article, a lot of people think its just about getting traffic to your site, whereas a small increase in conversion rate can make a huge increase in yearly turnover.

  24. It’s all about testing of new ideas. And sometimes small moves are making a great results.

  25. Thanks for the kick in the butt! Your illustration has motivated me to get with my analytics and continue to challenge the status quo!

  26. This is honestly a lot like the compounding increase in traffic climbing big G ladder. With each position on page 1 you increase your traffic goes up exponentially…

  27. Optimization is very important although it’s a tough and boring job it usually increased my revenue a lot so I keep doing it for every site.

  28. Thanks for the kick in the butt! Your illustration has motivated me to get with my analytics and continue to challenge the status quo

  29. Ok i must admit i didnt understand much of what you had to say about conversion rate increase. lol Anyway i think i’ll stick to my safaris

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