In our first article in this series on Conversion Rate Optimisation (CRO) we looked at how to approach CRO if you don’t have a lot of traffic flowing to your site. Then in our next article we took a bit of a detour to offer you some help in increasing traffic to your site. But now we’re back on track and today we’re going to look at the relationship between CRO and revenue to answer the question, “Why does CRO matter?”
Let’s start by thinking about our definition of CRO.
The purpose of CRO is to increase the ratio of the number of visitors to the website to the number of visitors who meet one of your goals – whether that is becoming a customer, a subscriber, a follower, or leaving details in a form for you to follow up.
CRO is a process – or a series of processes which uses data about the behaviour of your visitors, clients, readers and target markets to make more people want to engage with your business.
You’ve done all the groundwork, built a site, developed a product, promoted it, encouraged people to visit it. If you don’t then maximise the visits you have, it’s like tending your allotment, growing the most delicious fruit and vegetables, creating a sumptuous feast and leaving it in the kitchen where maybe a few adventurous people will help themselves!
CRO and revenue
If you look at our business at Flagship Marketing, we provide a range of growth services to clients on a retainer basis.
Hypothetically, using some easy to parse numbers, let’s say our current marketing spend generates 10 good leads a month from our website and of these leads one of them becomes a customer. We can calculate our conversion rate with the following formula:
1 new client per month / 10 leads per month = 0.1 (or 10%) Conversion Rate (CVR)
Let’s also say that our clients stay with us on average 36 months and that an average retainer is £5,000 per month. My current revenue is:
1 new client x £5,000 per month x 36 months = £180,000
Now, if I double my conversion rate to 20% and do nothing else to increase traffic to my site, I will still get 10 good leads a month to our site. But because the conversion rate has changed, it now looks like this:
10 leads per month x 20% conversion rate = 2 new clients every month
Using the same parameters of client retention average of 36 months and an average retainer of £5,000 per month my total revenue is now:
2 new clients x £5,000 per month x 36 months = £360,000
If you double your conversion rate, all things being equal, you will double your revenue.
CRO and profit
“But”, I hear you say, “Revenue is not profit and we need to consider costs as well, to come to a useful assessment of the importance of CRO.” That’s a very fair point, so let’s look at that.
If you consider the types of costs our business has, there are 4 elements that we would consider:
- Fixed costs which don’t change in relation to our marketing activity. These are not impacted by CRO.
- Activity-related costs that do change.
It costs us more to service two clients a month than it does to service one client a month. However, there is nearly always excess capacity in any business to accommodate more demand without having to invest in additional resources, so the increase in variable costs is invariably less than the increase in new revenue.
So, for example, the demand for raw materials, transportation, storage and plant may increase in response to winning new business, but personnel costs, including client service costs, may well not. And if you are a service or a software business, the rise in costs may be smaller still as you won’t have to deal with those manufacturing and transportation costs at all.
- Marketing costs, (part of activity-related costs, but worth singling out here). Because, in this example we haven’t tried to generate more traffic, these don’t change – we are just optimising what we already have.
- CRO costs (again, part of activity-related costs but worth singling out here). Whether we carry out CRO activities in-house or outsource it, there will be a cost associated with CRO that we need to take into account.
Where does this leave us?
If our overall costs do not rise as much as our revenues,
our profits will increase as we practice CRO.
And that is CRO in a nutshell. It’s not about spending more to generate more leads, although the more traffic the better; it’s about realising the potential that we have on our sites now.
If that excites you, we have some work to do! In our next article we will look at how to assemble all the CRO pieces to really maximise your opportunities.