Why Your Conversion Rate Doesn’t Matter (aka Conversion Rates are Relative)

Conversion rate doesn't matter
In 1907, a brilliant physicist proposed that “truth” is defined by the perspective from which it is observed.

That observation by Albert Einstein reverberates throughout all of our current knowledge, essentially throwing the traditional concepts of time and motion on their heads. His theory of relativity gave scientists a foundation to pioneer new discoveries.

It seems to me that marketers still need to apply the concept of relativity to their conversion rates.

I am often asked what an “average” conversion rate is. Each time, I explain how general conversion rate relativity works. Although I can see that they accept the explanation, they still want an average. I aim to debunk the myth of the average conversion rate here.

What is Conversion Rate?

Your conversion rate is the percentage of prospects or visitors to your website who perform your desired goal, or the “conversion event”. It may be purchasing a product, filling in a lead form, downloading a software trial or signing up for your newsletter, etc.

As an equation, conversion rate is calculated like this:

So, if you have 10,000 visitors today and 293 make a purchase, your sales conversion rate is:

What does this tell you in practice?

Your Conversion Rate Doesn’t Matter

At the risk of being shunned by my conversion rate optimization community, I’m going to tell you that your conversion rate does not matter.

How can I make such a crazy statement?

Bear with me for a moment while I state my case.

  1. Your conversion rate is dependent on two components, the numerator and denominator
    The numerator (the number on the top) increases if you increase the number of sales you make each day, which creates a higher conversion rate. That’s a good thing.
  2. The denominator (on the bottom) increases if you get more visitors to your website. If you get the same number of sales with more traffic, your conversion rate has decreased. But your sales are still the same. This is an irrelevant change as far as your business is concerned (assuming appropriate relative traffic cost) even though your conversion rate makes you think the business is in worse shape.
  3. You can artificially increase your conversion rate by eliminating sources of lower quality traffic. But, some of that lower quality traffic may purchase, just at a lower rate. Would it really improve your business to have 5000 visitors and 200 sales (again, assuming appropriate traffic cost)? Your conversion rate would have increased to 4% but total sales decreased.
  4. You could have a higher conversion rate with a marketing model that emphasizes repeat purchases from existing customers. That doesn’t necessarily mean it’s a good growth business. Perhaps emphasizing growth by attracting more new prospects would be better for the business while lowering conversion rates.
  5. Different calls to action will have varying conversion rates. A conversion rate for a whitepaper download may be quite different than for a “request a quote”, even with the same industry or business.
  6. Some products will have a higher conversion rate than others. Should you eliminate the products for the long tail of your customers just to boost your conversion rate?
  7. Conversion rates change dramatically based on external factors like seasonal urgency, competitive actions, your marketing offers, your stock levels, market fads, etc.
  8. A “typical” conversion rate doesn’t exist. Every business differs in its demand generation model, average order value, lifetime value calculation, retention and profit margin. On average, Switzerland is flat. But, the average elevation of Switzerland is meaningless.

So, are conversion rates totally irrelevant? How can WiderFunnel base our business on lifting conversion rates (and sales and profits)?

Here’s where I throw a wrench in the argument.

But Your Relative Conversion Rate is Critically Important

This is not a call for marketers to disregard conversion rates. It is a call for you to interpret conversion rates effectively.

If you know that emphasizing a different aspect of your value proposition would increase your conversion rate for the same visitor pool, you have used your conversion rate effectively. That would be a fundamentally important piece of knowledge to gain.

Your conversion rate is a critical metric when you are controlling the effect of a change in your marketing. That is the only case where conversion rates are important.

Let me emphasize that point: Conversion rates are only important for controlled tests.

Check out this example where a company added a huge new traffic source:

The conversion rate decreased overall with the new traffic source added, but sales were up and, most importantly, the relative conversion rate result in the test held strong. This test showed a 40.8% conversion rate lift the right way – with a controlled A/B/n split test.

That’s how to use your conversion rate.

6 Comments

  1. @spanishgringo January 9, 2013 at 10:23 am - Reply

    I appreciate the point that looking at conversion rate is nuanced. However, that point is true for all metrics, not just conversion rate. All metrics must also be evaluated in their own context.

    Just because individual cases may vary due to idiosyncratic circumstances, patterns may still emerge for many, if not most, cases. There are benchmarks and ranges that one can reasonably expect from certain types of activities or businesses. This is where experience and qualitative data can inform the analysis.

    If I just started with a new company that is primarily in mid-range eCommerce and I noticed that we had 40% conversion rates, then I would suspect that there is a problem in the coding, tracking, or in the size of our audience (or perhaps pricing). It may be the case that 40% is correct for that company, but my experience would suggest otherwise and warrant that it needed further investigation.

    Just because there is no 1 right number, does not mean that you can't answer the "average" question by couching it in what is most commonly observed and adding that your mileage may vary depending on the specifics of audience, pricing, product and all other factors in the marketing mix.

    • @chrisgoward January 9, 2013 at 5:33 pm - Reply

      Yes, there are extreme examples that could indicate tracking errors.

      But, at a typical operational level, I can't tell you if your conversion rate should be 1%, 3%, or 5%, for example, even though those represent 300% and 500% relative differences! Those are all within a small single digit range, but the different in revenue for the business could be enormous. And the expected "normal" for each of those businesses could be much different.

      Even within the same business, the conversion rate for different customer segments will vary considerably. Conversion rates will vary for: new visitors, returning visitors, recently-purchased customers, lapsed customers, email responders, in addition to all the other variables like seasonality and current marketing offers.

      For example, why does Schwan's have one of the highest conversion rates of any retailer? Probably because they have a lot of repeat customers due to their business model. That doesn't mean every food retailer should want that conversion rate. Maybe Shwan's should be growing faster by attracting more visitors who have a lower conversion rate?

      The point is that each business and scenario is so different that relative conversion rates is the only type that matters.

      And, yes, I do agree with you that the same logic applies to other metrics too!

  2. Cat September 20, 2013 at 6:37 pm - Reply

    Great post Thanks Chris

  3. Arnold February 12, 2014 at 7:37 am - Reply

    "(assuming appropriate relative traffic cost)" – unrealistic assumption

    • chrisgoward February 12, 2014 at 4:57 pm - Reply

      Why do you say that, Arnold?

  4. payudara August 16, 2014 at 6:33 am - Reply

    I liked your all points "Conversion Rate Doesn’t Matter" but conversion is the matter what so every If I am having 200 visits a month but got 30% conversion with or without ranking that actually does matter.

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