Conversions, Part Three: How Do We Measure Them?
January 23, 2018
Now that we have a handle on what conversions are and why they are important to your business, how do we measure them? Analytics packages like Google Analytics and Facebook Insights collect a wealth of information, but not all of the information they collect is relevant to conversions. In fact, it’s easy to get confused by a lot of vanity metrics that don’t relate to conversions.
The way to cut through this is to know the key performance indicators (KPIs) buried in the data. Not all of them are directly collected, but they can be calculated or modeled based on good analytics data, so always hook up your site to an analytics engine to get the basic data.
Here are some of the things to calculate to really see how well your conversions are working.
This is the main conversion metric you’ll find in analytics packages. It is the ratio of total visitors to how many visitors took an action that you specify. It could be a sale, a lead, a download, or whatever action you wish the visitor to take. For non-monetary conversions, this is the key metric.
Revenue Per Visitor
Calculating the revenue per visitor is easy. Divide the number of visitors to your page or site by the amount of revenue generated. This could be done per sales point or across the site as a whole. It’s better than a bare conversion rate because you can compare how much money each part of your site is generating per visitor. This will help you identify which products and services are paying for themselves and which ones aren’t.
Customer Acquisition Cost
For every customer you convert, a certain amount of revenue had to be spent convincing the customer to convert. This is the Customer Acquisition Cost or CAC. It is calculated by dividing the sum of all sales and marketing expenses by the number of new customers gained over a span of time. Thus, if you spent $1200 on sales and marketing and gained 100 new conversions over one month, the CAC is $12 for each of those customers. The price of your product or service must be high enough to pay for itself, plus CAC, plus whatever your profit goals are.
Lifetime Value of the Customer
The lifetime value of the customer, or LTV, is how much you believe each customer on average will spend over the lifetime of their entire relationship with your company. It’s an incredibly useful metric to calculate.
One simple model used is:
(Average value of a sales transaction) X (The number of repeat transactions) X (The average amount of time a customer is retained in months or years).
Let’s say you run a subscription site that charges $10 per month and your average user sticks around for 9 months before they leave. $10 X 1 transaction X 9 months = $90 over the lifetime of the customer. If they stuck around for two years, it would be $10 X 12 transactions X 2 years = $240 over the lifetime of the customer.
With a good LTV, you can calculate how much you can allocate to marketing. LTV - product and operations costs per customer lifetime - profit per customer lifetime = total available marketing budget. With a good LTV, you can determine just how much money you can spend on marketing and sales without going broke. Having a handle on LTV can even help you create models for identifying high-value and low-value customers so you can tune your marketing even more precisely.
In our next and final article of this series, we’ll take a closer look at various conversion goals beyond financial, such as customer acquisition and customer retention.