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Conversion Rate

Guide to Understanding the Conversion Rate

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Conversion Rate

In This Article
  • What is the definition of the conversion rate?
  • What is the conversion rate formula?
  • How can company become more efficient at converting site visitors?
  • How are conversion rates and site traffic related?

Conversion Rate Formula

The conversion rate measures the number of users that performed a specific desired action – e.g. the “end goal,” such as a customer placing an order, a user subscribing, or a sign-up for a free trial – divided by the total number of users that visited the website (and had the potential opportunity to convert).

Upon competition of the desired action, the visitor is effectively converted into either:

  • Leads: Potential Customers
  • Customers: Post-Sale Consumer (i.e. Transaction Complete)

The term “desired action” can take many forms / definitions, and it varies by the company (and website), but some common examples include the following:

  • Customers Orders
  • Subscriptions to Newsletters
  • Event Registration
  • Sign-Up for Free Trials

In particular, the metric is most frequently referenced by e-commerce companies and application-based businesses.

Nevertheless, tracking conversions is essential for all companies across different industries, such as a retail store measuring the percentage of customers that entered their store and then purchased an item.

Once someone becomes a customer, there are now upselling and cross-selling opportunities to further derive more sales from the same individual.

The conversion rate is calculated by dividing the number of conversions by the total number of visitors.

Conversion Rate Formula
  • Conversion Rate = Number of Conversions / Total Number of Visitors

For example, if an e-commerce business received 1,000 site visitors in one month and received 50 customer orders, then the conversion rate would be 5.0% for the month.

  • Conversion Rate = 50 / 1,000 = 5.0%

Interpreting the Conversion Rate

Since the conversion rate measures the percentage of visitors that completed the desired action, increasing the conversion rate leads to an increase in sales efficiency – all else being equal.

As a generalization, above-market conversion rates imply that the current marketing strategy is bringing in the right customers to the site (i.e. attracting the right targets to sell to) and the sales pitch or “message” resonates well with the viewers.

Defining what constitutes a “good” conversion rate is entirely dependent on the industry, audience demographics, as well as the total site traffic among various other factors.

For instance, an online business selling a niche product would aim for a much higher conversion rate than a business that sells a broad line of products with a broad reach, i.e. companies with a larger total addressable market (TAM) leads to more site traffic (and less “targeted” viewers).

However, if a business brings in greater site traffic, the reliance on a higher conversion rate declines, so they typically will target lower conversion rates.

As a website scales and site traffic (e.g. the volume of viewers) increases, it is inevitable for the conversion rate to decline over time, similar to how the growth rate of companies decreases in the later stages of their life cycle.

Conversion Rate Optimization (CRO)

Conversion rate optimization (CRO) describes the best practices implemented by websites to optimize their conversion rates and enhance the efficiency at which sales are generated.

In general, there are some global recommended guidelines to increase conversion rates, but there is no rigid methodology that works across all websites and industries.

Hence, companies frequently change their marketing strategies and conduct A/B testing in an effort to improve their conversion rates.

The customers within each market are unique, so each strategy must be tailored to meet their specific needs.

The core of all successful plans is a clear understanding of the target end market, i.e. the customers that the Company is attempting to reach.

More specifically, the Company must identify the problems faced by their potential customers, so that the right solution can be offered.

Even after establishing a plan with strong progress (e.g. increased conversions), the Company must adjust to the a continuously changing competitive landscape (and end-market customer dynamics) – which is why on-page and external surveys are often utilized to obtain user feedback.

In some cases, the reverse can also be done, in which a solution is marketed to customers that did not realize they had originally wanted the product or service.

Once customer data is collected, proper adjustments must be made to determine which customer types appear to be the most receptive, i.e. have the highest net promoter score (NPS) and lowest churn rate.

Conversion Rate Calculator – Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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E-Commerce Conversion Rate Example Calculation

Suppose we have two closely competing e-commerce companies that each had 100 orders placed on their websites over the past month.

The online products sold by the two competitors – “Company A” and “Company B” – are priced at the identical price of $250.00 per order.

However, the difference lies in their total number of website visitors for the month, i.e. the site traffic.

  • Company A Site Traffic = 5,000 Viewers
  • Company B Site Traffic = 500,000 Viewers

There is a significant discrepancy in site traffic between the two, so the conversion rates would also be far apart.

  • Company A Conversion Rate = 100 / 5,000 = 2.00%
  • Company B Conversion Rate = 100 / 500,000 = 0.02%

Despite Company A’s higher conversion efficiency, the total revenue brought in for the month by each company is identical.

At the end of the day, both companies received 100 customer orders with an average order value (AOV) of $250.00 per sale, so both of their monthly revenue amounts to $25,000.

  • Monthly Revenue = 100 * $250.00 = $25,000

Conversion Rate Calculator

 

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