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Conversion Metrics 101 - “Defining Success”

“If I told you once, I’ve told you twice, I’ve told you a thousand times” was my mother’s remark when it appeared that I wasn’t listening to her advice. To my defense, I often was listening but the amount of advice exceeded my capacity to process it. It was like drinking water from a fire hose.

As Internet business owners, we face a similar situation by the volumes of advice we receive on how to manage, market and grow our businesses. Weeding through the “need to know” versus the “nice to know” takes effort. Yet identifying the “need to know” is essential in defining and ultimately achieving success.

For your online business here is an essential “need to know”.

Think about this…

Your website received 5,600 visitors last month and it generated 26 sales.

Was last month a success?

You don’t know, right?

Defining “Success” - the Power of Performance Metrics

Performance metrics are measurable results gathered and calculated from your business’ online systems (traffic, website, and customer retention) and used to identify their aggregate and individual strengths, weaknesses and opportunities.

Referred to as “key performance indicators” or “benchmarks”; their importance carries the same weight as traditional financial ratios like return on investment and days sales outstanding carry for assessing a traditional business’ performance. They form a dashboard for a business owner to gauge the effectiveness of their current business strategies and sets a baseline for defining future success.

Further, performance metrics identify the “gap” between where you are today and where your business goals require you to be tomorrow. Without them, you’re operating a ship without a rudder and wandering aimlessly in a big virtual ocean. As Business Executive, Thomas S. Monson stated,

"Where performance is measured, performance improves. Where performance is measured and reported, the rate of improvement accelerates."

The Primary Performance Metrics

Performance metrics vary by each individual business; however, five specific metrics are most important among successful online businesses. These include:

A. Conversion rates

B. Cost per visitor

C. Cost per lead, prospect or referral

D. Cost per customer

E. Value per visitor

If every Internet business concentrated on these five primary performance metrics, their online businesses would increase exponentially. Why? Because…

“You can only Manage what You can Measure.”

Five Performance Metrics of Successful Online Businesses

All websites present choices to their visitors. Whenever a choice is made by a visitor a “conversion point” exists that generates two metrics: (1) cost of conversion and (2) rate of conversion. The key is to identify your business’ significant conversion points which if chosen most often by visitors will lead to the achievement of your goals.

These are the five performance metrics you need to know.

A. Conversion Rate

Google’s dictionary defines a conversion rate as “the number of visitors who took a desired action divided by the total number of visitors in a given time period (typically, per month).”

Formula: Desired Action / Total Number of Visitors = Conversion Rate

For example, if 1,000 unique visitors were driven to your website from a search engine and 10 elected to purchase a product then your “sales” conversion rate would be 1.0%.

Basically, a conversion rate is calculated whenever a desired action occurs by a visitor to your website. Examples include:

• A visitor types in their email address and clicks “submit” for your free report.

• A visitor clicks their browser’s “back” button to leave your website.

• A visitor buys your product.

The most crucial conversion rates are those directly associated with the achievement of your business’ goals.

B. Cost per Visitor

The cost per visitor is the dollar amount spent to drive one unique visitor to your website.

For example, if you spent $100 to drive 1,000 unique visitors to your website, then your cost per visitor is $0.10.

Formula: Money Spent / Total Number of Visitors = Cost per Visitor

Businesses usually have more than one “visitor source” or a way to drive visitors to their websites. Therefore depending on what result you are analyzing you may calculate “cost per visitor” using money spent on just a single visitor source or on multiple visitor sources.

C. Cost per Prospect, Lead, or Referral

The cost per prospect, lead or referral is the “cost per visitor” times the number of unique visitors needed to produce one prospect, lead or referral.

For example, if you spent $100 to drive 1,000 unique visitors to your website and it produced 10 prospects; your “cost per prospect” is $10.

Formula: Money Spent / Total Number of Leads Produced = Cost per Visitor

D. Cost per Customer

“Cost per customer” is the “cost per visitor” times the number of unique visitors needed to produce a sale.

For example, if you spent $100 to drive 1,000 unique visitors to your website and it produced 2 sales; your “cost per customer” is $50.

E. Value per Visitor

The “Value per Visitor” metric is a composite figure that consists of multiple, performance metrics including conversion rate, average value per completed action, number of unique visitors and number of completed actions.

For example, if the 1,000 unique visitors generated 2 sales worth $100 per sale or $200 in gross revenue then your “value per visitor” is $0.20.

Formula: Sales / Total Number of Visitors = Value per Visitor

O.K. - so why does this matter?

The “value per visitor” indicates what you are able to spend per visitor (i.e. cost per visitor) in order to breakeven on your traffic or strategic marketing investment. If a your website receives visitors at an average “cost per visitor” of $0.10 and your average “value per visitor” s $0.20 then for each new visitor you will gain $0.10 in gross profit.

Note: the “value per visitor” metric becomes more powerful for this type of analysis when you calculate it using all associated traffic costs including labor and material and net sales versus gross.

In addition to an internal, strategic decision-making tool, the “value per visitor” metric can also be used to evaluate external business opportunities.

For instance, if you were approached by a potential business partner and presented with an opportunity to receive 1,000 targeted visitors at a $150 investment, you could quickly do the math and use your average “value per visitor” metric as a baseline.

For example, 1,000 visitors for a $150 investment equates to a “cost per visitor” of $0.15. Using your average “value per visitor” of $0.20 you should earn roughly $25 per sale or $0.05 per visitor times 1,000, a total of $50.

However, depending on the size of the investment, you may suggest to your potential business partner a one-month test instead of a longer term partnering deal. Through performing a “test”, you could gather data and calculate a “value per visitor” specifically for the deal before jumping head-on into a long-term and potentially damaging engagement. By gaining measurable results you have negotiating leverage to work out an economical partnering deal or to pull the plug immediately with minimal loss.

Performance Metrics take the Risk Out of Your Decisions.

As Robert Kiyosaki stated in one of his best-selling books, “being uneducated is risky.” Adapting his advice to your online business, consider this:

“There are people who most often say, “new traffic channels, strategies, web designs, etc. are risky. For them that statement is true – but not because new traffic channels, strategies, web designs, etc. are risky. It is their lack of knowledge gained from tracking, testing and calculating their performance metrics that is risky.”

Knowing your performance metrics is advice you “need to know”.

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