Conversion Rate Formula and Definition, As a Critical KPI for a Startup
In the previous article, we examined one of the most critical startup KPI, namely “growth”. As mentioned, the identity of a startup is its growth and scalability. A business that does not have these two characteristics isn’t categorized as a startup. After reviewing growth, today’s article examines the conversion rate formula and definition as the next important feature. Stay tuned with SOJECT.
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Conversion Rate; The Most Crucial Key Performance Indicator for A Startup
From the moment the customer feels the need to buy the product till he finally buys it, he goes through a constant process including different stages. The transfer of the customer from one step in this process to another is called a “conversion”. Each conversion is accompanied by an “action” from the customer and a “call to action” from the startup. The action can be clicking a button, downloading a file, registering, activating an account, watching a movie or any other activity that directly leads the customer to the final action (purchase).
Conversion Rate Formula:
To calculate the conversion rate, we must calculate the number of users who have performed the desired action divided by the number of users exposed to the call to a call to action.
For example, a user enters the site by clicking on an advertising banner. This is the first step in conversion: converting a web user to a site visitor. Then, after navigating different pages and seeing the services or products, he decides to register on the site. This is the second step in the conversion process: converting the visitor to the registrar. Depending on the business model, this process can go step by step and eventually lead to a purchase and then repeating the purchase.
Naturally, as they move forward, the number of customers who continue to take what we want them to decrease. As mentioned, the ratio of customers who pass through a stage to others who didn’t is called the conversion rate of that stage. Conversion rate is one of the most important indicators of customer behaviour, and its optimization is one of the most critical goals of startups.
Increasing the conversion rate has a positive effect on increasing startup revenue.
Measuring and monitoring customer conversion rates at different stages of the purchasing process is a systematic way to understand how customers interact with the business. This measuring helps us to understand:
- What is wrong with the product?
- At which stage do we lose customers the most?
- Does the product design, communication or user experience have a direct negative or positive effect on this type of behaviour?
Customer Funnel
Suppose visualizing the customer buying process based on the user’s number at each stage. In this case, we will encounter a funnel-like diagram known as the “Customer Funnel” or “Conversion Funnel.” As the name implies, the conversion funnel simply shows how efficient your business is in persuading customers to go through the buying process.
Think of a business like a local famous online market. In the first place, it must draw web users to the site. It does this, for example, with banner ads. Take a look at the following steps example:
Action One: Clicking on Banners
Suppose, for example; the market banners are displayed to users 1 million times. Out of 1 million users who view the banner, only 30,000 people click on it.
Action Two: Scrolling More than One Page
Of the 30,000 people who enter the site, 27,000 leave the site without clicking on a link and seeing another page, so 3,000 people visit more than one page.
Action Three: Adding at Least One Product to the Cart
Out of these 3,000 people, 500 people choose a product and add it to their shopping cart.
Action Four: Logging in to the shopping page
In the next step, only 300 people decide to go to the shopping cart page.
Action Five: Payment
And at the end, only 240 people make their purchases with the final payment.
Once the conversion rates of the customer funnel are determined, the next step is to find solutions to optimize each of the rates.
Conversion rate optimization has a financial approach and aims to direct the most significant number of customers to the buying action with the lowest advertising costs.
Conversion Rates in the Above Example:
The First Conversion Rate:
In the example above, the first conversion rate (banner click rate) is 3%. If we consider the cost of banner advertising as a thousand dollars, each successful click (visit) costs $ 3.
Considering that our hypothetical market is a well-known one, it is expected that its click-through rate on public banners would be low. Therefore, to increase this rate, they should introduce specific products or campaigns to encourage visitors to click on the banner.
To do this, they would use “Retargeting” or “Data Mining” strategies to display product ads tailored to the user’s needs to increase click-through rates. If it is impossible to access customer data to customize the product on the banner ad, A/B Testing can select the best product category or campaigns to display.
In this technique, a limited set of banners with different messages (depending on the type of product or campaign) are randomly displayed to different categories of users. Then the click-through rate of each banner is calculated, and finally, the best banner is selected as the final banner to continue the campaign.
The Second Conversion Rate:
In the next step, only 10% of the visitors (3,000 people) become multi-page visitors.
Optimizing this conversion rate depends on two main factors:
- Improving input users
- Optimization of the landing page designing and user experience to attracts more users and prevents them from bouncing
The most effective way to reduce bounce rates and increase user retention on the landing page and navigate other pages is A / B Testing.
The Third Conversion Rate:
In the third stage, only 16% (500 people) of users who have browsed the site create a shopping cart. This conversion rate depends on the following factors:
- External factors such as login time, user needs, financial conditions, purchase preferences, etc.
- Internal factors such as product variety and pricing (or discount mechanisms)
The Fourth Conversion Rate:
In the fourth step, 60% (300 people) of the users who have created the shopping cart click on the payment button and go to the bank payment page.
Some of these 300 people may return to the site after a few hours or even days to complete their purchase. Techniques such as texting, emailing, or mobile notification are suitable to remind them to complete their purchase.
The Last Conversion Rate:
In the last step, 80% (240 people) of the users who enter the purchase page complete their payment successfully. However, some users skip payment due to process issues, and others due to psychological choices such as delaying or cancelling a purchase.
The fall in the last stage happens for all startups all over the world. Consequently, on average, only 79% of those who enter the payment page succeed. Unfortunately, the optimisation of this step is not possible due to non-systematic factors, as well as fulfilling the purchase through the bank page.
Conversion Rate Optimization
According to conversion rates analysis in the customer funnel, the marketing team can do activities to increase it. These activities ultimately increase the number of customers who fulfill their purchase. Therefore, the Cost per Click/Visit, the Cost per Forming Basket, the Cost per Order/Payment is reduced. Reducing these costs ultimately affects the return on investment (ROI) of advertising.
Therefore, conversion rate optimization is a set of activities that try to increase the return on investment by focusing on the factors related to the conversion rate in different stages. The use of recommender systems, account-based methods, data analysis and machine learning, and A/B Testing optimize customer conversion rates.
Prediction and Targeting Based on Conversion Rate
Another application of conversion rate is future forecasting and targeting. If enough time has passed since the startup started, you can calculate the conversion rate values and use them to predict the future. You can also plan and execute your activities so that this rate gets better and better over time.
There are usually some benchmark rates in the market that you can use as a reference to compare your startup performance. In this case, the conversion rate is an indicator to evaluate the marketing team’s performance, product design, or user experience design.
In many cases, this funnel may have only one step. For example, the user encounters only one call for action (CTA) as soon as he enters the site. This CTA may be a click to downloading an ebook. In this case, the issue is simplified by optimizing an internal conversion rate (download) and an external conversion rate (clicking on the banner).
Conversion rate optimization can involve a broader range of actions, evaluations and parameters. For example, it is possible to increase the internal conversion rate by adequately evaluating the audience personality of an advertising medium and its relevance to the type of startup service.
You can achieve proper optimization over time by performing several advertising experiences on different channels, various advertising networks, social networks, etc. Finally, the sum of these experiences and evaluations can be summarized in the Customer acquisition cost index and used to decide on future actions.
Different external components play a role in conversion rate values: time, geography, demographics, etc. Although these factors are beyond our control, most advertising platforms provide opportunities to target advertising campaigns based on these factors. Therefore, it is still possible to optimize the conversion rate in the customer funnel by properly planning marketing programs and constantly optimizing them.
At What Stage Is There the Highest Customer Loss Rate?
The conversion rate funnel shows the bottleneck (s) of the buying process well. But it does not specify the cause. Determining the low or high conversion rate is based on the characteristics of the startup, the psychological, sociological and behavioural aspects of the customers and the design features of the product. However, marketing, product design, and customer relationship management activities can easily have a positive or negative effect on conversion rates.
Irrational Behaviour of Customers
Contrary to popular belief, customers often do not behave rationally. Their decision-making is influenced more by psychological and emotional components than logical and analytical elements. However, we can predict their irrational behaviour with a good approximation.
Our goal is not to know precisely the customer decision process. Whether this process is logical or illogical, we can anticipate it and change it in favour of the startup with controlled changes and planned actions.
An example of irrational customer behaviour is leaving the shopping cart. A significant part of these customers do not have a serious decision to buy from the beginning. However, they add products to their shopping cart and leave them unpaid.
In fact, they are just looking for virtual shopping fun; Like those who spend a lot of time wandering the streets and visiting stores without intending to buy anything. On the other hand, customers who intend to make a purchase may cancel the payment after completing the selection process and viewing the invoice in the final shopping cart. That’s because they do not have enough money or the psychological burden of paying cash overwhelms them. They may also defer payment to the future to escape the difficulty of making the final choice.
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