How to do ROI calculations for conversion optimization?
Calculating the ROI of your conversion optimization efforts is much more difficult and time-consuming than calculating the ROI of any marketing campaign (SEO, PPC, etc).
This is because when it comes to measuring the performance of a marketing campaign, say SEO, you can assess the performance of SEO by assessing the performance of ‘organic search traffic’, in terms of completing and assisting website conversions.
Similarly, when it comes to measuring the performance of PPC, you can assess the performance of paid search traffic in terms of completing and assisting website conversions.
But when it comes to measuring the performance of a conversion optimization program, you can’t quite put your finger on any one thing. When you do CRO, you work on improving the overall website user experience. You work on removing the bottlenecks in your sales funnel. As a result, you increase sales and ROI across multiple marketing channels.
All marketing campaigns (from SEO, PPC, social media to email) benefit from your conversion optimization efforts in one way or the other and as a result, each campaign delivers better ROI over time.
However, it is not possible to determine, exactly which part of a marketing campaign or which part of the sales funnel, can/will benefit from your conversion optimization efforts and by what degree.
If your CRO program has been successful, you will notice a significant improvement in overall website sales and ROI. But you still can’t put your finger on any one change or set of changes you made to improve the business bottomline. You still can’t make a claim that this particular change or set of changes on the website improved the sales and ROI.
In a multi-channel and multi-device world, different marketing channels, marketing messages, website elements, and devices work together to create user experience and conversions. No single marketing channel or particular set of website changes can be held solely responsible for generating sales and ROI.
Besides, the following factors also positively or negatively affect the overall sales and ROI of a website and that too almost 24/7:
- Seasonality
- Changes in advertising
- Changes in competitors landscape
- Changes in social media & search engine landscape
- Changes in weather
- Website redesign
- Introduction of new products
- Discontinuation of existing products
- New product pricing
- Introduction of new offers, etc
With so many variables in play, it becomes very challenging to assess the performance of a conversion optimization program in isolation.
I have found that the best way to assess the performance of a conversion optimization program is to measure the incrementality it brought to the projected overall sales and ROI.
However, before you calculate the ROI of your conversion optimization program, take a baseline measurement by forecasting the overall website sales and ROI for the next 4 to 6 months.
Determine what the projected sales and ROI will be, for the next 6 months, if you continue to operate the way you are currently operating, without optimizing your website and user experience for conversions. Forecast where your current marketing activities will take your online business, if you do not test and optimize your website any further, for conversions.
When it comes to forecasting sales and ROI, you can go as scientific in your approach as your current skills and resources allow. For example, if you are currently executing both marketing mix modelling and ‘attribution modelling’ and you have a data scientist at your disposal then you can feed your attribution modelling data to your marketing mix model and carry out regression analysis to accurately forecast the impact of various marketing activities on sales and ROI, for the next 4 to 6 months.
Even if the statistics and data science are not your forte, you can still make a reasonably accurate guess of future sales and ROI based on your:
- Current marketing activities
- Historical sales data
- Business and marketing plans in the immediate future.
Whether you use statistical analysis or do educated guessing, it is important that you spend some time in forecasting sales and ROI for the next 4 to 6 months. Otherwise, you will have a very hard time understanding the impact of your conversion optimization program on overall sales and ROI.
Follow the steps below to forecast sales and ROI:
Step-1: In order to forecast the sales and ROI as accurately as possible, involve following stakeholders in forecasting calculations:
- Marketing professionals (SEO, PPC, email, social media experts)
- Web analyst, usability experts, data scientist (if you have got one)
- People from the finance team
- IT team
- ‘C’ level executives (CEO, CMO, CFO, etc).
Step-2: Ask marketing professionals to forecast sales and the cost of sales from their marketing efforts in the next 6 months. For example, you can ask your SEO expert to forecast sales and cost of sales from organic search traffic in the next 6 months. Do not worry about being 100% accurate or going into too much detail. This is not an accounting exercise.
The forecast just needs to be reasonably accurate. However, do look at the method your SEO used to forecast sales and question him/her if the projected sales do not look reasonably accurate based on historical data.
It is important that you involve marketing professionals in projecting sales and cost of sales from their own marketing efforts. There are two strong reasons for that:
#1 Marketing professionals understand their industry landscape and campaigns the best and are thus in a better position to more accurately forecast sales and ROI than you.
#2 They are less likely to make a claim on the incrementality in sales you generate by your conversion optimization efforts in the near future, as they won’t be able to raise objection on their own projected sales and ROI data.
Step-3: Ask the IT team, what website changes they are planning to make in the next 4 to 6 months. Note down their plan.
Step-4: Ask business owners / ‘C’ level executives what they are planning to do in the next 6 months to increase overall sales and ROI. Maybe they are planning to launch a new product line or discontinue a product. Maybe they are in the middle of acquiring a company, starting a new form of advertising, increase product pricing, etc. Get as much data as possible about their immediate future business and marketing plans.
Step-5: Collect and combine the projected sales and cost data from all the stakeholders and then consult your web analyst or data scientist, to confirm that the forecasted sales and ROI makes sense, is statistically significant or at least reasonably accurate.
Once you have projected sales and cost data in place, any incrementality you bring to the projected sales in the near future is most likely because of the result of your conversion optimization efforts.
Your conversion optimization program would/should exceed the projected overall sales volume and ROI.
Now the question comes, how much incrementality in projected sales is acceptable to justify investment in conversion optimization?
The answer to this question depends upon your fees for carrying out conversion optimization. Whether you do SEO, PPC, or CRO you should consider delivering at least 100% ROI.
100% ROI means if your client spent X on conversion optimization program, then he gets 2X in return.
So if you are charging say $40k as a fee for carrying out conversion optimization on a website, you are expected to deliver at least $80k in additional sales during your contract period. This is the revenue in addition to the projected sales.
So if projected sales for the next 6 months are $200k then after carrying out the conversion optimization program, the projected sales should be around $280k. This will give you a ballpark figure of what to aim for. The more you charge, the more you would be expected to deliver. So beware of how much you charge for conversion optimization.
It is worth noting that at no point have I asked you to focus on improving website conversion rate. At no point have I asked you to forecast the conversion rate metric. In fact, it is highly unlikely that you can forecast conversion rate for the next 6 months even with a small degree of accuracy. This is because the conversion rate is a ratio metric that changes all of the time.
Above all your website conversion rate is destined to decline over time. The ever increasing traffic on your website will always tend to lower the conversion rate and the website traffic does not increase in proportion to the conversion volume (sales, transactions, and other conversions), no matter what you do.
Not every website visit will lead to conversions. You will always get some traffic which won’t convert, no matter what.
If you do not see a lot of fluctuation in your website conversion rate on a weekly/monthly basis, then it means your traffic acquisition strategy is weak. You are not as aggressive as you should be, in acquiring new traffic. You have become content with the existing traffic volume. Such contentment will sooner or later make you less profitable despite your rigorous conversion optimization efforts.
While it is good to convert more of existing website traffic into sales and leads, you always need a lot of new traffic because the majority of your existing users/customers will eventually disengage (visit your website less often, complete less conversions, generate less sales, etc) from your website and become less profitable over time for no apparent reason. You need a constant flow of new traffic regardless of your conversion optimization efforts.
Conversion rate is a horrible metric to focus on when assessing the performance of a conversion optimization program esp. if you are heavily involved in multi-channel marketing. Focus on improving overall conversion volume (sales, orders, gross profit).
Related Article: Here is Why Conversion ‘Volume’ Optimization is better than Conversion ‘Rate’ optimization
Calculating the ROI of your conversion optimization efforts is much more difficult and time-consuming than calculating the ROI of any marketing campaign (SEO, PPC, etc).
This is because when it comes to measuring the performance of a marketing campaign, say SEO, you can assess the performance of SEO by assessing the performance of ‘organic search traffic’, in terms of completing and assisting website conversions.
Similarly, when it comes to measuring the performance of PPC, you can assess the performance of paid search traffic in terms of completing and assisting website conversions.
But when it comes to measuring the performance of a conversion optimization program, you can’t quite put your finger on any one thing. When you do CRO, you work on improving the overall website user experience. You work on removing the bottlenecks in your sales funnel. As a result, you increase sales and ROI across multiple marketing channels.
All marketing campaigns (from SEO, PPC, social media to email) benefit from your conversion optimization efforts in one way or the other and as a result, each campaign delivers better ROI over time.
However, it is not possible to determine, exactly which part of a marketing campaign or which part of the sales funnel, can/will benefit from your conversion optimization efforts and by what degree.
If your CRO program has been successful, you will notice a significant improvement in overall website sales and ROI. But you still can’t put your finger on any one change or set of changes you made to improve the business bottomline. You still can’t make a claim that this particular change or set of changes on the website improved the sales and ROI.
In a multi-channel and multi-device world, different marketing channels, marketing messages, website elements, and devices work together to create user experience and conversions. No single marketing channel or particular set of website changes can be held solely responsible for generating sales and ROI.
Besides, the following factors also positively or negatively affect the overall sales and ROI of a website and that too almost 24/7:
- Seasonality
- Changes in advertising
- Changes in competitors landscape
- Changes in social media & search engine landscape
- Changes in weather
- Website redesign
- Introduction of new products
- Discontinuation of existing products
- New product pricing
- Introduction of new offers, etc
With so many variables in play, it becomes very challenging to assess the performance of a conversion optimization program in isolation.
I have found that the best way to assess the performance of a conversion optimization program is to measure the incrementality it brought to the projected overall sales and ROI.
However, before you calculate the ROI of your conversion optimization program, take a baseline measurement by forecasting the overall website sales and ROI for the next 4 to 6 months.
Determine what the projected sales and ROI will be, for the next 6 months, if you continue to operate the way you are currently operating, without optimizing your website and user experience for conversions. Forecast where your current marketing activities will take your online business, if you do not test and optimize your website any further, for conversions.
When it comes to forecasting sales and ROI, you can go as scientific in your approach as your current skills and resources allow. For example, if you are currently executing both marketing mix modelling and ‘attribution modelling’ and you have a data scientist at your disposal then you can feed your attribution modelling data to your marketing mix model and carry out regression analysis to accurately forecast the impact of various marketing activities on sales and ROI, for the next 4 to 6 months.
Even if the statistics and data science are not your forte, you can still make a reasonably accurate guess of future sales and ROI based on your:
- Current marketing activities
- Historical sales data
- Business and marketing plans in the immediate future.
Whether you use statistical analysis or do educated guessing, it is important that you spend some time in forecasting sales and ROI for the next 4 to 6 months. Otherwise, you will have a very hard time understanding the impact of your conversion optimization program on overall sales and ROI.
Follow the steps below to forecast sales and ROI:
Step-1: In order to forecast the sales and ROI as accurately as possible, involve following stakeholders in forecasting calculations:
- Marketing professionals (SEO, PPC, email, social media experts)
- Web analyst, usability experts, data scientist (if you have got one)
- People from the finance team
- IT team
- ‘C’ level executives (CEO, CMO, CFO, etc).
Step-2: Ask marketing professionals to forecast sales and the cost of sales from their marketing efforts in the next 6 months. For example, you can ask your SEO expert to forecast sales and cost of sales from organic search traffic in the next 6 months. Do not worry about being 100% accurate or going into too much detail. This is not an accounting exercise.
The forecast just needs to be reasonably accurate. However, do look at the method your SEO used to forecast sales and question him/her if the projected sales do not look reasonably accurate based on historical data.
It is important that you involve marketing professionals in projecting sales and cost of sales from their own marketing efforts. There are two strong reasons for that:
#1 Marketing professionals understand their industry landscape and campaigns the best and are thus in a better position to more accurately forecast sales and ROI than you.
#2 They are less likely to make a claim on the incrementality in sales you generate by your conversion optimization efforts in the near future, as they won’t be able to raise objection on their own projected sales and ROI data.
Step-3: Ask the IT team, what website changes they are planning to make in the next 4 to 6 months. Note down their plan.
Step-4: Ask business owners / ‘C’ level executives what they are planning to do in the next 6 months to increase overall sales and ROI. Maybe they are planning to launch a new product line or discontinue a product. Maybe they are in the middle of acquiring a company, starting a new form of advertising, increase product pricing, etc. Get as much data as possible about their immediate future business and marketing plans.
Step-5: Collect and combine the projected sales and cost data from all the stakeholders and then consult your web analyst or data scientist, to confirm that the forecasted sales and ROI makes sense, is statistically significant or at least reasonably accurate.
Once you have projected sales and cost data in place, any incrementality you bring to the projected sales in the near future is most likely because of the result of your conversion optimization efforts.
Your conversion optimization program would/should exceed the projected overall sales volume and ROI.
Now the question comes, how much incrementality in projected sales is acceptable to justify investment in conversion optimization?
The answer to this question depends upon your fees for carrying out conversion optimization. Whether you do SEO, PPC, or CRO you should consider delivering at least 100% ROI.
100% ROI means if your client spent X on conversion optimization program, then he gets 2X in return.
So if you are charging say $40k as a fee for carrying out conversion optimization on a website, you are expected to deliver at least $80k in additional sales during your contract period. This is the revenue in addition to the projected sales.
So if projected sales for the next 6 months are $200k then after carrying out the conversion optimization program, the projected sales should be around $280k. This will give you a ballpark figure of what to aim for. The more you charge, the more you would be expected to deliver. So beware of how much you charge for conversion optimization.
It is worth noting that at no point have I asked you to focus on improving website conversion rate. At no point have I asked you to forecast the conversion rate metric. In fact, it is highly unlikely that you can forecast conversion rate for the next 6 months even with a small degree of accuracy. This is because the conversion rate is a ratio metric that changes all of the time.
Above all your website conversion rate is destined to decline over time. The ever increasing traffic on your website will always tend to lower the conversion rate and the website traffic does not increase in proportion to the conversion volume (sales, transactions, and other conversions), no matter what you do.
Not every website visit will lead to conversions. You will always get some traffic which won’t convert, no matter what.
If you do not see a lot of fluctuation in your website conversion rate on a weekly/monthly basis, then it means your traffic acquisition strategy is weak. You are not as aggressive as you should be, in acquiring new traffic. You have become content with the existing traffic volume. Such contentment will sooner or later make you less profitable despite your rigorous conversion optimization efforts.
While it is good to convert more of existing website traffic into sales and leads, you always need a lot of new traffic because the majority of your existing users/customers will eventually disengage (visit your website less often, complete less conversions, generate less sales, etc) from your website and become less profitable over time for no apparent reason. You need a constant flow of new traffic regardless of your conversion optimization efforts.
Conversion rate is a horrible metric to focus on when assessing the performance of a conversion optimization program esp. if you are heavily involved in multi-channel marketing. Focus on improving overall conversion volume (sales, orders, gross profit).
Related Article: Here is Why Conversion ‘Volume’ Optimization is better than Conversion ‘Rate’ optimization
My best selling books on Digital Analytics and Conversion Optimization
Maths and Stats for Web Analytics and Conversion Optimization
This expert guide will teach you how to leverage the knowledge of maths and statistics in order to accurately interpret data and take actions, which can quickly improve the bottom-line of your online business.
Master the Essentials of Email Marketing Analytics
This book focuses solely on the ‘analytics’ that power your email marketing optimization program and will help you dramatically reduce your cost per acquisition and increase marketing ROI by tracking the performance of the various KPIs and metrics used for email marketing.
Attribution Modelling in Google Analytics and BeyondSECOND EDITION OUT NOW!
Attribution modelling is the process of determining the most effective marketing channels for investment. This book has been written to help you implement attribution modelling. It will teach you how to leverage the knowledge of attribution modelling in order to allocate marketing budget and understand buying behaviour.
Attribution Modelling in Google Ads and Facebook
This book has been written to help you implement attribution modelling in Google Ads (Google AdWords) and Facebook. It will teach you, how to leverage the knowledge of attribution modelling in order to understand the customer purchasing journey and determine the most effective marketing channels for investment.
About the Author
Himanshu Sharma
