How do you determine a satisfactory conversion rate?

Question

I'm calculating the value of a website that helps the client sell their services. I know how to calculate the conversion rate for sales:

conversion rate = sales ÷ visitors × 100%

But I need to know what the conversion rate should be assuming the site and marketing are reasonably optimized. Is there a formula for this? I.e., "If the product costs < $200, expect a conversion rate of 1%."

Answer 1

To answer your direct question: "whichever rate where benefit > costs".

I don't think it's possible to determine a formula a priori, because conversion rate is influenced by many factors, like traffic, design, targeting, funneling, geo location, time of the day, day of the week, month of the year, price (absolute), price (relative to competition), layout (copy, color, images) and many more. As you may notice, there are both quantitative and qualitative dimensions to consider, so I find it hard to believe a formula is even possible.

To better understand what I mean, take a look to this page. It deals with only one of the dimensions (color) and you'll see how changing only this could mean some dramatic increase in CTR (or decrease, of course). I personally love this:

Bing increased their revenue by $80 million dollars by finding the exact color of blue for their links. Why is that? It’s because people are used to links being blue. When WWW first came to be, blue was the color of links. Microsoft engineers working on this also admitted this: “…it was a shade of blue quite similar to the one used by Google.”

All of the above being said, you have to consider your conversion rate as a relative value rather than an absolute value. When you launch your site, you will obviously start at 0, since you won't have any data to compare. Once conversions starts to flow, you'll be able to analyze data and identify issues (if any). With time, you may have something like this (just an example):

Month 1

Week 1 CTR: 12%
Week 2 CTR: 12%
Week 3 CTR: 8%
Week 4 CTR: 4%

Month 2

Week 1 CTR: 11%
Week 2 CTR: 14%
Week 3 CTR: 7%
Week 4 CTR: 5%

This will tell you a median you can use to compare further months. You'll see first month's average CTR is 9% and second month is 9.25%. So 3rd month results will tell you if the rate is more or less static or if there's a trend. It will also tell you your users are being more cautious towards the end of the month, so you can plan for that as well.

Bottom line is: CTR is just a metric, at the end of the day, the only thing that matters is the end result. For example, with the same amount of traffic:

• 90% conversion rate on a $5 dollars product/service is way worse than 1% CR for a product/service that costs $100,000.
• 20% conversion rate on a $5 dollars (fixed) product/service is way worse than 15% on $5 dollars (recurring) product/service
• 20% conversion rate on a $5 dollars product/service with $4 expenses is way worse than 20% conversion rate on a $5 dollars product/service with $2 expenses
• If I offer $500 to every visitor that buys my $200 dollars service, I'll probably get close to 100% CR. How is CR important at all if I'm losing 150% for every sale?

and the list goes on and on and on

So again, it's all relative to the many metrics you'll have at hand

Answer 2

This question pops up from time to time, especially asked in the formats:

• "Our competitor's CVR is higher - we need to have that, too"
• ...and the one you are asking.

I recently read a very nice article on GrowthHackers.com, which gave an interesting, reasonable approach to this. The general problem is, that it is very hard to compare at all. And if we can not compare a CVR, the question is: Where to start? What is the first leveling?

So it apparently requires a different approach. The proposed solution was "Find out you company's 'magic number'. Summed up the magic number describes the threshold you have to overcome to have a profitable customer. Read more here: http://firstround.com/review/From-0-to-1B-Slacks-Founder-Shares-Their-Epic-Launch-Strategy/

With the example of SLACK, this number is "2000". A user has to write 2000 messages to have a chance of 93% to convert to a paying customer. So your first "CVR" can be: How big is the CVR of person that reached the magic number? Or you could also measure the success to decrease the magic number number, so lets say only 1500 message lines to have the same conversion rate to a paying customer.

You might have already guessed: This is not giving away a conversion rate. But that is not what it should do - it tells you what you CAN achieve, which should be the ultimate goal. "What is my service capable of?" as a measure instrument to see where you can be. This concept gives you the possibility to not compare yourself to the market, but compare to capability of your own service. This also introduces UX as a concept: You want to try to have an ever decreasing magic number, while this ultimately uplifts your CVR, or at least amount earned.

I know, it is not the ultimate answer to your question, but I personally feel it is very dangerous to start off the way you did. Why? Let's take Amazon services. The regular Amazon service has a conversion rate of ~13%, while Amazon prime is at ~74% (that number never stops to amaze). Maybe this visualizes the power of uniqueness of a single feature pretty well.

Anyhow, I think it is smart to set your own leveling, not to take over a foreign or a general one.