As Internet business owners, we are bombarded with advice on how to manage, market and grow our businesses. Because of the sheer volume of information, we are forced to weed through the “need to know” versus the “nice to know.” We realize that identifying the “need to know” is essential to achieving our goals.
Think about this…
Last month, you spent $2,000 on advertising to send 5,600 visitors to your website and it generated 26 sales. Did last month’s activity move you closer to your goals? You don’t know, right? Well you need to know.
Why? Because you have to decide whether to invest more or less money on the same advertising strategy
or to try out a new one next month.
And you have to decide if your current website strategy motivates your visitors to act or if you need to adjust your website’s sales copy, headlines, pricing and layout.
In other words, you have decisions to make BUT no information to guide you.
Performance metrics are measures that evaluate the performance of your advertising and website strategies.
Also called “key performance indicators”, performance metrics form a dashboard to gauge the effectiveness of your current advertising and website strategies. They identify the gap between where you are today and where your business goals require you to be tomorrow. 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 following three performance metrics are essential for all web businesses.
A. Conversion rate
B. Cost per Action
C. Value of a Buyer
If you concentrate on just these three, you will achieve your goals with confidence. Why? Because you cannot manage what you do not measure.
Conversion Rate: Your Performance Lever
Website conversion is a process of turning website visitors into prospects and customers. The most common website conversions, generically called “actions”, include:
Generating e-mail opt-ins
Producing product sales
Signing up subscriptions
These actions produce measurable outcomes. Ideally, the actions you want to measure are those most closely tied to the growth of your business; therefore product or service sales are the most common actions tracked.
The quality of your advertising strategies (e.g. Overture, Google AdWords, and Yahoo via natural search) and the efficiency of your website (e.g. sales copy, layout, and headlines) are measured by your conversion rate.
Your conversion rate evaluates: (1) the quality of the visitors attracted by your advertising strategies and (2) how satisfied your visitors are interacting with your website.
Your conversion rate is calculated as follows:
Completed Actions / Total Number of Visitors = Conversion Rate
It is important to use the same time range when gathering your completed actions and the total number of website visitors. For example, if last month 1,000 visitors visited your website and 10 purchased your product, your “sales” conversion rate is 1%. For every 100 visitors to your website, 1% of them are satisfied.
an make “informed and actionable” decisions. You manage a continual process of testing new advertising and website strategies, quickly determining their influence on your conversion rate and you either adjust them if your conversion rate drops or maximize them if it increases.
As author Jim Clemens states in his article, “Don’t Wait to See the Blood!”: "Improving…performance without constant feedback is like trying to pin the tail on the donkey when we're blindfolded; only through knowing where we are, can we change where we are going."
As a lever, increases to your conversion rate exponentially increase your revenue, profit, and ROI. Like precision instruments used by a high-performance car mechanic, your conversion rate enables you to rev-up your advertising and website “sales engine” to accelerate goal achievement.
Cost per Action: Effectiveness of Your Advertising Dollars
Your “cost per action” is the advertising cost you pay for one completed action. As with your conversion rate, an action may be generating an email opt-in, producing a product sale or downloading a white paper. For example, if last month you spent $1,000 on advertising to generate 2,000 visitors and 20 of them subscribed to your newsletter, your cost per action for a newsletter subscription is…
$1,000 ad cost / 20 subscriptions = $50.00 Cost per Action
Advertising Cost / Total Completed Actions = Cost per Action
Once again, it is important to use the same time range when gathering your advertising cost and your total completed actions.
Your cost per action shows how well your advertising and website strategies perform relative to your advertising investment. Ideally you want a low cost per action. This is achieved by either increasing your conversion rate (adjusting your website strategy) or reducing your advertising cost (adjusting your advertising strategy).
The importance of your cost per action magnifies when compared to your “Value of a Buyer.”
Value of a Buyer: Learn What You Earn
Your “value of a buyer” is the average gross profit you earn from a completed action. It evaluates the efficiency of your advertising and website strategies at turning visitors into profitable customers.
To calculate your Value of a Buyer, you’ll need some additional data including:
* Average Action Value: how much an action is worth to you (e.g. your sales price.) * Gross Profit: how much you make on a product or service sale excluding ad costs.
Average Action Value x Gross Profit as % of Sales = Value of a Buyer
For example, last month you spent $1,000 on advertising to generate 2,000 visitors to your Web site. Twenty visitors bought at an average of $100 per sale with a gross profit margin of 90%. Therefore, your value of a buyer was...
$100 average sales value multiplied by 90% gross profit = $90.00 Value of a Buyer
Thus, you generate $90 in gross profit for every customer through your website.
By comparing your Cost per Action to your Value of a Buyer you quickly gain an understanding of what strategies to maximize, adjust or drop to increase performance.
If your cost per action is less than your value of a buyer, you are making money and are able to increase your advertising budget or maximize your current website strategy. However, if cost per action is greater than your value of a buyer, you are losing money and need to reduce your advertising budget, find alternative advertising strategies or adjust your website strategy to increase your conversion rate.
Your Value of a Buyer is a benchmark for gauging whether to increase your advertising budget or “pause” it for necessary adjustments, before you sacrifice profitability on a poorly performing advertising or website strategy.
Knowing these three performance metrics reduces the fear associated with operating a Web business. They help quickly identify the most effective advertising and Web site strategies among the thousands available for your business. And by educating yourself, you become armed with “need-to-know” information that guides your strategic thinking, establishes an objective baseline for determining “more or less” and ensures you are heading in the right direction to goal achievement.
Author: Kevin Gold, Co-Founder - Enhanced Concepts
Kevin Gold is co-founder of Enhanced Concepts, Inc., a traffic generation and conversion enhancement strategy company that enables businesses to achieve positive financial results online. Kevin is also author of FroogleMaximizer™, the first Quick Start Guide to Google’s free product search engine.