How much should you invest in conversion rate optimization (CRO)? Should you invest in it all? Will it be a big waste of money?
As biased as I am, the answer for me is not always “yes, you should invest in CRO!” The opportunity costs of a single test or an entire testing program and have to be taken into account, whether you’re optimizing a website or yourself.
So, before you hire an expensive CRO agency, here’s a back-of-the-envelope calculation you can do to project the upside/downside of your investment:
Step 1: Estimate your site’s current conversion rate.
If you’re using Google Analytics/Adobe and have conversions set up properly then it should be just a matter of pulling up a conversion report.1
Step 2: Estimate your site’s current annual revenue.
For an eCommerce site, then just look at the revenue numbers for the same time period that you used to find your conversion rate. In the interest of making a good guess of future revenue, use a time period that represents a typical time for your site, meaning that if your business is heavily seasonal and generates most of its revenue in December, make sure you include more than the December revenue numbers.
It’s better to use an entire year’s data as the sample. If your site generates revenue through leads instead of transactions, there is a little guesswork involved because you probably rely on multiple touch points to make a sale (web form, media campaign, phone call, etc.).
Try to figure out the amount of revenue in the past 12 months that was directly influenced by someone filling out a lead form on your site.2
Step 3: Estimate your possible conversion rate lift
This part is truly guesswork, but let’s assume that you’re working with someone who gets good results and that you have an average site: the design looks pretty good but nobody has spent serious time and energy on improving the conversion rate. In that scenario, the expected conversion lift from a dedicated CRO working for 3-6 months would be 20-75%.
Again, this is a guess, but based on my experience and from talking to others, that’s a normal range (although sometimes results are much much more impressive, but you don’t want to put too much probability into that outcome).
Step 4: The Calculation
OK, so let’s take an example and do the math.
Current conversion rate: 2.1%
Annual revenue (1/1/13 to 12/31/13): $300,000
A 20% lift in conversion rate would raise the conversion rate to 2.52% (2.1 x 1.2) and raise yearly revenue to $360,000.
A 75% lift in conversion rate would raise the conversion rate to 3.67% (2.1 x 1.75) and raise yearly revenue to $525,000.
NB: these calculations are rough because they assume that your traffic will stay the same. But that’s not necessarily a reason not to invest in CRO–an increase in conversion rate can also mitigate a drop in traffic by making the most of the fewer visitors you do receive.
Step 5: Subtract marginal costs and the costs of the CRO investment
Let’s work with higher end projection from the example above, an increase of yearly revenue that results in $525,000 in revenue per year. To review:
New revenue level: $525,000
Old revenue level: $300,000
Net increase: $225,000
Next, let’s factor in marginal costs. Revenue is great, but if you’re selling a product then there’s probably a cost associated with each additional unit you sell (even if your products just happen to be falling off the back of a truck you have to pay for *security*).
So let’s say that you sell a piece of furniture at $300 and each piece costs you $200 before you sell it. That’s $100 profit on each unit sold.
With this factored in, we have this:
Old Annual profit: $100,000
New, post-optimization annual profit: $120,000 to $175,000 (depending on how much lift you get from CRO).
Annual profit lift: $20,000 to $75,000.
Now you have a number you can work with! If you spend less than $20,000 on CRO, you have a very good chance of it paying off, with lots of upside built-in if the testing yields higher than a 20% lift. If you’re more optimistic (because you’re hiring a pro or because your site really sucks and has lots of room to grow), you can err on the side of the 75% lift and you have more room to play with.
You can take this back-of-the-envelope projection and use it to figure out your budget for CRO, whether you’re hiring a consultant, an agency, a new hire, or even if you’re considering doing it yourself and want to figure out if it’s worth it to spend many hours learning CRO yourself.