Strategy Centre

Patch your tyre before riding on

  
13 October 2014 10:48
  
Patch your tyre before riding on

An analogy that is often used for conversion rate optimisation is that of ‘fixing a leaking bucket’. The problem with a leaky bucket being that you need to keep adding more water (traffic) to keep it full.

In reality, what you should be doing is plugging those holes, then filling up with water, then letting some of that traffic swish around until it turns into customers.

I like this comparison, but on the IRP we have a great history of selling bikes, so I like to change the analogy a little to focus on cycling.

I love cycling and I love digital commerce. For me, the possibilities of both are limitless.

Unless you have a flat tyre, that is.

The flat tyre

Having an ecommerce site with less-than-optimal conversion really is very like having a bike with a slow puncture. We’ve all been there. You dig your bike out of the garage to take it for a spin. The tyre is a bit flat, flatter than it should be. You suspect a puncture but you don’t really have the time or energy to fix it. There is still a little air left inside, after all — maybe it’s just a while since you’ve been out?

So you pump it up and hope for the best. You don’t hear a hissing, so that’s a good start. It should hold out for a few hours at least. You stick the pump in the bag just in case and off you go to get some miles under your belt!

We’ve probably all done the same in ecommerce too. You suspect that your site is leaking potential customers, but you’re not quite sure where. It’ll take you a while to find out and you’ve got to hit your end-of-year targets. So in the end, you just pump in a bit more traffic until you get time to analyse things in detail later.

Yep, you guessed it, this is basically like riding on a flat tyre — in the long run it’s a lot slower, less efficient and the slick tyres you’ve just added and the extra training you’ve done won’t show their full value until you fix that puncture!

If you take a look at the IRP commerce equation it becomes immediately clear how important a fully functional inner tube is to the bottom line of digital commerce sales:

[Number of Visits] * [Conversion Rate%] * [Average Order Value/Customer Lifetime Value] = TOTAL SALES

[Air pressure] * [% of air retained in tube] * [Quality of tyres/Weight of bike/General fitness of rider] = TOTAL TIME

It’s an extremely simple, yet extremely effective formula for calculating your online sales/time to ride up a mountain. It also shows very clearly that if your tyre is flat, you’ll not be going anywhere.

A Tale of Two Websites

In this article I’d like to use the example of a couple of friends, Froome and Wiggins, to illustrate with figures just how important it is to repair that tube, sooner rather than later.

Wiggins’ Big Bike Tubes

Wiggins is Ecommerce Manager for newly-launched ecommerce site, BigBikeTubes.com. His boss has told him to launch the site, grow sales and keep to a target CPA of 5% (Ad Spend as a % of Total Sales).

You see, Wiggins’ boss is a clever chap. He’s worked out his margins and knows that no matter how much Wiggins spends on advertising his tubes, as long as he keeps this to 5% of total revenue, he’ll be turning a healthy profit. Sweet!

Ok, so now the scene is set, let’s see how Wiggins gets on in his new role.

Wiggins’ first month …

In month one, Wiggins’ traffic costs average out at £0.10 per visitor. His conversion rate is 2%. BigBikeTubes.com gets 1000 visitors and 20 sales with an AOV (average order value) of £100. He’s got £2000 sales for a £100 advertising spend. That’s a 5% CPA. Bingo!

Wiggins hasn’t optimised anything yet but he’s very happy. He’s generating sales and is hitting his target CPA. He knows he’s profitable and decides to buy more traffic.

Wiggins’ second month …

In month two, we’ll assume he manages to buy more traffic at the same price (lucky devil). For ease of calculation, let’s also assume his conversion rate does not drop and AOV stays the same.

In month two, Wiggins’ website gets 2000 visitors and 40 sales with an AOV of £100. This equals £4000 sales for a £200 advertising spend. 5% CPA. Excellent! Old Wiggins has lucked out and is delighted. His boss is also happy, so he tells Wiggins to keep buying more of that good value lucky traffic.

Wiggins’ third month …

In month three, his website gets 3000 visitors and 60 sales with an AOV of £100. Wiggins notices however that in getting that extra traffic his CPV has gone up, in turn driving his CPA up to 5.5%. He takes the decision to try to optimise his Ad campaigns and monitor costs closely.

Wiggins’ fourth month …

In month four he’s got more traffic again, but his costs have sneaked up further and his CPA has risen to 6%. He gets a ticking off from his boss so decides to ease off on the advertising to reduce costs and starts to look at how he can improve conversion.

We can see Wiggins’ progress in the table below:

Wiggins' progress spreadsheet showing conversion rate figures

Wiggins’ fifth and sixth month …

In months five and six he manages to get his conversion up but he’s had to temporarily reduce paid traffic and it takes him a while to build it up again. After six months he’s spent a total of £1,920, has generated £36,900 in sales and has 369 customers who are happy with their purchase and might buy again. His overall CPA is 5.18% so his boss is happy, if not delighted.

Wiggins hasn’t had a bad first six months, but has spent a lot of energy putting air back in his suspect tyre rather than pausing to think about the problem. Surely he could have stuck a patch on earlier to improve performance?

Froome’s Tubes

Let’s take a look at how Froome gets on with his website, FroomesTubes.com. Both sites are in the same industry and have similar costs and margins. As such, Froome’s boss has given him the same remit as Wiggins — launch the site, grow sales and keep to a target CPA of 5%.

Froome’s first month …

Froome’s first month in business is identical to Wiggins’ — £2000 of sales for a CPA of 5%. Pretty good! Froomy is happy, but he’s not satisfied. He’s been taking his new role as Ecommerce Manager very seriously and knows that the sooner he looks at his conversion rate the better.

Froome’s second month …

In month two he decides that he has enough traffic to experiment with, so just lets his advertising tick over while he gives himself a little time to make sure all is in order.

He doesn’t want to go too crazy so just focuses on the simple things:

  • He adds the glowing reviews he received in month one to the front page of his website.
  • He checks his product descriptions and images for any mistakes.
  • Whilst adding extra images for products so that they can be seen from all angles, he notices he can optimise his image file sizes and reduce page load time.
  • While inspecting the country demographics of his visitors, he also notices that in month one he had 20% traffic from France but only one sale. He decides to add special shipping messages and rules for French customers.
  • He also reworks his About Us page a little, adding that he’s won the ‘Tour de France’ and so if anyone should know about tubes, it’s him!
  • He also makes sure he restocks on all sizes of his most viewed products, having noticed a high bounce rate on product pages where he had limited choice.

All these actions only cost Froome a bit of his time and he’s really got to know his customers and his ecommerce platform better.

In month two, Froome’s website gets the same 1000 visitors as month one, but manages 23 sales with an AOV of £100. This equals £2300 sales for a £100 advertising spend. 4.35% CPA.

Froome’s third month …

In month three, he gets 2000 visitors and 50 sales with an AOV of £100. This equals £5000 sales for a £200 advertising spend. 4.0% CPA. You can see the detail of this and the following months below.

Froome's progress spreadsheet showing conversion rate figures

The fruits of Froome’s labour are gradually starting to show. Sure, he’s a little bit behind his mate Wiggins on sales after 3 months, but whereas Wiggins’ flat tyre is sapping up his energy, Froome is improving every month. The increased conversion really sets him free to put more resources into boosting site traffic, safe in the knowledge that his CPA can handle any increases in costs.

He’s also now got the buzz for conversion optimisation and keenly sets about doing weekly A/B tests on key areas of his site. It reminds him of the good old days on the tour, when he’d try hundreds of types of puncture repair kits before finding the one that had the nicest chalk and the stickiest patches.

Froome’s fourth to sixth month …

If we look at his final figures, Froome has managed to keep improving his conversion whilst he grows his traffic, and has therefore been able to absorb the increased costs that have come with it.

After six months Froome has spent £2370, has generated £49,100 in sales and has 491 customers that are happy with their purchase and might buy again. His overall CPA is 4.69%.

His boss is delighted. He’s generated 30% more sales than his buddy Wiggins and his CPA is slightly lower than budgeted. He’s still got room for manoeuvre to go and buy more traffic! That little bit of work in month two only became more and more profitable as the months went on for Froome.

His tyre may have been a bit leaky at the start, but he quickly patched it up and is now reaping the benefits, as opposed to just getting out his pump again. Congratulations Froome, you’re a champ!

The Moral of the Story

Of course the above is an overly-simple example, but I believe it’s a good one.

Obviously a good digital commerce team will be constantly optimising every part of the equation. Better managed paid marketing, social media or organic traffic streams will reduce your advertising costs. Product promotions, special offers and free shipping incentives can increase your average order value.

Conversion optimisation, however, not only gets you more immediate sales but more customers too, and the lifetime value that comes with them. Conversion is the glue that holds the equation together – or the glue that holds the patch on the tyre, so to speak.

If you send a million visitors to your site and have an average order value of £1000 but you only convert one visitor to a customer, you’ll make only £1000. No matter how much air you put in, or how light your bike is, if the glue in the middle is not there then the patch will not stick, and you’ll slowly grind to a halt.

In an ideal world you’d have the time to fix everything. Unfortunately, this is not always possible. So, if a choice needs to be made, make sure you take a few minutes to patch your tyre before pumping up again and riding on up the mountain.

P.S.

Check out the IRP Ecommerce Calculator used to create the above example figures.

Comments

You must be logged in to comment on this article.


Copyright © 2017 IRP Commerce. Use of this website constitutes acceptance of the IRP World Terms of Use, IRP Privacy Policy and IRP Cookie Policy
IRP Commerce is a Trading Name of Export Technologies Limited, a Deloitte Fast 50 Company five times: 2010, 2011, 2012, 2013 & 2014   Deloitte.