A successful CRO program involves integrated costs and revenues. We have formulas for these figures, but they come disguised in three-letter words, like PPC, ROI, and AOV.
If this is your first project on conversion optimization, the formulas might seem a bit daunting. But, with time, you will get used to the basic math we are presenting in this chapter of our guide.
Let’s take baby-steps. We will start with the main formulas of CRO.
The basic conversion rate equation is:
Conversion Rate =
Total number of conversions / total number of visitors
In a month, if your site reaches a total of 100,000 visitors and registers a total of 10,000 orders, your conversion rate is = 10,000/100,000 = 10%
What is the number of visitors used in this formula?
When you look at your analytics program, the number that is used in the formula is the number of sessions. If a single visitor might come to the website twice, then we use these two sessions in our calculations.
Notice that ‘unique visitors’ is the metric we are going to use when calculating the conversion rate.
For an aggressive pay-per-click (PPC) advertising campaign, at a minimum, you should calculate the budget for the campaign, cost per click, and impact on profits.
Two elements control the success of paid online advertising campaigns:
- The cost associated with running the campaign
- The revenue generated by the campaign as determined by its conversion rate
When creating a campaign, you have to plan and budget for both costs associated and income generated. Several scenarios could affect campaign profitability, so you must always answer the following questions:
- What budget should you set for a paid advertising campaign?
- What is the average cost per click you should spend while remaining profitable?
- How will the conversion rate of the campaign impact profitability?
- What is the absolute minimum conversion rate for the campaign to generate a profit?
This chapter will help you in identifying:
- the amount you should spend per click
- the impact on profitability brought by a campaign
- the average order value
- the lifetime value of a customer
As an example, we will talk about the online campaign of company XYZ, which specializes in selling products at its brick-and-mortar store and nets $75 of profit for each unit sold.
The company decides to experiment with selling online. In planning the campaign, the marketing team makes the following assumptions:
- The team will drive 100,000 visitors to the landing page
- Estimated landing page conversion rate is 1%
The initial campaign numbers:
Number of orders = Number of visitors x Conversion rate
Number of orders = 100,000 x 1% = 1,000 orders
Gross Profit = 1,000 x $75 = $75,000
Cost of PPC campaign = ($15,000)
Net Profit = $60,000
Could XYZ spend more than $15,000 on its PPC campaign?
Yes! The marketing team projected a gross profit of $75,000. That means the company could conceivably spend all of that on driving visitors to the campaign.