Imagine a new restaurant that has customers lined up around the block to get in. But after they sit down and read the menu, 19 in 20 get up and walk out without so much as ordering an appetizer. No traditional business could survive such a disaster. On the Internet, however, shoppers do this all the time – it’s more the rule than the exception. But while website operators find it frustrating to deal with hoards of tire kickers, the Internet is so new that it’s not clear what the low ratio of buyers to visitors really means, says
Imagine a new restaurant that has customers lined up around the block to get in. But after they sit down and read the menu, 19 in 20 get up and walk out without so much as ordering an appetizer. No traditional business could survive such a disaster.
On the Internet, however, shoppers do this all the time – it’s more the rule than the exception. But while website operators find it frustrating to deal with hoards of tire kickers, the Internet is so new that it’s not clear what the low ratio of buyers to visitors really means, saysPeter Fader, a professor of marketing at Wharton.
“Browsers-to-buyers is what it’s often called,” he said in a recent interview. The more formal term is “conversion”, a statistic derived by dividing the number of people who take a desired action on the site by the number who visit it. If 100 people click onto the site in a given period and five buy a product, ask for more information, register, subscribe, or act in some other desirable way, the conversion rate is 5%. In fact, conversion rates of 2% to 5% are fairly typical today; 10% or higher is considered remarkable.
To explore the significance of conversion, and to look at ways conversion rates might be raised, Fader has organized a day-long event in Philadelphia on May 30, From Browsers to Buyers: Online Conversion Workshop. The attendees range from academics to website executives, and the speakers include Ron Farmer, senior director of McKinsey & Company, the consulting company; Farhad Mohit, chairman of Bizrate.com, the online shopping site; and Jerry Shereshewsky, vice president of direct marketing for Yahoo, the Internet portal and John Jongbae Bu, co-chief executive officer of Goldman Sachs Ventures, the financial-services investment firm.
Conversion is gradually becoming one of the most important statistics, or metrics, for gauging website performance, offering more valuable information than statistics that were emphasized in the early years of the Internet, such as page views, Fader notes.
“It used to be, ‘If we build it, they will come,’” he says, describing the philosophies of early site designers. “Sure enough, they came and they looked around and they left and they didn’t come back.”
With the collapse of so many dot-coms in the past year, more attention is being paid now to how a site will contribute to a company’s bottom line, he says. “Conversion really is the natural step as you go from traffic to purchasing,” Fader points out. “It’s the thing that links them together.”
Customers may abandon websites for many reasons aside from deciding they don’t want the products or services they find there. A site may be aesthetically displeasing or confusing to use. Taking action may require too many steps, or the site may ask intrusive personal questions. There may be technical glitches, such as pages that load too slowly.
Any obstacle can quickly shake a customer’s resolve. Jumping to a competitor’s website is much easier than driving to another department store.
The best example of a successful site is Amazon.com, where the conversion rate is a stunning 15%, Fader says. “That’s remarkable when you take into account how many people use Amazon as just their card catalogue,” he notes. “It means they’re doing something right.”
But just what makes Amazon work so well is not entirely clear. The site does seem to be visually appealing and easy to navigate, and Amazon has a very quick one-click purchasing process. But the study of conversion is in such an early stage that there are no firm rules about what works and what doesn’t.
Nonetheless, many people who study the Internet are convinced that the successful companies of the future will be those that have a clear understanding of what drives conversion rates. In a March 6, 2000 column in Fortune magazine, Internet analyst William Gurley described conversion as “the most powerful Internet metric of all.”
If a site spent $10,000 to attract 5,000 visitors and had a 2% conversion rate, it would have 100 transactions at a cost of $100 each, he observed. With a 4% conversion rate, the transaction cost would fall by half, to $50. “As the conversion rate goes up, not only does revenue rise, but marketing costs as a percentage of sales fall, representing true leverage,” he argued.
It’s easy to understand why conversion rates are of vital concern to both struggling dot-coms and large established companies that have launched Internet operations that they hope will pay for themselves in time. With the insight gained from conversion data, a company might learn that an apparently effective advertising campaign is really a failure: It may draw large numbers of visitors, but too many don’t make purchases.
Gurley points out that conversion rates vary for different kinds of customers. Returning customers typically have higher conversion rates than first-time visitors, and conversion rates tend to go up in the holiday season, when customers are eager to buy.
Some data also indicate older sites have better conversion rates. That may be because people visit several times before buying – or because sites survive long enough to be considered “older” only if they solve the conversion-rate problem.
Slicing the conversion data can reveal how the site appeals to the most valuable customers. “Small gains on low conversion rates can have unbelievably powerful effects on a company’s performance,” Gurley wrote. What’s more, focusing on conversion rates will help improve all elements of a company’s business, including performance, convenience, customer service, advertising effectiveness and word of mouth advertising as a percentage of sales.”
Nonetheless, according to Fader, a site that spends millions to achieve a small improvement in its conversion rate may be wasting money. Often the key to driving conversion rates higher may lie in implementing relatively inexpensive but creative ideas.
For example, a recent article in Business 2.0 wrote about Ice.com, an online jewelry retailer, which used an innovative approach to increase its online sales. The company sent out two sets of e-mail messages to potential customers. In the first, readers of the e-mail message had to click through to Ice.com’s website in order to complete the transaction. In the second, however, customers could complete the transaction in a few clicks within the e-mail message itself. Much to the surprise of Ice.com executives, they found that conversion rates among the second group were five times as high as the first.
Such issues will discussed at length at next week’s conference. During the workshop, attendees will break into small groups during a morning session to compile lists of questions related to conversion. Industry experts and Wharton faculty members will lead the breakout groups. Early in the afternoon, a group of academics and other researchers will discuss the current understanding of conversion. Attendees will again break into groups to discuss and sum up the points raised during the day, and to identify areas in which more research is needed.
“We want to agree on what the language and the issues are,” Fader says. To accompany the workshop, Fader is setting up a website to serve as a continuing source for conversion-related research, opinion and data. “In many ways we are just beginning the conversation,” he adds.
Interested in conversion issues? For information about or to register for the “From Browsers to Buyers” Workshop on May 30 in Philadelphia, click here.