Why is CRO usually the most powerful marketing investment you can make? Because when you 2X conversion rate, you don’t increase variable costs, and thus all that additional revenue flows to your profits! – Or so says Rand Fisken from SEO MOz:
Sourced from: http://www.conversion-rate-experts.com/power-law/
Introducing “The Power Law of CRO”—and why it means CRO is the most important activity for your business
Many companies start doing conversion rate optimization (CRO) without realizing its true potential. In this article, you will discover the three benefits of CRO that can drive your company into an economic “virtuous circle” of growth.
Benefit 1: The obvious one—CRO gets you more customers, free
The obvious reason to improve your conversion rate is that you want more customers without having to spend a penny more on advertising.
Your revenue is equal to…
- your visitors multiplied by…
- your conversion rate (the percentage of your visitors that turn into customers) multiplied by…
- the lifetime customer spend (the amount that each of them spends with you):
So if you double your conversion rate, you double your revenue. (Whenever we say “double” in this article, it’s to make the examples easy to understand. But, as you’ll see, even a small increase can result in one heck of an office party. We highly recommend you carry out the calculations for your own business. They can be eye-opening.)
But CRO has other, even better benefits…
Benefit 2: Your profit is even more sensitive to your conversion rate than your revenue is
Your profit is your revenue minus all your costs:
Profit = Revenue − Costs
When you double your conversion rate, all your costs don’t double:
- Your variable costs do double (by definition). This includes all costs that scale in proportion to the number of units sold, including the cost of goods sold, the costs of direct labor, distribution, and customer support.
- But your ad costs remain the same.
- And your fixed costs stay the same (by definition).
As a result, your profit increases disproportionately. Sometimes profoundly.The following diagram shows how a doubling of conversion rate can cause the profit to multiply by four times:
The effect can be even greater. For some companies, a small increase in conversion rate can mean the difference between suffering a loss and making a profit.
Benefit 3 (an even more exciting one): CRO opens up floods of traffic
Once your conversion rate has increased, you’re more profitable. It pays to sacrifice some of that profit into increasing your advertising bid prices—which can dramatically increase your number of customers. You can outbid your competitors and profitably dominate all the advertising space in your market.
Many of our clients find that CRO unlocks marketing opportunities that were previously prohibitively expensive, allowing them to get loads of new customers.
For startups and small-to-medium sized businesses, CRO is often the catalyst that enables them to start advertising, profitably, in PPC, magazines, newspapers, direct mail, radio, and TV. Clients also become able to pay affiliates more—which wins the affiliates over from their competitors. The principle even applies to SEO: if a company will generate twice as much revenue from the number-one spot, it can afford to spend twice as much to capture it.
This principle is so extreme that many advertising agencies pay us to work on their clients’ websites, because they understand that CRO allows their clients to profitably increase their ad spends. With the right combination of CRO and traffic buying, you can displace competitors for good.
Benefit 1 × Benefit 2 × Benefit 3 = The Power Law of CRO
Here’s the best bit: Benefits 1, 2 and 3 are multiplicative. Which means your profit has a power-law relationship to your conversion rate. (That is, your profit is equal to your conversion rate to the power of something—maybe squared, cubed, or even more.)
Looking at the equations from above, you can see why:
Of course, the multipliers depend on the financials of the business. You can see how your own profits would be affected by an increase in conversion rate by modeling different scenarios in a spreadsheet.
Incredibly, that’s not the end of it. As the number of orders grows, economies of scale kick in. These further increase the amount you can afford to spend on getting more customers.
CRO is a virtuous circle. The world’s leading web companies all focus on it—on user experience, conversion flows, network effects, and customer journeys.
Without doing CRO, it’s impossible to win.