Quantifying Conversion Funnel Opportunities

In my last article, I discussed the practice of breaking the ecommerce conversion funnel down into four distinct transition points to help establish benchmarks and to locate and isolate the greatest opportunities for profitable improvement. Measuring these transition points is a valuable first step in the process. The next step, however, is where the dollars and cents really come into play.

Here’s a quick recap of the four funnel ratios we’re measuring:

  1. Overall Visits to Decision-Page Visits: The percentage of visits reaching a page with an offer description, pricing, and an add-to-cart option. As noted in my last article, this should be no less than 60 percent.
  2. Decision-Page Visits to Cart Visits: The percentage of decision-page visits taking the next step to the shopping cart. This percentage should be roughly 30 percent.
  3. Cart Visits to Checkout Starts: The percentage of shopping-cart visits taking the next step to start the checkout process. This percentage should be 60 percent, and anything less, typically, warrants a closer look.
  4. Checkout Starts to Completed Orders: The percentage of visits starting the checkout process that actually complete the order. This percentage should be 75 percent, and ratios less than 75 percent at this deepest part of the funnel should prompt a focused diagnostic effort.

Once these four conversion funnel transition points are measured, the gaps between current performance and expected benchmarks at each transition point can be quantified — effectively turning the percentage differences into revenue- and profit-value estimates.

By quantifying the performance gaps at each stage, the value of making improvements becomes clearer and much more compelling. Let’s face it, percentages aren’t very motivating, but hard dollars can inspire massive action! Quantifying performance gaps also helps with prioritization and budgeting — ensuring a focus on the most significant opportunities and maintaining appropriate investment levels for improvement efforts.

The Quantification Process

Quantifying performance gaps is a relatively simple process, but it does require some math. And it also requires some additional information about your typical order sizes and margins. To illustrate the process, I’ll use an example case from my client files.

First, we nail down baseline performance and calculate the magnitude of the performance gaps relative to expected benchmarks.

From here, it’s much clearer where this company’s greatest opportunities for profitable improvement are located. In two areas—decision-page visits and checkout-start visits — the current ratios exceed the benchmarks. At the same time, shopping-cart visits and completed orders are currently performing well-under the benchmarks. In this case, it would be a better use of resources to shore up the poor-performing areas, rather than attempt to squeeze even more out of the areas that are already performing pretty well.

But just looking at the percentages can be misleading because the largest numbers don’t always represent biggest opportunities in terms of revenues and profit.

To estimate the revenue and profit impacts of improving performance to benchmark levels, we use the firm’s typical order sizes and margins to quantify the negative gaps while holding the other funnel ratios constant. In the shopping-cart visits area, for example, we estimate the incremental value of the performance gap by recalculating the overall funnel, substituting the 13 percent gap for the 17 percent current shopping-cart ratio.

To estimate incremental revenue in the shopping-cart area, the formula would look like this:

32,500 x 68% x 13% x 64% x 48% x $114 = $100,615

Similarly, to estimate incremental revenue in the completed-order area, the formula would look like this:

32,500 x 68% x 17% x 64% x 27% x $114 = $74,010

We now have a better estimate of the value these performance gaps represent in terms of dollars. Isn’t $100,615 a much more motivating figure than 13 percent? You bet it is. And if we really want to get excited, just remember that these numbers are weekly—we can annualize our estimates by multiplying by 52 for some eye-popping impacts.

Understanding the Quantification Results

For Company “X”, focusing their limited resources on improving their decision-pages and checkout process are clearly highly-profitable activities. Of course, the task of diagnosing the specific problems and identifying root-causes in each area still remains. But this further diagnostic process is a whole lot easier when focused on specific areas.

Should the firm tackle both areas at once or individually? It depends on the firm’s available resources and ambitions. But I usually recommend making improvements in more than one area at a time. Why? A conversion funnel is an inter-connected system where improvement impacts combine and compound as they move through the rest of the funnel. In this way, improvements in multiple areas can produce compound impacts far greater than the sum of their parts.

By focusing on specific areas, does that imply that there’s no room for improvement in the other areas? Certainly not — even where benchmarks are being surpassed, there is always room for improvement. It’s just that in my experience, it’s much more difficult to improve something that’s already performing very well. I’ve found that it’s usually far easier and more efficient to identify and implement big-bang optimizations in areas with significant performance gaps.

It’s important to remember that this quantification process produces estimates. There are a number of variables that aren’t accounted for in this simplified model — differences in order sizes and margins, changes in other funnel ratios, and variable transaction costs, to name a few. Of course, you can choose to account for some of these elements when creating a quantification model specific to your situation.

PEC Staff
PEC Staff
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