If you haven’t already, please take a look at the above forum thread. It’s a great one about conversion rates.

I know that the author of the thread wanted to know specifically about conversion rates. Still, let’s start with that thread and use it to get to the big picture for a moment.

The bottom line metric in any direct marketing (web-based or offline) is cost per order. If you spend $1,000 in marketing and get 10 orders, your cost per order is $100. It costs you that amount to get one paying customer.

If you are selling a product with a gross margin that exceeds $100, you have made money with your marketing campaign. If you are selling a product with a gross margin below $100, you are losing money on your marketing campaign.

Some people use cost per lifetime-customer-value, which can justify losing money on the first order to gain a loyal customer over time. For instance, you might pay $100 for a customer who buys a $50 product, in the expectation that they will buy at least 2 more $50 products so that you end up ahead of the game.

However, the most profitable companies I know never fall for this trap. They roll out products and services where they make money on the first order. That’s not to say the lifetime-customer-value approach is a poor one, but it is second best. (And this goes against convention wisdom. But I can give you an example of a private company that earns $500 million in revenue a year, and the owner takes home $75-100 million annually! They follow the cost per order strategy religiously).

So what leads to a low cost per order? First, a targeted list/marketing strategy. Second, a great offer that attracts people to the site (low cost per click/visitor) and then a great navigation scheme/offer that drives them to buy (conversion rate).

So start with cost per order, and work backwards from there….

  • crazed_canuck

    This sounds a lot like the IKEA philosophy of setting the price of a ‘coffee table’ AND THEN designing a ‘coffee table’ based on that selling price.

  • roffie

    In that respect, let’s hope that the strategy works better here than in the coffee table business. Wouldn’t want to need a toolkit filled with additional screws, pins plugs and drilling machines to get an e-commerce website up and running… :-)

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