A Key Metric Every Web Designer/Developer Needs to TrackBy Andrew Neitlich
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….