Why CRO should (probably) be a priority

Before diving into the heart of this article, two facts have to be acknowledged:

• We ourselves are a CRO agency
• We’re trying to make the case that CRO should be a priority

Given the obvious vested interests here, you’ll be forgiven for being a little skeptical.

To overcome some of that skepticism, here’s a promise:

We promise to keep this piece rhetoric-free and to stick strictly to the facts.

And here’s the first fact we’d like to present:

Businesses that run a/b tests – who engage in some form of CRO – grow faster.

Researchers at Harvard Business School tracked the stock price growth of businesses running experiments (a/b tests) vs. all other stocks in the S&P 500.

Of course, correlation isn’t causation, but nonetheless – these researchers found that organizations that invest heavily in experimentation grow faster.

A lot faster.

This post is our attempt to explain why this is the case.

To do this, we’ll be focussing in on five main advantages that CRO offers:

1. Reduces CACs, increases revenues
2. Supercharges all other marketing channels
3. Improves profit
4. Cost savings
5. Unfair competitive advantage

1. Reduces CACs, increases revenues

We frequently speak to businesses that are spending millions of dollars each year on PPC, but little or nothing on CRO.

In most cases, this is a big mistake.

To see why, we’re first going to offer up an analogy, before digging into some hard (and quite shocking) numbers:

Take a look at the image below:

Your website is like a funnel and your traffic is like a liquid that you’re pouring into it. Your goal as a business is to get as much of that liquid through your funnel – as much of that traffic through your website – as possible.

If your funnel is riddled with holes – if your website is poorly optimized – then very little of that liquid is going to make it through the entire funnel.

If your funnel is hole-free – if your website is well optimized – then all of it will.

By allocating a small percentage of your PPC budget to CRO, you ensure that the holes in your funnel are plugged and that every penny of your PPC spend goes further.

To see how this might work in practice, let’s crunch some (slightly simplified) numbers:

Let’s say that you have

• an ad spend of $2m, which at a cost of $2 per click buys you 1m visitors to your site
• a conversion rate of 5%
• an average order value (AOV) of $100

(Feel free to plug your own numbers into this scenario!)

This means that the revenue you generate will be:

Traffic x conversion rate x AOV = 1,000,000 x 5% x $100 = $5,000,000

Now let’s imagine you move 10% ($200k) of your ad spend into CRO, and that over the course of a year you’re able to increase your conversion rate by 50% (this may sound ambitious, but when it comes to unoptimized sites, there are often lots of easy wins at the outset, so this is actually quite a reasonable estimate).

This means your new numbers are

• An ad spend of $1.8m ($2m minus the $200k you’re now spending on CRO). At a cost of $2 per click, this buys you 900,000 website visitors;
• A conversion rate of 7.5% (50% higher than in the original example);
• An average order value of $100.

Returning to the same equation, then:

Traffic x conversion rate x AOV = 900,000 x 7.5% x $100 = $6,750,000

In this scenario, your revenue would go up by $1.75m!

This is an entirely realistic scenario, but let’s imagine we were only able to increase your conversion rate by 20%. Plugging these numbers back into the formula above, this would still yield a $400k increase in revenue – and the relative increase in profit would be even greater.

To see how this kind of conversion rate increase affects your CACs, take a look at the equations below:

CAC = marketing spend /no. Of customers = marketing spend /(traffic x conversion rate)

• Scenario 1: CAC = $2m /(1,000,000 x 5% )= $40
• Scenario 2: CAC = $1.8m/(900,000 x 7.5%) = $26.67

So, in this scenario, CACs have decreased by 33%!

These numbers may seem too good to be true – but they’re not at all.

Many of our clients achieve results like this, which is why we – and they – are so bullish on CRO..

2. Supercharges all other marketing channels

From the example above, we’ve shown how outsized an impact CRO can have on your revenue and CACs – but here’s another very important point to be aware of:

Many business leaders think of CRO as a marketing channel, but there’s a key difference between CRO and channels like PPC or SEO or Email Marketing:

Put simply, CRO makes all other channels more effective.

To see why, consider once again the idea of a funnel:

All other channels have to pass through your website – your funnel – in order to achieve a sale. If your funnel is faulty – if your website is poorly optimized – then ROI on all channels goes down.

But here’s the good part:

By investing in CRO, not only will you improve your CACs and ROI from your PPC spend – you’ll improve the ROI of all other channels.

SEO, organic social, WOM – everything will become more effective.

Your conversion rate is the number that all traffic sources are multiplied by to give your total website revenue. The more optimized your website, the larger the multiple you’re working with.

3. Profit is more sensitive to CR than revenue

Here’s one of the coolest – and most compelling – things to know about CRO:

Your profit is more sensitive to your conversion rate than your revenue is.

This means that if you can move your conversion rate upwards, your profit will increase disproportionately.

To see why, let’s return to the example from the first section. Here, by increasing the conversion rate by 50%, we were able to increase revenue from $5m to $6.75m, i.e. an increase of 35%. (Again, feel free to plug your own numbers into the equations we share here).

To work out the impact on profit, we need to rely on an equation that you’re probably already familiar with:

Profit = revenue – (fixed costs + marketing spend + variable costs)

(note: this equation usually includes marketing spend as part of the variable costs, but since marketing spend stays the same in both scenarios, it makes sense to split it out here).

By increasing the conversion rate by 50%, we’ve increased revenue by 35% while keeping fixed costs and marketing spend constant. Variable costs scale in proportion to sales, so they also go up in line with revenue, i.e. by 35%.

Given that variable costs are the only costs that rise (while fixed and marketing costs stay fixed) this means that total costs (i.e. fixed + variable costs) increase by significantly less than 35%.

And if revenue increases by 35% while total costs increase by less than 35%, then profit will increase by more than 35%. Sometimes by a lot more.

In fact, if fixed costs make up a large proportion of your total costs, you’ll find that profits rise significantly more quickly (as % increase) than revenue.

This is all quite abstract and speculative, so to help illustrate this point, we’ve added in a bar chart below:

4. Cost savings

In addition to the more glamorous advantages of CRO presented above, there’s another extremely important advantage of CRO that few people talk about:

Its ability to save costs.

Based on standard industry win-rates, we know that something in the region of 70-90% of a/b tests fail. This means that potentially 9 out of every 10 changes you make to your website could be negatively impacting your conversion rate.

Without empirically testing website changes, you never know which ones are driving your conversion rate up – and which are doing the reverse. Untested website changes could well be costing you a fortune each year.

To give two particularly striking examples from our own work:

• One of our clients, a global leader in fast food, wanted to implement a vertical scroll carousel on their online store. This was viewed internally as something of a no-brainer, but after some back and forth, we persuaded the client to test this changeb before pushing it live globally. This apparently minor change significantly reduced orders and would have cost our client something in the region of $85m each year.
• Whirlpool, a global leader in home appliances, was thinking about offering a 90 day money back guarantee. On the surface, this seemed like a sensible decision: many of their competitors were offering 90 day money back guarantees; to stay competitive, they should do the same. We tested this and found that the money back guarantee actually reduced orders. Had we not tested this idea, our client would have incurred the costs associated with the money back guarantee – plus they would have seen their order rate decrease!

As a general point, CRO offers a powerful means of empirically evaluating ideas before they are developed and pushed live.

If those ideas are validated by the data, you can forge ahead in full confidence that they are going to succeed.

And if they’re not, you can abandon them before they cost you $85 million each year!

Final thoughts: CRO as an unfair competitive advantage

As we’ve hopefully demonstrated here, when done well CRO is one of the most effective ways to reduce customer acquisition costs. This is important when it comes to increasing revenue and improving profit margins, but it also offers another massive advantage:

The lower your CACs, the more you can afford to pay per click for website visitors. If you can outbid your competitors on paid traffic, you can drive potential customers away from their websites and onto yours.

This kind of advantage can help you steadily increase your market share and help pave the way for long-term growth.

Unfortunately, this point has a double edge:

If your competitors are investing heavily in CRO and you are not, then they are creating an unfair advantage against you. They will be able to pay more per click, divert traffic away from your website, and – ultimately – steal your customers.

If you want to pull ahead of your competitors – and if you want to stop them pulling ahead of you – it is our firm conviction, based on all of the arguments presented above, that CRO offers one of the most reliable ways of doing so.