Posing this question to myself last week, brought me to a number of nuggets that I wanted to write down for reference and share.
Conversion rate is a percentage of your audience that was successfully “sold” to your message and engaged into a purchase to the overall audience that viewed your communications. Conversions come in various shapes: sales, leads, sign-ups for newsletters, information requests, linking to your site or blog, views of a certain page, downloads of a specific media material or referrals. In other words, it could be any action that you want your target audience to do as a response to your communications.
Conversion tracking becomes a very “magical” tool when you want to test the efficiency of your ads, copy or keywords in your online marketing initiatives. As an example: you can have 2 versions of an ad with a rate of 1.3% CTR (click-through) and 1.7%. If you just rely on the CTR, you will keep using the second version with a higher rate. However, even though more people clicked on the second ad, how many did actually register a purchase? This is answered by the conversion rate that might prove the opposite regarding the effectiveness of your ad. Perhaps the “catchy” headline in the first ad was very effective, but call-to-action copy failed to deliver. By having the conversion rate metric you can use the call-to-action copy from the second ad. And test.
You still need CTR! To calculate the profits you make from your ads. That’s where CPC (cost per click) comes in. Thus, you can see how much you spend relative to what you gain. But again, we are only using 2 metrics and can miss on the information. As an example, you might have an ad or a keyword with a lowest CTR and low CPC, but it can convert very well. Here you need to add another dimension – the amount of traffic which you can measure as well. How valuable all the traffic that this ad brings to your site? This way you need to calculate the profit each ad brings. To do so you need to calculate the total number of conversions (number of clicks multiplied by the conversion rate and divided by 100) and the value of a conversion (which you can assign (example your sale is $50 and you keep $30 after subtracting all the costs and fees, thus $30 is your conversion value). The value of a conversion helps you understand how much this action is worth for your business. The profit per ad = (conversion value X total number of conversions(profits)) – costs).