June 10, 2007

Do Online Conversion Rates Differ By Business Model?

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Each year, Internet Retailer publishes their Top 500 websites, in terms of annual net sales.

If one is willing to take the time to have information transcribed into digital format, there are interesting tidbits to consider, including information about conversion rates and business models.

In this case, I took the top three hundred sites, and analyzed various performance metrics by the type of business model employed by the brand.

In other words, Crutchfield would be viewed as a cataloger, due to their catalog heritage, whereas Talbots would be viewed as a Retail Chain, due to their retail heritage. Blue Nile would be a web-only business. Sony would be a Consumer Brand Manufacturer. Internet Retailer made these determinations.

Of the three hundred sites, I adjusted the top ten and bottom ten outliers for each metric. For instance, if the top ten conversion rates were 20%, 18%, 17%, 16%, 15%, 15%, 15%, 14%, 14% and 14%, then I adjusted all ten outliers to 14%.

Now for today's tidbit. An analysis of conversion rates by business model indicates that Catalogers have the highest website conversion rate at 4.89%, followed by Web-Only businesses at 3.92%, Retail Chains at 3.05% and Consumer Brand Manufacturers at 2.99%.

Catalogers have natural advantages. They bring in traffic via catalog marketing and online marketing. Retail Chains have disadvantages online, in that websites are used for research that results in an online purchase. Consumer Brand Manufacturers have distinct disadvantages, in that conversion may actually happen at a Cataloger, Web-Only Business or Retail Chain.

For catalogers, the news is encouraging. With postage and paper costs impeding the catalog marketing channel, this provides hope. Undoubtedly, catalog marketing will evolve as the cost structure makes traditional catalog marketing difficult. Catalogers will evolve their online experience further away from "order taking", moving closer to the experience provided by Web-Only businesses. The economics of catalog marketing will dictate this.

For retailers, the news is encouraging. The data may indicate that the retail channel gobbles up between thirty and sixty percent of possible orders. Online marketers within retail businesses have an opportunity to analyze "incremental" profit and loss statements, those that account for the sales that are truly driven by the website. Ultimately, appropriate cross-channel analysis should result in a bigger marketing budget for online marketers in retail organizations.

3 comments:

  1. Anonymous5:47 PM

    Hi Kevin --

    Site conversion rates are a function of several factors: site effectiveness, offer (pricing, merch, etc) effectiveness, and traffic quality.

    We've worked with (smaller) clients who had suspiciously HIGH conversion -- say, almost 10%.

    The issue?

    These catalogers with abnormally high conversion weren't doing enough (any?) web advertising -- the web site was basically a catalog quickorder device. Hence the site response rate was an "impressive" 9% or 10%.

    In such a scenario, a 10% site conversion rate is a sign of sickness, not of health.

    Conversely, if a site had a typical 1% or 2% conversion rate for PPC, but had an amazing SEO and natural traffic program (say they were able to get dugg regularly, whatever), the site conversion could be driven down from the "true" 2% to a "low" observed 0.5% site conversion.

    Thus, paradoxically, a conversion of 10% could be sign of sickness, and a 0.5% conversion rate could be a sign of vibrant health.

    Ratios like response rate and conversion need to be analyzed in context -- their absolute level could arise in several different situations.

    Cheers --

    Alan


    http://www.rkgblog.com

    ReplyDelete
  2. Alan, you're comments are correct.

    I tried to account for this bias by only looking at the top 300 websites.

    I did run a series of regression models against the data, and the models clearly indicate that as the percentage of traffic from search increases, conversion rate decreases, validating your hypothesis.

    ReplyDelete
  3. Alan --- last point, the models also looked at other factors.

    As skus increase, conversion increased, but at an ever-decreasing rate.

    As average order size increases, conversion decreases (i.e. big ticket items drive down conversion rate).

    Homepage density (which I'll get to later this week) plays a role --- conversion rate increases as more merchandise is offered on the homepage --- however, homepage density drove down AOS.

    For sites with relatively equal sales, significant increases in traffic are associated with lower conversion rates (i.e. traffic quality).

    Sites with very loyal buyers (monthly unique verses total visitors) actually had lower conversion rates.

    After controlling for those (and other) factors, catalogers had conversion rates that were at least one point higher than any other site.

    ReplyDelete

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