If you ask a typical business owner what his or her budget is for conversion rate optimization, you’re likely to get a blank stare. People who run companies know how much they should be spending on office space, personnel, supplies, and even advertising. But when it comes to the murky waters of online marketing, particularly conversion rate optimization, it’s not quite so easy to set budgets.
The million-dollar-question is “How much is conversion rate optimization worth to my specific company?” Because it’s going to be different for you than it is for your friend who owns a coffee shop, or your CPA with his accounting firm, or your professional staffing company’s business.
Effective Calculations Start With One Ultra-valuable Metric: Customer Lifetime Value
To begin calculating how much you should be spending on conversion rate optimization, you need to know a very important metric: Customer Lifetime Value. And to calculate this metric, you need to determine two things: how much your average sale is, and how long your average customer stays with you.
Step 1: Calculate Average Sale
Let’s say you sell three different packages of monthly services (to keep things simple for illustration purposes). The first package is $300, the second package is $500, and the third package is $800. Suppose you’re currently invoicing 10 packages at $300/month, 40 packages at $500/month, and 20 packages at $800/month. And let’s say for simplicity’s sake that you’re not affected by seasonal swings – so the percentages in relation to one another stay steady. You’re bringing in a total of $39,000/month, divided up amongst 70 clients. That gives you an average sale of $557.14.
Step 2: Determine How Long Your Average Customer Stays With You
Next, you need to figure out how long your average customer stays with you. This is easily done in a spreadsheet. Simply create a chart of each company who has ever been a client (past and present), and how many years each stayed with you. Now, simply take the total number of years all clients stayed/have stayed with you and divide that by the number of clients.
Step 3: Multiply Average Sale x Average Length of Time Each Customer Stays
Multiplying the value of your average sale times the average length of time a customer stays with you will give you your Customer Lifetime Value calculation. (Note: This is a simple version of this calculation. If your business has a significant difference in profit margin between different packages or a significant difference in how long customers stay depending on what package they’re purchasing, you will want to take those factors into consideration and calculate each package/client-stay-length separately before getting an average.)
Step 4: Determine What Percent of Your Revenue is Profit.
Now that you know your Customer Lifetime Value, you can determine how much you should be spending on CRO. Add up all your monthly expenses and, if you have them, COGS. Subtract that number from your total monthly revenue to get your monthly profit number, and then divide that profit number by your revenue to get a percentage.
Step 5: Determine the Profit Margin of Your CLV.
Now take your profit percentage and multiply that by your Customer Lifetime Value to determine the profit you’re making for each customer over each one’s lifetime.
Step 6: Calculate What a 10% Lift in Conversion Rate Would Do for You.
A 10% lift is an extremely conservative estimate for a good CRO campaign. Good CRO campaigns regularly lift conversions 50%-300%, or even higher. But let’s play it safe. How many customers per month are you converting now, before a CRO campaign? Take that number and multiply it by your Customer Lifetime Value Profit number. This is how much profit you are making long-term from the number of customers you are converting each month. Now take that amount and multiply it by 10%. This is how much minimum extra profit you can be pretty sure you’ll make per month from your CRO campaign. You now know the maximum amount you can spend per month on CRO before hitting the point where there is not ROI. (At some point, you’ll be able to significantly reduce your monthly spend anyway, because you will have completed the initial optimization and will only have a few things left that you can do to continue increasing your conversion rate higher and higher.)
Your CRO budget doesn’t have to be a wild guess. You should know how much you can spend, and you should be tracking your ROI on your CRO campaign to know just how much you’ve improved your bottom line.