Advertising or conversion optimization? Do the math before you answer.
5 min read
Opinions expressed by Entrepreneur contributors are their own.
We’re all familiar with the concept of trade-offs. In your personal life, you have to determine whether you’ll take a big vacation this year or if you’ll replace your old car instead. Should you accept that higher paying job that requires a lot of business travel, or stay with the current one that allows you to spend more time with your family? Resources like time and money are limited, so you have to make decisions about how to maximize them.
Those trade-offs exist in business too, of course. Should you hire a new salesperson to bring in new business or a new software engineer to build new features to meet existing customer expectations? What about deciding how to allocate your marketing budget?
Marketers spend money on online advertising to increase awareness of their brands or products and to drive traffic to their websites as part of their new business acquisition strategy. Conversion rate optimization (CRO), in contrast, is all about delivering a better experience to visitors once they arrive on your site so they ultimately convert. CRO can encompass a lot of different activities such as A/B testing, experience design, personalization, content and product recommendations and more.
Businesses are tasked with balancing investment in these acquisition and conversion activities. Do you add more money to the top of the funnel to bring in more prospects, or do you spend more money to convert more of the prospects you already have? It’s a classic marketing debate.
How would you manage the trade-offs? If you were given an extra $ 50K to spend on marketing next year, where would you spend it?
The math of the budget trade-off.
Before you make your decision, you’ll want to do a little math. Let me take you through a simple version of that math.
Let’s assume that your monthly traffic is around 50,000 visitors a month. At a conversion rate of 2 percent — which is pretty common for many industries — you would convert 1,000 of those monthly visitors. And if your average conversion value is $ 100 — either the average order value for an ecommerce business or the value of a lead captured for a B2B business — that translates into $ 100,000 in value per month. With your additional $ 50K, you want to grow that value as much as you can.
Adding to your advertising budget.
If you decide to add $ 50K to your advertising budget, you could generate 50 million additional impressions, based on an average CPM of $ 1. If your clickthrough rate from advertising is .05 percent, you’ll bring 25,000 more visitors to your site. Nice job! But with a conversion rate of 2 percent, you’ve only gained 500 new conversions — or $ 50,000 in incremental business or incremental lead value.
That incremental $ 50K is the same as the $ 50K you spent to acquire those new conversions. Is that worth it? Of course not.
Adding to your conversion optimization budget.
However, if you put that $ 50K toward improving conversions, and you grow your conversion rate from 2 percent to, say, 2.2 percent, you’ll convert more of your original 50,000 monthly visitors without adding traffic. Each month, you’ll convert 1,100 people, or 100 more than you would have been able to convert at your lower conversion rate — representing an incremental value of $ 10,000 per month. Over the course of one year, this conversion rate improvement will result in an additional $ 120,000. That’s a much better ROI on your $ 50K investment!
The acquisition vs. conversion decision.
Many smart marketers don’t think twice before increasing their advertising budgets, even though the math doesn’t always warrant it. Why do they do this?
It could be that looking at the budget in terms of percentage increases and decreases is misleading. If you’re already spending $ 500K on advertising, increasing it to $ 550K next year doesn’t seem like a lot, because that’s only a 10% increase. But spending that same $ 50K on a conversion optimization solution that wasn’t in the budget last year seems like a significant investment.
Marketers are also always aware of the need to grow awareness and drive traffic. They fear that if they ever turned off the flow of people coming to the website, they would lose all of their conversions. And, of course, you always want to drive traffic to your website, whether that’s through advertising, email, social media, search engine optimization or any other acquisition approach. So I would never argue that you should cut all acquisition program spend.
But as you plan your marketing budgets for next year, do some quick math, and check your assumptions. Don’t just incrementally increase your ad spend because it’s easy to pay your agency more or put more money into Google AdWords.
Instead, give more thought to what the ROI of your ad spend is. In many cases, that investment truly is worth it. But in other cases, it isn’t. Ask yourself if that money may be better spent providing a better experience on your site to convert more of your existing traffic. It may ultimately take more planning to spend that money appropriately than simply increasing your ad budget. But the math says it will be worth it in the end.