Why revenue-oriented metrics are ultimate KPIs, and always need to be present when talking about conversion rate.

Introduction

I have been requested several times to create “dashboards” (mind the quotes) containing powerless metrics. Powerless because the client has not thought about the business question/s behind the dashboard in the right context, so data be easily misinterpreted.  

Context is so important. For example if I don’t know the impact of an improvement in the conversion rate (CR) in the revenue, then I cannot know if that’s good or bad news. In theory more CR leads to more revenue, but that’s not true necessarily. That´s why CR should go together with a revenue metric, that can be the revenue itself or at least something like average order value .

I think it was at Congreso Web, in Zaragoza where I heard from one the best analysts I know (Xavier Colomes) that he can “believe” any excuse we analysts claim to justify our lack of action. But there is an exception, he cannot believe that your boss does not want to make more money (more revenue). And I agree with him.

Why revenue is that important?

Because it can tell you whether the business (or business unit etc.) is improving over time or not. Any other metric is not that powerful. Specially CR. I have seen too many times the conversion rate going up and the revenue going down, and the other way around.

Revenue gives you the right context to analyse conversion rate.

Explanation is simple. If you sell i.e. theatre tickets, customers buy normally two tickets (couple) or let´s say four (group of friends). Always one transaction, but units and AOV (average orde value) are going to be twice bigger in the second option.

It also happens when you sell i.e. an offer for a cheap meal, that makes an improvement in transactions and CR of i.e. 10%, but in terms of AOV, or revenue could be just i.e. 2% if that´s product is way cheaper than your average. Still good, as any improvement, but the spike is not as good as we would think if we would only look at the CR.

This does not need to happen in every company. I don’t think anyone buys six pairs of boots in different colours at the same time. But units (number of product being sold) is a very important metric in some industries. 

The key idea is that focusing on just improving the conversion rate (without any context on the real impact in the business) is like focusing on improving just the bounce rate.

Why should we work to optimize the revenue and not the conversion rate?

Optimizing the conversion rate should be a means to an end, and not the end. A means to improve the revenue. Ask your CEO if in doubt 🙂

Some products (or categories, or packages etc.) may have a smaller conversion rates but generate more revenue. And we should identify them by segmenting our data, and then try to improve the conversion rate in these specific segments.

That´s why I think that when we create a dashboard or talk about CR, we should look at the evolution of the CR and its impact in the final goal of the company (that is, making money).

I am not a football fan, but will use it for a clear example.

What´s the ultimate “conversion” KPI in football?

Goals. Full stop.

What micro conversions lead to get more conversions or goals?
Let´s mention a few key football metrics: corner kicks, shots on target. ball possession, dangerous attacks, avg. kilometers per player etc.

 

 

 

Passes are very important, and as a KPI can be segmented

 

 

 

 

 

 

These metrics above may make us think that there wasn’t a big difference between both teams. Let´s take a look to goals, which is the ultimate “Key Football Metric”

Something to say? 🙂

Back to Analytics

I would have been grotesque (even more…:) that after the match, Brazil would have given some importance to the metric total shots, or claimed that their players runned more kilometres than in the previous match, so there’s a positive trend there…

Anyone cares if you have improved your “shots on target” rate if you lose 7 -1. And anyone cares about an improvement in <insert your fave metric here> if the revenue goes down. Specially the CR.

Data need context. And part of the context of a micro conversion is how the macro conversion is affected. Thus, part of the context for the i.e. customer retention metric is how the revenue is affected. Same thing, in a football match. Goals needs to be related with the metric dangerous attacks. Any other thing is pointless and may make us think that something is going well when actually it´s not (or the other way around).

We should care about the revenue and a few KPIs, like CR. But these KPIs need to be segmented and measured together with their impact on the revenue.

Two benefits of giving a special treatment to the revenue are:
– We can know very quickly if we are performing better or nor as a business
And then segment and look the other KPIs in order to understand why, and what groups of customers / products we should focus on
– We will catch & keep more easily the attention of the stakeholders
We are talking about what they care. The language of money is always understood.

Last thought

This same idea should apply when we focus of our analysis in a specific part of the funnel. We should look at the CR, or the next step to get the whole context.

It may happen that the Transition Rate (TR) from step A to step B is working better for a specific product, device etc. but the Conversion Rate (CR) is worst. Or the other way around. And that´s something we need to know.

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