Conversion marketing in E-commerce

For managers to assess and improve the effectiveness of their customer relationship manage­ment implementation, evaluation using the conversion marketing concept is useful. In an online context, this assesses how effective marketing communications are in converting:

• Web browsers or offline audiences to site visitors;
• Site visitors to engaged site visitors who stay on the site and progress beyond the home page;
• Engaged site visitors to prospects (who are profiled for their characteristics and needs);
• Prospects into customers;
• Customers into repeat customers.

We referenced a high-level model based on this approach which can be used for planning purposes in Figure 5.14. This shows the acquisition part of the process and gives an indication of how the different channels can support each other. At each conversion step, some visitors will switch from one channel to the other, dependent on customers’ preferences and market­ing messages which encourage customers to switch to other channels for the next conversion step. The dilemma for marketers is that the online channels are cheapest to service, but tend to have a lower conversion rate than traditional channels because of the human element. It follows that it is important to offer phone, live chat or e-mail contact in online channels to help convert customers who need further information or persuading to purchase.

Varianini and Vaturi (2000) suggest that many e-commerce failures have resulted from low conversion as a result of poorly targeted media spending. They suggest the communications mix should be optimized to minimize the cost of acquisition of customers. It can also be sug­gested that optimization of the conversion to action on-site is important to the success of marketing. Conversion to customer acquisition will be low if the site design, quality of service and marketing communications are not effective in converting visitors to prospects or buyers.

Agrawal et al. (2001) have developed a scorecard, assessed using a longitudinal study analysing hundreds of e-commerce sites in the USA and Europe. The scorecard is based on the performance drivers or critical success factors for e-commerce such as the costs for acquisition and retention, conversion rates of visitors to buyers to repeat buyers, together with churn rates. Note that to maximize retention and minimize churn, service-quality- based drivers need to be evaluated.

There are three main parts to this scorecard:

1. Size of visitor’s base, visitor acquisition cost and visitor advertising revenue (e.g. media sites).
2. Customer base, customer acquisition costs, customer conversion rate, number of transactions per customer, revenue per transaction, revenue per customer, customer gross income, customer maintenance cost, customer operating income, customer churn rate, customer operating income before marketing spending.
3. This uses similar measures to those for conversion customers.

The survey performed byAgrawal etal. (2001) shows that:

companies were successful at luring visitors to their sites, but not at getting these visitors to buy or at turning occasional buyers into frequent ones.

Agrawal et al. (2001) performed a further analysis where they modelled the theoretical change in net present value contributed by an e-commerce site in response to a 10 per cent change in these performance drivers. This shows the relative importance of these drivers, or ‘levers’ as they refer to them:

Attraction

• Visitor acquisition cost: 0.74% change in net present value (NPV)
• Visitor growth: 3.09% change in NPV.

Conversion

• Customer conversion rate: 0.84% change in NPV
• Revenue per customer: 2.32% change in NPV.

Retention

• Cost of repeat customer: 0.69% change in NPV
• Revenue per repeat customer: 5.78% change in NPV
• Repeat customer churn rate: 6.65% change in NPV
• Repeat customer conversion rate: 9.49% change in NPV.

This modelling highlights the importance of on-site marketing communications and the quality of service delivery in converting browsers to buyers and buyers into repeat buyers. It also highlights the need to balance investment between customer acquisition and retention. Many start-up companies invest primarily in customer acquisition. For failed dot-com retailers such as LetsBuyit.com this was a strategic error since customer retention through repeat purchases is vital to the success of the online service. For existing companies, there is a decision whether to focus expenditure on customer acquisition or customer retention or to use a balanced approach.

Source: Dave Chaffey (2010), E-Business and E-Commerce Management: Strategy, Implementation and Practice, Prentice Hall (4th Edition).