The Return On Investment for eCommerce Usability Will Always Beat Online Advertising, Because of the Principle of Amortized Improved Conversion
I don’t understand why online advertising agencies don’t add usability to their service offerings. Armed with a usability component, agencies could help improve the Return On Investment (ROI) for eCommerce companies well beyond any improvement gained by conducting online advertising. Why? Because of what I call the “Principle of Amortized Improved Conversion.”
Here’s how it works:
Let’s assume that you are a business owner and you have $10,000 you want to spend to help increase sales on your eCommerce web site. You can choose to spend the $10,000 for online advertising, which will generate incremental leads and sales. Or, you can choose to spend it on a usability improvement project on your eCommerce order form, which will increase conversion and sales.
Given this choice, which would you do?
If you’re smart, and I know you are because you’re reading this, you’ll pick usability – because you know an equal amount of money spent on usability will always beat the same amount of money spent on online advertising, given a long enough period of time.
This is because the one-time spend, and subsequent one-time incremental lift in leads and sales generated by online advertising is temporary. Turn on the advertising, you increase leads, turn off the advertising, and the number of leads go back down to their prior (normal) state.
With usability, the one-time spend in improving online form conversion creates a permanent increase in conversion. This means the cost of the usability improvement can be amortized over a very long period, which decreases the total cost per sale.
Here’s the proof, we’ll look at how online advertising, and usability, impact the sales and cost per sale of a web site over a one year period of time (but first, a few assumptions):ASSUMPTIONS:
1. This eCommerce web site generates 2,000 leads per month naturally, with no advertising expense.
2. The conversion rate of leads into sales for this site is a nice 10%.
3. We’ll ignore “lights-on” costs associated with the sales on the website, it’s a cost of doing business and will not be included in the Cost Per Lead and Cost Per Sale metrics here.
Here’s what a typical month looks like for your pretend company:
You generate 2,000 leads per month through natural (not paid advertising) methods. Your 10% conversion in your online order form results in 200 sales per month. Well done.
The ROI of Online Advertising
In this scenario, you’ve spent $10,000 to conduct an online advertising campaign for one month. The good news is you’ve hired an excellent agency that provides an amazing campaign, and with your $10,000 you’ve generated 4,000 extra leads. That’s a total of 6,000 leads instead of the normal 2,000 for that month. That’s 3 TIMES (that’s 300% for you math wonks) the normal monthly flow of leads to your site. Very well done!
This provides you with an advertising Cost Per Lead of $2.50 (your $10,000 advertising cost divided by your incremental advertising-generated 4,000 leads).
With your site’s 10% conversion those 6,000 leads become 600 sales instead of the normal 200 sales. Your advertising-generated Cost Per Sale for that month is $25.00 (your $10,000 advertising cost divided by your incremental advertising-generated 400 sales).
Now let’s look at how this impacts your year (you may have to click on the graphic to see the full-size image if your eyes – like mine – are over the age of 40):
Now, let’s mash-up all the monthly metrics into a final yearly total. For the year, you had a total of:
- 28,000 total leads
- $10,000 in online advertising cost
- $0.36 total Cost Per Lead
- 10% conversion
- 2,800 total sales
- $3.57 total cost per sale
The ROI of Usability
With this scenario, we start with the same assumptions. However, in this case you’ve chosen to spend the $10,000 on usability improvements of your eCommerce order form.
The good news is the usability work that took place over the first month resulted in a modest improvement on your site’s order form, resulting in a modest increase in conversion. Your conversion was 10%, but after the new user-friendly order form is launched in the 2nd month your conversion went up to 15%. This 15% conversion is permanent, and continues for as long as the order form (or web site) is active.
This is significant, it means that each and every month you’ll now be adding more sales, but with the same free leads, you were receiving prior to the usability improvements.
Here’s what the yearly total looks like (put your reading glasses on, or just click the graphic to see it larger).
Now, let’s once again mash-up all the monthly metrics into a final yearly total. For the year, you had a total of:
- 24,000 total leads
- $10,000 in usability cost
- $0.00 total Cost Per Lead
- 14.6% conversion
- 3,500 total sales
- $2.86 total cost per sale
The Difference Between Online Advertising & Usability
So here’s what the difference looks like when we compare online advertising vs usability.
The usability improvement to the eCommerce order form resulted in an INCREASE of 25% more sales for the year, and a DECREASE of almost 20% in Cost Per Sale vs the Online Advertising scenario.
If we were to extend this into 2 or 3 years, the differences would become truly staggering, with that one-time usability improvement impressively beating the one-time advertising spend.
For those of you who are visual learners, here’s what these yearly differences look like in graph form:
Conclusion – eCommerce Usability ALWAYS beats Online Advertising in generating more sales, and a reduced cost per sale
I’ve actually been quite conservative with the above scenarios. The reality is I’ve very seldom seen an online advertising campaign generate 3 times the normal number of leads, and I’ve rarely seen usability improvements only increase eCommerce order flows by a paltry 5 percentage point lift.
In reality, usability beats the tar out of online advertising much better than I’ve indicated above.
As was demonstrated in the case above, over time, spending money on eCommerce usability improvements provides a much better return on investment for any business that wants to increase their web site sales, while at the same time decreasing the total cost per sale.
That’s the “Principle of Amortized Improved Conversion” in action.
Smart online advertising and web development agencies will add usability testing to their service offerings.
Smart eCommerce business owners will invest in usability improvements to permanently improve their sales and cost per sale, and thus their ROI of their web sites.
If you’d like more information about adding usability to an agency service offering, or conducting a usability optimization to improve eCommerce just contact me for usability testing information and I’ll be glad to explain how easy it is to get started.