eCommerce ROI: Why Usability ALWAYS Beats Advertising

eCommerce ROI: Why Usability ALWAYS Beats Advertising

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The Return On Investment for eCommerce Usability Will Always Beat Online Advertising, Because of the Principle of Amortized Improved Conversion

Useful Usability eCommerce ROI articleI 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.

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Or...
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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:

The ROI of a typical month of an eCommerce web site

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

The ROI of online advertising spend
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):

ROI of online advertising per year

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

The ROI of usability on an average month

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).

The ROI of usability per year

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

The ROI difference between online advertising and 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:

The ROI difference in number of sales between online advertising and usability

The ROI difference in cost per sale between online advertising and usability

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.

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13 COMMENTS

  1. Thanks for sharing. Great convincing data is rare. Hopfully allot of VP's and CEO's are reading you blog.

    Keep up the good work!

  2. Do you have any real world data to back this up? It looks like you are ignoring external factors. I think that most conversions may have other driving forces such as price and selection. Once your store hits a certain level of usability, additional investment would suffer diminishing returns. Once a store is “good enough”, it would be logical that generating more visibility through marketing would be the way to go.

  3. Hi Mike,

    Thanks for your comment. Yes, I do have real world data to back this up, so do most usability companies that provide improvements for their clients. However, I think you might have misunderstood my post.

    The point I’m making is usability improvements are permanent, and last for the lifetime of the web site.

    Online advertising is temporary. Your banner ad campaign will only generate results for a limited time. Once the campaign is complete, your traffic will go back down to a more “normal” level.

    As to conversion – unless your web site is converting traffic at 100% (and the best I’ve ever seen is about 20% conversion) then there’s definitely room for improvement and no such thing as “good enough.” Unless you like having 8 out of every 10 people abandon a shopping cart never to return.

    My point is – making usability changes to your eCommerce web site means additional incremental sales for the lifetime of your web site – and that’s bigger than big and a secret that really good eCommerce marketers understand and leverage.

    If you still don’t believe me, then feel free to sign up for my service – and I’ll provide you with a usability expert review, including recommendations for improvements that you can try out using A/B testing. If my usability improvements don’t increase your conversion – I’ll give you your money back! How’s that for real world data?

    :-)

  4. one last usability tip. Don’t forget to check whether “call to action” link at the end of article is working or not :p

    Many thanks for the informative article. Teaches me something.

  5. Ouch! And thank you for teaching me something. In moving my blog to WordPress I’ve done a bit of a bad job in updating my hard coded links. Now I know what I need to work on during down times!

    Thanks for the tip, and the nice comments!

  6. That’s a really convincing way to put it. Thanks for the article.

    Considering your first point, am I right in guessing that maybe many online advertising agencies have many clients who have totally unusable websites, no awareness of the importance of usability, and think advertising is the only way to increase sales and meet targets, and therefore use the advertising services on a regular basis. The question is would they educate those clients about the importance of usability testing? What if after a quick usability test, a regular client always with a nice budget and a horrible website, redesigns their website and is happy with the new monthly [targeted] sales and does not feel the need of advertising campaigns anymore? Could this be one of the reasons why advertising and usability services seem to be separated?

  7. Thanks for you comments!

    I’m not sure an advertising agency would feel concerned that advertising would cease due to a better site performance. Remember that Usability is only one part of the total Sales process:

    Here’s a common direct marketing way to refer to the sales process for a typical eCommerce web site, AIDA:

    Awareness – (Outside the web site, Advertising drives this)

    Interest – (Inside the web site, landing pages etc. mix of advertising & web copy)

    Desire – (Inside the web site, Persuasion via use of content with emotion, trust, etc.)

    Action – (Inside the web site, Usability of sales or sign-up tasks)

    As you can see, advertising has a crucial role to play in 2 and arguably 3 of the AIDA roles for direct marketing. There’s plenty of business for agencies even if a web site is improved with usability.

    My point is a smart agency would include usability services to “assist” much more of the sales process and truly help their client. This is done by generating awareness and interest as well as improving conversion at the Action (usability) level.

    Agencies would benefit by having an additional revenue stream, clients would win by having a higher conversion, and customers would have a better user experience in finding and purchasing the items they are interested in. It’s a Win, Win, Win!

  8. Also, add to this research (no, I didn’t save the URL re the report – someone here maybe can dig it up…) that shows that only 2% of potential customers make purchasing decisions based on advertising.

  9. Great article,

    You’re right :) Usability beats online advertising every time! It’s such a shame that so few users actually conduct on-page conversion optimization.

    Anyway, good job!

    Haukur

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