Good Behaviour

This is an article I wrote for issue 176 of .net magazine in the UK.

I used to be Head of Online Planning and Buying at a London based media buying agency. I was there for 3 years between 1999 and 2002. In my first year our nascent online media planning and buying department experienced a 1000% growth in billings and some growing pains. Of course overall spend was much lower then than it is now as online media was also in its infancy relatively speaking.

Then in 2001 things slowed dramatically. At the time, growth in online media had been fed by new internet start ups with lots of VC capital looking to advertise to help grow their businesses and drive inexorably towards IPO! Additionally it was driven by a growth in interest from mainstream advertisers looking to dip a toe in and check the temperature.

Advertising is often considered a bellwether of economic decline as it’s one of the first things to be cut from budgets as belts tighten and when the slow down came in 2001 billings pretty much flat lined in our corner of the online media world, but other channels fared worse.

Part of the reason why online advertising may have fared better is due to much greater levels of accountability compared with other forms of advertising. Now consider the level of accountability we have with web analytics.

Back then in the early “naughties” web analytics was barely a twinkle in a webmaster’s eye, now it is proudly sitting at the boardroom table.

Not only can web analytics bring even greater accountability to on and offline advertising (if set up correctly) but it also completely opens up the level of business accountability for the website itself. It can be used to drive growth and cut costs through improved efficiencies across the whole spectrum of online communication.

If we are truly staring down the barrel of worsening economic conditions, especially looking forward into 2009 then arguably the worst thing any organisation could do would be to cut its web analytics budget.

Back in January I was working with a client that operates in an industry that is itself suffering but the saving grace for this particular client was their new website which had proved a great success in the face of a generally poorer trading climate.

If economic conditions deteriorate web analytics and the insight that it provides should be safeguarded and pored over with even greater intensity in the same way that normal business reporting and results are.

Measuring conversion on an ecommerce site pretty much always involves establishing an overall site conversion rate. For most ecommerce sites this figure seems to hover around the 2% mark. Overall conversion rate seems like a hallowed metric – the one true “anchor metric” by which overall performance is measured. As a result there seems to be a slavishness regarding the site conversion figure. I think this can be misleading.

Firstly, to be clear, increasing the conversion rate is an excellent goal to aim for, but if it drops off it is worth considering two other performance metrics:

1. Total volume of sales
2. Cost per sale

What are overall sales doing? Are they increasing or decreasing?

Has there been a marked increase in marketing spend or spend in any other areas of acquisition?

Volume Vs conversion
As a rule, the more paid for (solicited) traffic driven to a site the greater the pressure the site is under to perform.

Demand generated traffic, by which I mean the likes of online display, tends to deliver visitors with lower levels of interest and a lower pre-disposition to take a desired action. It’s not surprising that this often has a negative impact on overall conversion. However, driving traffic to a site is crucial to growth for obvious reasons.

Affiliate marketing is a good case in point. Say an agreement is made between a client and an affiliate network (such as TradeDoubler or Commission Junction) with remuneration being established on a cost per sale basis, effectively the client’s acquisition (CPA) cost is fixed at a certain rate. The result is that the cost of driving the mix of volume and quality traffic is passed on to the affiliate network. The affiliate network’s strategy (to begin with) may be to drive a large volume of extremely low cost traffic, with the result that conversion goes down while sales volume is met and CPA is met.

Because the affiliate network is paid on every sale that is attributed to them they are incentivised to provide as many sales as possible at the lowest possible cost to them. There could also be an additional incentive if they reach a certain target volume in a given time period. In other words these combined conditions can give rise to a situation in which volume of sales increases while conversion rate falls.

I have seen instances reflecting this where conversion has taken a sudden dip while volume of sales remained steady; on further investigation it was traced to an increase in traffic which in turn was traced to one specific site in another country – a direct result of rogue affiliate action.

Cost per sale Vs conversion
In the case of an e-commerce site where the desired outcome is generally pretty simple by definition – sell something – all efforts can be said to contribute towards that one goal. Therefore all expenses incurred can be said to be as a result of pursuing that goal. It would be reasonable then to establish a cost per acquisition figure which should also act as a key performance indicator.

The issue becomes how to measure cost per acquisition and what to include in the cost of sales: advertising, site updates, internal labour costs, 3^rd party costs (professional services, systems etc), administration and so on.

The more included the higher the CPA. But, fixing the equation will at least allow the CPA to be used as a benchmark performance metric over time.

It seems to me that if sales are increasing and overall cost per acquisition is falling then performance can still be viewed positively despite a conversion rate which may also be suffering as a result.

By contrast, if the conversion rate is going up but sales are falling and cost per acquisition is increasing in part due to an expensive but highly targeted acquisition strategy which has a low yield then the increasing conversion rate can be misleading.

Doubtless this is all stating the obvious but it is done so in the aim for a more balanced perspective.