The One Metric That Smart Investors Are Obsessed with. And You Should Be Too.

By Arun Sivashankaran

conversion, cro

I recently came across an insanely great article by Bill Gurley of Benchmark Capital – Conversion: The Most Important Internet Metric of All. In it he asserts that when considering the tradeoff between customer acquisition and customer optimization, the latter should be the obsession of startup and high-growth Internet firms seeking a competitive advantage. An obsession with conversion rate can bring tremendous economic advantage, and in his words:

improving conversion, even a little bit, can produce insane economic leverage for your business.

Another very successful entrepeneur and investor that I highly respect once told me that if I should show conversion metrics demonstrably improving over time. Do that, he said, and investors would be beating a path to our door, checkbooks in hand.

That’s an enviable position to be in, but the last thing that entrepeneurs want to do is drum up artificial numbers for the monthly board meeting to placate investors. If you’re running an online business, the Conversion Rate should be an obsession of yours as well, and here’s why.


I so need to FOCUS a bit more on the simple things in life~EXPLORED

Stop Deluding Yourself

Entrepreneurial passion is a vital and necessary ingredient for any new venture to emerge and thrive. There is however a critical point where a firm needs to embrace data, and specificallydata-driven decision making. I’ve talked about some of the tactics of Conversion Optimizationhere before, but the reality is that it starts with adopting the right mindset. One of the most challenging aspects of being an entrepreneur is holding onto that passion and vision while at the same time making decisions based on evidence and data. The data will tell you if you’re able to successfully articulate that same passion to your customer and compel them to act. If you can’t measurably do that there’s no point in proceeding until you can – it’s an exercise in frustraton waiting to happen.

The Role of Art

There are creative aspects to everything we do online. At the end of the day we’re creating something that doesn’t exist. Art is fluid and subject to intepretation. It’s Don Draper whisking the cover off of his latest inspiration and basking in the client’s adoration. It’s tempting to think that it’s going to work that way for what we create, and customers are going to flock to it as soon as it’s released.

Data is unyielding, unforgiving, and often harsh. And too often there’s a false tension between the creative types and the data nerds. But the best companies are able to harmonize their creative efforts with their analytics to show real, tangible benefits to the business. At the end of the day, if the design changes don’t improve the conversion rate, what’s the point? You’re better off expending that money and effort somewhere else that has a positive ROI.

Valuable Metrics

Enough with the soapbox – why focus so much on conversion rate? What about other metrics that we could measure? In their tremendous book Lean Analytics, Alistair Croll & Benjamin Yoskovits discuss good metrics as being:

  • Comparative – Often comparing one time period vs another
  • Understandable
  • Often a ratio or a rate - Exposing an inherent tension between numbers
  • Actionable - The driven in data-driven

The various conversion rates across your funnel meet all of these requirements.

Google Analytics is great for many things, but in my (and many others’) opinion it has unfortunately elevated the set of so-called vanity metrics. Examples of these include number of visits, pageviews, and signups. They are probably only going to go “up and to the right” (unless you’re really doing something wrong), and feeling good about watching them do so is another act of self-delusion.

Validated Learning

It’s been said that the only remaining competitive advantage remaining for businesses is knowledge of and engagement with customers, which is why the CMO’s IT spend is expected to outpace the CIO by the end of the decade. The amount of information now available to the organization about their customers is unprecendented, and between two competitors the firm with a higher conversion rate has a combination of better knowledge about their customers and ability to execute on that knowledge.

Showing Long Term Improvement

A/B and multivariate testing are the discrete tactics to improve conversion opportunities. These work incrementally, but have a profound cumulative impact over time. It’s probably the highest ROI activity that can be taken by an online business with sufficient traffic. But the right user analytics can objectively demonstrate that all of these changes are positively affecting the business over time.

The Cohort Report

Simply put, a cohort report compares similar groups (generally users) over time. Taking the example of a Software as a Service (SaaS) business, it’s not sufficient to just look at a rates from month one and compare them to rates from months two, three and four. The users in month one will have had a much different experience (due to the changes that you’ve made) to the users from months two and three. The cohort report breaks these users into buckets (time based in this example) which show how the users who performed some activity (e.g. visited the site) converted over time vs users who visited the site in subsequent months.

Cohort Report Example

In this example the rate being displayed is the conversion rate from visiting the site to sign up. The users are grouped into ‘buckets’ based on the month that they visited the site (along the Y axis). Along the X axis, the conversion rate is counted for the month that the users converted following their visit. So in our example for the January visitors 10% converted in the first month, vs 22% for the May visitors. Here you can see that users are converting faster and in greater numbers over time.

Cohort analyses like these (and more sophisticated variants that segment across different dimensions) give you insight as to the cumulative effective of your changes. They allow you to understand if the ongoing changes that you’re making have a positive long term impact. Generating cohort reports can be challenging even if you are collecting the data – I’ve found thatKISSMetrics does an excellent job with them.

So a focus on analytics, and an obsesson with and ability to act observed conversion rates can be the crucial differentiator for a business. If you have any examples of how you’ve made better decisions with data or recommendations on tools and techniques that you use let us know in the comments.

Improve your Conversion Rates with FunnelEnvy

From research & analysis to test and campaign development our optimization engineers will get your conversions headed in the right direction.

Learn About Our Services