The wrong KPI that many directors are using

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Last month I had two different clients call me to say their board of directors were deeply concerned about the drop in conversion rate on their website.

Both times I had to explain that, although the overall conversion rate had indeed dropped, the directors were incorrect in their conclusion that something was wrong. They were actually misunderstanding the figures – and more importantly, were focused on the wrong figure.

It wasn’t their fault.  Few directors have been trained in understanding digital marketing analytics, and what figures they should be comparing.

The truth was, if we fixed the “problem” that the directors were concerned about, it would actually hurt the company’s sales.

The role of a board of directors is governance. As such, they need to review overall high-level figures that give them a sense of whether the company is heading in the right direction. Their job is not to get into the nitty-gritty detail that day-to-day managers need to take care of. Instead, their reports should be high level, but with enough detail for them to either be confident things are working well, or be able to raise concerns in areas where things appear to be going off track.

In both cases, the board of directors were doing their job – they were looking at some overall KPIs and were raising genuine concerns where the KPI showed a decline in its performance.

The problem was, however, that the KPI they had chosen was not the right one to be using.

In both situations, the KPI figure shown to the board was the overall website conversion rate, with month on month comparisons. As a first impression, that sounds like a robust KPI, but it can actually lead to bad decisions.

It was true that both websites had seen a sharp decline in the overall website conversion rate – which is what raised alarm bells. However, sales had increased.

One of the two clients has an ecommerce store, so we’re able to measure their exact sales through analytics. Their sales from our digital ad campaigns had just achieved their best month ever.  Yet their conversion rate was down.

The other client is a leads-focused business, because sales happen offline.  Their leads had showed very strong growth.  In the month the directors were concerned about, their leads were 140 percent more than just four months earlier – so leads had more than doubled. Yet their overall website conversion rate was now half of what it was those four months prior. How can that be?

The short answer was that we had increased the amount of display ads (image ads) that were being run for these clients.

Display ads are different from Google search ads, because if you search for something on Google you are shown text-based search ads that match what you were searching for.  Whereas display ads are image ads that sit alongside articles or other content on websites. Display ads appear on news sites, blog sites, TradeMe and millions of other sites online.

The downside of display ads is that traffic from these ads have a much lower conversion rate than other forms of traffic.

But the upside of display ads is that this traffic is very cheap, they put your company in front of your target market which builds awareness, and you get leads and sales from them. While a much smaller percentage will buy or enquire straight away, other users will return later and convert.

When we increased the amount of display traffic coming to the websites it had a direct result of decreasing the overall conversion rate.  However, it also helped increase the number of sales/leads from the sites, for the same amount of money spent.

If we had followed the directors’ concerns and tried to fix the overall conversion rate, it would have been easy – just turn off display advertising. However, this would have decreased the total amount of sales/leads they were getting from their advertising spend each month.

So, if the overall conversion rate is not the right KPI, what figures should directors look at?

Firstly, for ecommerce sites, I recommend directors ask for the Return On Ad Spend (ROAS) figure. This is the total cost of ads divided by the total revenue generated from those ads. For example, if you spent $1000 on digital ads and this generated $5100 in ecommerce revenue, your ROAS is 5.1. The higher the number the better the return.

Alternatively, for lead-focused businesses the best KPI would be the Cost Per Acquisition (CPA) – which is the total ad spend divided by the number of leads.  If you spent $1000 on ads and received 20 leads you have a CPA of $50 per lead.

These are excellent top-level figures directors can compare month to month.

The above figures only show the performance of online advertising, so it is still helpful to include a KPI that will show the overall website performance across all traffic sources.

To do this, I recommend directors look at a filtered overall conversion rate. This is simply the overall conversion rate but with display ads traffic filtered out. This will give directors a reliable conversion rate figure that can be compared month-to-month.

If directors, CEOs or managers look at the wrong figures, it can lead to making bad decisions that can hurt company growth. But by choosing the right KPIs, good decisions can be made that can result in long-term success.

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Josh Moore

Josh Moore is the managing director at digital marketing agency, Duoplus. www.duoplus.nz