How Much Should You Spend On Optimization? Calculate Your BUU
Analytics platforms. Split testing software. User testing tools. This is starting to sound expensive. And it is. What if it were more expensive not to have these things in your online business? It might very well be. Your business may be one of the many that is hobbled by a “launch and hope” approach to […]
Analytics platforms. Split testing software. User testing tools.
This is starting to sound expensive. And it is.
What if it were more expensive not to have these things in your online business? It might very well be.
Your business may be one of the many that is hobbled by a “launch and hope” approach to digital marketing. Not every business will benefit from such tools, but yours may.
How much will you benefit? How much does it make sense to spend?
This is an exercise in budgeting for website optimization. We will show you how to calculate a Basic Upside Unit (BUU) and how to use it to calculate your website optimization budgeting process.
These calculations apply to e-commerce sites as well as B2B lead generation websites.
Know Your Numbers
There are three magic numbers you can use to calculate your website optimization budget:
- Revenue from the website
- Number of visits
- Average Order Value or Average Lead Value
You can calculate these on a yearly basis to average out natural seasonal changes in sales. You may want to take these numbers from your last three months to account for current trends, up or down.
For the most conservative estimate, choose months from your slow season.
The budget we’re developing here is an estimate, a calculation of the order of magnitude. Take numbers from last month for your back-of-the-napkin analysis.
Revenue For The Long Sales Cycle
If your business has to work long and hard for sales after generating an online lead, fear not. The key is to not get wrapped around the axel on attribution. A little info from your CRM can give you a good estimate.
- Number of new customers in the last 12 months
- Number of new web customers over the past 12 months
- Number of web leads in the last 12 months
- Revenue over the past 12 months and where the purchase originated (web or brick-and-mortar)
Your Web Revenue can be estimated by New Revenue x (New Web Customers/Total New Customers). New Revenue is new from the web, as opposed to recurring revenue from past purchases.
Your Average Lead Value can be estimated by Web Revenue / Web Leads.
There are some obvious flaws with this calculation. It assumes leads for the last year turned into revenue for that year. That’s not true for long-sales-cycle businesses.
It also assumes that web leads close at the same rate as leads from other sources. That’s not usually true, either. We’ll note these discrepancies and move on. You can do that when you’re doing back-of-the-napkin calculations.
Number Of Transactions
To calculate your conversion rate, we’ll estimate the number of online transactions your site generates.
Online transactions = Web Revenue / Average Order Value
Online leads = Web Revenue / Average Lead Value
If you have actual data for the period, compare the number of transactions to reality. If they are not in the same ballpark, your Revenue number or your Average Order Value should be adjusted. Don’t just plug in the real number for transactions.
For most businesses, conversion rate is a course measure of online success. It assumes that your average order value doesn’t change, and that the quality of your traffic doesn’t change. For budgeting purposes, it’s an interesting data point, though.
Conversion Rate (CR) = Transactions / Traffic
A more interesting number is the Revenue per Visit, or RPV.
Revenue Per Visit
Revenue per visit takes into account the average order value and quality of traffic. It tells you for any period of time the value of a visitor to your site. You probably know the cost of a visitor in terms of ad spend. Now, we’ll calculate the upside of your traffic.
RPV = Revenue / Traffic
Don’t be discouraged if this number seems small. However, if your costper-click is close to the RPV, then you’re advertising may be losing money.
Optimization Is About Small Changes
For most businesses, website optimization will deliver small changes on a month-to-month basis. The point of this budget exercise is to see the impact of small changes on your bottom line revenue over time.
For example, if you increase your revenue-per-visit by just 7% a month, you will have doubled it in just one year. That could equate to a doubling of your online revenue next year.
Small changes in RPV deliver like compounding interest.
Your Basic Unit Of Upside
So, what if you increased your conversion rate this year by a small amount? What if you added just 0.1 to your conversion rate? What would the impact be over the following year?
We define the Basic Unit of Upside as the yearly revenue generated by adding 0.1 to your conversion rate. It is a way to calculate the ROI of website optimization in a way that makes it easy to play “what if” without a spreadsheet.
For low conversion rates, the BUU is higher. For a 1% conversion rate, a BUU delivers a 10% increase in revenue. For a 2% conversion rate, adding 0.1 delivers a 5% increase in revenue. The higher the conversion rate, the lower the BUU. This provides a conservative estimate of upside for businesses that enjoy higher conversion rates. This is best for our back-of-the-napkin estimates.
If you’re using a month’s worth of data, the BUU is (0.1 / CR) x Monthly Web Revenue x 12 months.
This is your basic unit of upside, or BUU. If you have predictable profit margins, your basic unit of upside profit (BUUP) is your BUU times your average profit margin.
For lead generating businesses:
BUU = (0.1 / CR) x Annual Web Revenue
I’ll show you an example below.
Now that you know your BUU, you can start asking questions about the effect of different levels of website optimization.
How many BUUs can you generate over 12 months?
Can one or two BUUs cover the cost of your website optimization tools?
What if you went all in and doubled your revenue per visit? That’s a 100% increase, or 10 BUUs. How much additional annual revenue would 10 BUUs mean to your business?
Here are three examples of different kinds of businesses.
Lower Conversion Rates
A company gets 20,000 visits per month with an average-order-value of $2,000. The monthly web revenue is $200,000.
Annual Revenue = $200,000 revenue x 12 months = $2,400,000
Monthly Transactions = $200,000 revenue / $2,000 average order value = 100 transactions
Conversion Rate = 100 transactions / 20,000 visits = 0.5%
Revenue per Visit = $200,000 revenue / 20,000 visits = $10 per visit
BUU = (0.1/0.5 conversion rate) x $2,400,000 revenue = $480,000
Assuming the profit margin on each sale is 20%, we can calculate the Basic Unit of Upside Profit.
BUUP = $480,000 BUU x 20% profit margin = $96,000
A conversion rate below 1% indicates that there is significant room to grow. However, the low number of conversions means split testing will be a challenge. If we can bring the conversion rate up to .8% from 0.5%, three BUUs equaling $1,440,000 in additional yearly revenue.
Three BUUPs means $288,000 in yearly profit. Thus, if we wanted to get our money back in one year, we wouldn’t want to spend more than $288,000 on website optimization. That leaves room for a pretty good website optimization budget.
Higher Conversion Rates
A company gets 150,000 visits per month with an average order value of $55. The monthly Web revenue is $275,000.
Annual revenue should be $275,000 x 12 month = $3,300,000.
Monthly transactions = $275,000 revenue / $55 AOV = 5,000 transactions
Conversion Rate = 5,000 transactions / 150,000 visits = 3.3%
Revenue per Visit (RPV) = $275,000 revenue / 150,000 visits = $1.83 per visit
BUU = (0.1/3.3 CR) x $3,300,000 revenue = $100,000 per year
Assuming a 15% profit margin:
BUUP = $100,000 BUU x 15% = $15,000
One BUUP of $15,000 isn’t much of an upside, and doesn’t provide much of a budget. Their conversion rate of 3.3% is higher than our last example. This gives us a more conservative upside estimate, and lower BUU.
Ironically, businesses like these are the ones that need a disciplined monthly effort to move their conversion rates. If this business spent $45,000 to move the conversion rate three BUUPs, from 3.3% to 3.6%, they would break even on the expense in the first year.
Business To Business
A company closed $21 million in services for 45 new enterprise customers last year. That makes their average transaction value $466,667. Of these sales, 15 came from web leads.
Online marketing generates 5,000 visits-per-month and averages 200 leads-per-month, or 2,400 leads-per-year.
The conversion rate is 200 leads / 5,000 visits, or 4%.
The web revenue is 15 web sales x $466,667 per transaction, or $7,000,005 per year.
Average Lead Value is $7,000,005 web revenue / 2,400 leads per year = $2,917 per lead
By this measure, a webinar that generates 20 leads is worth over $58,000 in potential revenue. Nice.
Revenue-per-visit is $7,000,005 / (5,000 visits x 12 months) = $116.67 per visit
BUU = (0.1/4 CR) x $7,000,000 = $175,000
Assuming a gross margin of 40%, BUUP is $175,000 x 0.4, or $70,000.
The low number of sales in this scenario means that, statistically, these models aren’t as reliable. This business may set the optimization budget more conservatively.
Nonetheless, an increase in conversion rate of two BUUs, from 4% to 4.2% could deliver $350,000 in revenue. It is important not to increase leads at the expense of sales close ratios. If more leads are generated, but of lower quality, the RPV number will drop, defeating our purpose.
What do your numbers tell you about your business? You can get your own upside report by using our calculator.
You can try various optimization techniques to add BUUs of revenue to your bottom line. Some of the “low-hanging fruit” is found in:
- Fixing Errors – Is your site broken for certain browsers, operating systems or mobile devices?
- Lowering Checkout Or Registration Abandons – How many visitors aren’t getting through the purchase process?
- Using Landing Pages – Can you direct your ad-driven traffic to landing pages designed to convert them?
- Email – Do you “nurture” prospects with “drip” email, or use email to make them experts at solving their problem?
- Testing – Split testing is the most reliable and measurable way to go about getting more BUUs in the bank.
Once you know your Basic Unit of Upside (BUU) and Basic Unit of Upside Profit (BUUP) you can make quick estimates about how to invest in website optimization.