Is 97% of your marketing budget a waste of money?

Every year companies spend millions of dollars on marketing; AdWords, banners, SEO (search engine optimization), TV commercials, affiliate programs, etc. However, approx. 97 – 98 % of all those millions do not create any revenue. A waste of money? 

Only 2-3 % of your customers buy your products

The reason for this is, that only 2 – 3% of all the visitors at your website buy a product or a service (source). This is called your “customer conversion rate”, or just your “conversion rate”. 

Your conversion rate is calculated based on this formula:

Number of orders / number of unique visitors * 100 = conversion rate 

(Note: the conversion rate can also be calculated based on “visitors” or “number of visits”). 

It is all about the conversion rate   
My clients´ conversion rates are in the range of 0.5 – 13%. This large variation depends on which line of business they are in, which products they sell, the level of competition, etc.
Let’s say that your website’s conversion rate is 3%. This means that 97% of all the customers who visit your website do not buy anything. The reason for this often is due to poor usability.

A new AdWords customer will cost you 100 $
Based on this, you should think about how you spend your marketing budget. Should you invest in more (paid) traffic, or should you instead make it easier to shop at your website to get more orders? Well, let’s do the math. A company has the following data:

Annual revenue Conversion rate Average order size Number of orders Number of visitors

= 10,000,000 $ = 2.75% = 500 $ = 20,000 = 727,273

This company makes its website more user friendly and sales oriented. It improves its conversion rate from 2.75% to 2.90% – a 15% point increase, which is a very realistic scenario. Based on this, the company will improve its revenue by 545,459 $.

Let’s say you decide to buy more Google AdWords in order to get more traffic at your website. One click may easily cost you 3$ (and much more in some industries). Based on this click price, it will cost you 300 $ to attract 100 new visitors. If 3 of those 100 visitors buy a product from your website, it will cost you 100 $ to get one new customer. For most companies this will mean, that the company loses money the first a customer buys a product.

You would have to spend 1,091,001 $ on AdWords to get the same result
You must attract 363,667 more visitors to get the same revenue increase. At a cost of 3$ per AdWords click, this would cost you a staggering 1,091,001 $ to attract 363,667 visitors.

First of all, it is really bad business to spend 1,091,001$ to get a 545,459$ revenue increase. Secondly, you could get a state-of-the-art E-commerce website that will improve your conversation rate greatly for that amount of money.

Let’s assume that you can get a new E-commerce website for 200.000 $. This will mean, that you will have an approx. 5 times higher ROI (Return On Investment) rate if you improve your website, rather than paying for more traffic.

Is 97% of your marketing budget a waste of money?
Does this mean that 97% of your marketing budget is a waste of money? Not if you have few visitors at your website. No visitors, no revenue. However, if you have as many visitors as described in the above scenario, you should spend your marketing budget at making your website better at converting more visitors into buyers.

Have your done this calculation in your company? Feel free to comment!