In his book “Why we Buy,” Paco Underhill tells the story of senior executive of a multibillion dollar chain who was asked “How many of the people who walk into your stores buy something?” This executive knows a lot about his business. He knows the total sales, the average sale amount, the sales in any given store vs. last year, profitability by item, and many other things. His answer to the question was, “Damn near all of them.” Since their stores were “destination” stores he reasoned, people didn’t go there unless they had some very specific purchase in mind. The reality was 48%, which, as it turns out, is a very good rate for stores of its kind. Underhill’s book is filled with stories about how many things are “hidden in plain sight,” and how obvious some things are once we can “see” them.
The concept of the conversion rate, implying as it does that shoppers need to be “transformed” into buyers, was alien to his organization. That changed when the company realized that by changing some things about the store, they could improve their conversion rate.
Our Batting Average
Most component manufacturers I know can quote their sales figures for any given month. Sales totals and gross profit figures, viewed together, seem to be the most basic indicators of the overall health of the business. Fewer are as conscious of their conversion rate, or “Of the opportunities we had, how many bought something?” It’s the “batting average” for the business. If we know we sold “100” this month, was it 100 out of 300, or 100 out of 1000? The conversion rate is a third very fundamental way the health of the business can be measured, and also carries with it important intelligence about the market we are operating in.
Keeping Score
If we are tracking quotes and have some kind of a way of calculating what percentage become orders, we have the basic information needed to calculate our conversion rate. We also need to know, “Among the quotes that have not turned in to orders, which are still ‘in play,’ and which went to competitors?” Even better information can be gathered if we also record why they did not become orders. Although many will go in the books as lost to “lower price,” the ones that don’t will be instructive. We might see “Couldn’t meet delivery date,” “Loyalty to other supplier,” “Project was cancelled,” “Other supplier was able to include wall panels” - and others. Gathering this information will, over time, uncover some new insights into the market. Imagine, for example, the market intelligence we’d have in observing the percentage of quotes where the “Project was cancelled” increase over time from an average of 5% a month to 15% month.
Is there any reason not to record and review “Why we didn’t get the order” or “Why we got the order” (!) on every quote? Among those lost to the competition, why shouldn’t we find out and record who the competition was that beat us out and “keep score?”
What we Might Learn
Although looking at the numbers alone would tell us some things, even more revealing might be seeing changes in the numbers over time. For example, if we see that we were getting a conversion rate of about 40% for the 3rd quarter, but it went down to 30% in the 4th, it tells us that something is changing. What is it? Has a new competitor come into the market? Is there less work out there and competitors are lowering their prices (more than we are?) If we track the fate of every quote, the reason we got or lost the job, and who we lost out to, we’d have great insight into the current market.
In a general way, we use conversion rate information to look at:
1) the extremes – the biggest and the smallest conversion rates in any sample and ask, “Why?”
2) the biggest changes over time and ask, “What’s going on and what (if anything) should we do in response?”