An All-Purpose Gauge
The best way to find a common language with business stakeholders is to communicate in numbers. The language of numbers is familiar to people who plan projects or are responsible for business operations. They let you compare either before-and-after results or your client’s results with their competitors’ performance. But the most important thing is being able to tie the results of your UX design changes to money a client earns or saves. This is the best way to improve your ability to communicate the value of user experience to your clients.
What kinds of numbers make useful metrics for user experience? There are three types:
- money earned—for example, conversions or ARPU (average revenue per user)
- money saved—for example, support costs or task performance efficiency.
- non-monetary results—for example, user loyalty or recommendations to friends
Using these metrics makes your communications more objective. You’re discussing not artifacts like wireframes, but business goals and roadmaps for achieving them. For example: “To increase conversions, we should rework five key pages of the checkout process—creating wireframes of our design solution and conducting usability testing. Then, once the changes are live, we’ll track performance indicators to measure whether our work was successful.” You can avoid your client’s endlessly questioning Is this what we really need? and your facing a series of painful attempts to convince them that your design decisions would satisfy customer requirements.
But, even more important, by using metrics and tying them to business indicators, you can transform projects that would have died at the sales stage—with a prospective client’s saying, “We’ll think about it”—to sales successes. These metrics can help your clients to economically justify their engaging UX professionals on a project, because their return on the money they’ll pay for your work will be the additional earnings or savings they’ll achieve. What metrics should you calculate? Let’s discuss some specific metrics and how you can calculate them.
Metric #1: Conversion Rates
The Web became an effective sales channel some time ago, and for many companies, it’s now their main or even their only channel. Therefore, this channel has to provide a reasonable payoff, which requires understanding how a sale is made and how a company’s Web site can support the purchasing process. What does its sales funnel look like? What actions must a prospective customer take on what pages to complete a purchase?
Conversions might measure the number of sales on an ecommerce Web site in comparison to the number of visits, the number of product requests customers submit on a bank Web site, or the number of new registrations for a paid service.
When you optimize a sales funnel’s performance, the result is increased sales. And you can measure the value of a UX designer’s contribution in additional profits for a client. If you can show these kinds of numbers to your clients, there’s a good chance that you’ll be able to convince them of your value.
How to Calculate Conversion Rates
Let’s take a travel booking Web site as an example. The key metric here would be converting visitors to customers—that is, the number of site visitors who successfully finish the booking process. Here’s the formula:
number of people who complete the booking process / number of site visitors * 100% = conversion (%)
Step 1: Starting Conversion Rate
Let’s assume that some initial generative research, a slight redesign, and its implementation would cost $10,000. The return on a client’s UX investment should cover at least this cost. But the return should really be greater than that to consider a project successful. To achieve an optimal return on investment, it’s necessary to know how much profit each new order would contribute. Using hypothetical numbers, if each new order were $100, your client would need to bring in 100 new customers.
$10,000 / $100 = 100 customers
Step 2: Target Conversion Rate
How long would it take to reach this goal? Let’s evaluate site traffic. Suppose your client’s Web site receives 10,000 visitors per day. If 50 of 100 visitors who start the booking process complete the process successfully, the conversion rate is 0.5%.
50 people completed the booking process / 10,000 site visitors = 0.5%
Your client may have told you that 20% of those who complete the process are unpaid bookings—thus, they don’t increase sales revenue. After excluding these orders, the conversion rate is 0.4%, or 40 orders a day.
The client’s current Web site generates $4,000 of revenue a day. Increasing its conversion rate by 1% would increase revenue to $10,000 a day. Therefore, a UX design effort that achieved this would enable the client to earn $6,000 more in sales revenue per day, which would pay off their UX investment in less than 2 days.
($10,000 - $4,000) / $10,000 = ~2 days
Step 3: Using Conversion Rates to Communicate the Value of UX
The benefit of hiring UX designers seems evident, but you can go further and compare the results of an improved user experience with other ways of acquiring customers. Your client is already trying to grow sales—whether through advertising, a deferred activation on-demand program, or some other marketing approach. Let’s assume that monthly advertising expenses are $100,000. In comparison, the development budget is only 10% of that, and this is one-time expense. If your client reallocates a part of their marketing budget or expands the development budget for just one month, they’ll be able to increase the efficiency of their monthly ad spending thanks to increased conversion.
Customer acquisition costs through advertising are greater than through other channels. Assume it’s $50 for advertising. This is much greater than $10—the average cost of customer acquisition through all channels. Increasing the conversion rate makes advertising more efficient—more newly acquired customers pay for their orders—so the client’s customer acquisition costs have decreased to perhaps $40. In turn, this means that the client can acquire same number of customers with less monthly ad spending. If it cost $10,000 less, the client could spend this money to reinforce their marketing effort—for example, by ?advertising through additional channels.
Limitations of Conversion-Rate Metrics
These calculations look good, but the reality is a bit more complicated. It may not always be possible to get accurate figures, and increases may not be so large. Plus, this hasn’t taken the client’s other marketing efforts into account—for example, special offers or price changes. And there may be other factors like seasonality, the differing efficiency of various traffic sources, and deferred demand. But your efforts can raise conversion rates.
However, bear in mind that, with services like social networks, increasing the number of registrations doesn’t directly increase profits. So you’ll need more complicated calculations. For ecommerce Web sites, it’s easy to see a direct connection between conversion rates and growth in profits.
How to Obtain and Validate Conversion-Rate Metrics
Where can you get all of this information? Part of it comes from Web analytics. Google Analytics is a free tool that helps you to track conversions and learn about user behavior patterns. You can get many figures and a lot of other information directly from your clients—chiefly from their CRM (Customer Relationship Management) systems.
To understand and configure a client’s conversion funnel, you must understand its usage scenarios. Communicating these through a diagram lets you identify all key points in the funnel and find bottlenecks, enabling you to answer these questions:
- What pages must a customer visit during a checkout process?
- How does a customer start the purchasing process—coming from what traffic sources and landing on what pages?
- What happens when a customer completes this process? Does he receive a confirmation email message or phone call? Must he visit a company’s office?
For a conversion optimization project to be successful, your client should implement and test all potentially viable UX design solutions. For almost any problem, there is a range of potential solutions from which it is possible to choose the most suitable one only by testing all of them in actual use by customers on the site. You can run A/B or multivariate tests to compare the performance of design alternatives, then choose the best one. This approach quickly gives you statistically significant results.
My final advice is not to chase after the one and only killer solution that would immediately multiply conversion rates. In practice, there are dozens of small tweaks you’ll need to make to achieve optimal results.
Metric #2: Average Revenue Per User
For both subscription-based applications and services and those that use a freemium model and rely on regular user participation, the average revenue per user (ARPU) metric is highly important. The goal is to motivate customers to use more product features and, in this way, grow your client’s profits by selling more services and products. For a SaaS (Software as a Service) product, this might mean motivating customers to purchase an enhanced user account; for a massively multiplayer online game (MMOG), getting players to buy more artifacts.
If you can prove that user interface changes would help to increase sales to existing customers, your client will be much more willing to listen to your reasoning and increase the UX budget.
How to Calculate ARPU
Let’s take a productivity application for small businesses as an example. The key metric for such a Web application is average payments for service usage per user. To calculate ARPU, you must divide all revenue for paid services by the number of registered users. Here’s the formula:
revenue from paid services / number of registered users = ARPU ($)
Step 1: Starting ARPU
As in the previous example for the conversion metric, let’s assume that initial research, a minor redesign, and its implementation would cost $10,000. Suppose that the product has 10,000 registered users, and each of them pays $5 a month on average for an enhanced account. Increasing revenue might mean selling additional services to earn $1 more per user. Alternatively, you might try to decrease the average cost of converting new customers—although this is not something to which a service’s user experience can contribute greatly.
$10,000 / 10,000 users = $1 per month
Step 2: Target ARPU
Once you know your target ARPU, you need to determine how to achieve it. For what services do you need to increase sales, and how much would it cost to achieve this additional revenue? Assume that you’ve examined your client’s business and have found that 10% of users would have to subscribe to an enhanced account rather than a standard account to gain a $0.75 ARPU increase. In addition, your client might increase sales of consultations by 10%. With an average price of $100 per consultation, that would increase revenues by $0.25 more.
$1 in target ARPU increase = $0.75 + $0.25
You need to understand what design changes would pay for your UX budget and how long it would take to pay for it. This is a matter of planning rather than precise calculations—that is, determining a set of activities that would lead to your achieving your target numbers in, for example, 2 months. In this case, your initial message has changed: if it would take several months to get to your $1 target, and your plan assumes that, in each of these month,s ARPU would grow by $0.33, your UX budget would pay off within 2 months. Here is the formula:
$1 → $0.33 per month #1 + $0.66 per month #2
Step 3: Using ARPU Metrics to Communicate the Value of UX
All the numbers add up, but why should your client invest in the UX changes if their product is already profitable? Because this is a matter of generating additional profits, communicating the time it would take to achieve a certain amount of profit is the best way to lobby for proposed UX improvements. But you can amplify the effect of this approach by providing a summary of revenues over a longer period of time—a year, for example. Acknowledging the gradual achievement of a $1 target for ARPU growth lets you show that the client can earn $110,000 in additional profits with the current number of registered users. And if their user base typically grows by 100 people a month, yearly earnings growth would be even greater—$116,567. The formula is:
ARPU per year = ARPU per month #1 * number of registered users in month #1 + … + ARPU per month ## * number of registered users in month ##
After subtracting the UX budget, the client’s additional profit would be $106,567, and they would undoubtedly have business development plans that would benefit from this unexpected funding. Your getting work on such a project becomes much more feasible when you bring these kinds of numbers to contract negotiations.
Limitations of ARPU Metrics
I’ve simplified my description of this metric in many ways. If a client proposes selling additional consultations, you may need to take other considerations into account—for example, possible limitations in the availability of specialist resources; new tariffs that could significantly increase the workload of a support team; or decreased user loyalty resulting from a company’s motivating customers to switch to an enhanced account by limiting the capabilities of the cheaper version. But even a simplified justification for your UX budget can improve your negotiating position. And you can use a more precise metric whenever possible.
Be careful not to break something that’s already working. You can quite easily revert to your previous design if a new design doesn’t achieve the expected results. Doing this won’t affect new orders. But you’ll need to recover the loyalty of existing users if a new design does not work well.
How to Obtain and Validate ARPU Metrics
Increasing ARPU is about generating more revenue from existing customers who are already loyal users of a product. Through user research, these users can help you to understand and meet their needs. You need to know what motivates people to use a service, and those who are already using it can tell you. You must identify the barriers that prevent people from successfully using a product, and people who don’t use a service can help you to identify them. You can find out what you need to know by running a series of qualitative and quantitative studies—for example, interviews or surveys.
Google Analytics and other Web analytics tools tell you what the real usage scenarios are for a service. How are users landing on a site? How are they using it? How does a service connect with other task scenarios? At what point did a user make payment? What other services does a user employ? You also need specific numbers regarding payments and can obtain these from your client’s internal accounting system.