You have probably heard of the compounding effects when it comes to investments and interest.
It’s a powerful, yet mostly unintuitive effect of seemingly small but regular improvements.
A talk we had in our Slack made us realize this is something not all marketers think of, so we want to show you how small improvements in your acquisition strategies can be significantly better than trying to hit that one magical change. Warning: math incoming!
The compounding in marketing explained
Let’s use a simple funnel as an example where you look at CPC, CVR and AOV. Your CPC is currently $1, your CVR is 2%, and your AOV is $100.
A $100 spend would bring you $200 in revenue, on average.
What if you improved your AOV by 30%? You would get $260 in revenue.
But 30% AOV increase is not that easy. What if you had 10% improvement for CPC, 10% for CVR, and 10% for AOV?
So your CPC goes down to $0.909, your CVR goes up to 2.2%, and your AOV goes up to $110.
Now, for $100 spent you get $266.22 in revenue, on average. Here’s the calculation.
100/0.909 means 110.(011) visitors to your website. Out of those, 2.2% convert, so 2.42 become buyers for an AOV of $110. So $110 x 2.42 = $266.22.
The verdict
Is it easier to improve one stat by 30% or is it easier to improve three parts by just 10%? And what if you had >10 such factors you could improve just by 10%? And what about improving them every month. That’s how those hockey stick growth graphs are built in reality!
If you have limited resources, and you know one part is just very bad, it’s probably best to focus on it. Once you have everything close to “industry average”, and can’t get big wins in one place, it’s time to compound those small improvements into your next big win.
