The Only Metric You Need When A/B Testing

Introduction

Many people debate over the best way to measure their success in pricing and business initiatives. Should you care more about overall revenue, overall profit, or something else altogether?

At Intelligems, we firmly believe that profit per visitor (PPV) is the most important metric to look at when evaluating your price tests because it takes into consideration both the revenue generated, the variable cost of fulfilling the revenue, and the conversion rate. Our definition of PPV is total gross profit divided by the total number of visitors. 

By looking at this metric, you can truly maximize your total contribution profit, which is what every e-commerce brand should care most about at the end of the day. Because you're already taking into account revenue and variable costs as well as conversion, you're accounting for everything including marketing and acquisition spend as well. 

Why PPV is the best

1. What you care about at the end of the day is making more money, right?

• As the old saying goes: revenue is vanity, profit is sanity, cash is king.

• When you take this into consideration, you may start to wonder why so many businesses care about orders, conversion rate, and revenue, when they should really only  care about profit.

2. Addressing the percent margin fallacy

• Let's get this straight, just because your business is making a lower margin percentage does not mean you're making less profit!

• Let's think about this with some real numbers. Would you rather have 50% margin on $1K ($500 profit) or 40% margin on $1M ($400,000)? Okay, okay, obviously that's unrealistic. But what about 40% margin on $2K ($800)? While your margin may be lower, you're still walking away with more profit in your pocket.

3. What about CAC? (This is the most important and  the most commonly misunderstood!)

• Your CAC = your customer acquisition cost, which has a very strong relationship with conversion. It would be an oversimplification to assume your CAC won't change if you change your prices.

• However, at the end of the day, you're paying for impressions and clicks, not for orders and customers. The more of those impressions and clicks that turn into orders, the lower your CAC will be.

• Let's think about this with an example:

  • Say you lower your price and your percent margin. You have less "money" to spend on acquiring a customer, but since the price is lower, your CAC should also be lower because your conversion rate will increase.

  • On the flip side, let's say you increase your price and your percent margin. It may seem as though you have more money to spend on CAC, but since the price is going up, your conversion rate will go down, meaning your CAC will actually increase. So it's a catch-22.

• All of this is to say that if you measure "profit per site visitor," you're already taking the effect of  conversion rate into account. So, as long as your marketing dollars send the same number of visitors to your site, maximizing PPV will maximize your $$$.

4. Let's revisit the math:

• The equation for profit per site visitor is pretty straightforward, and there are a few different ways to look at it

• Profit per visitor = profit per order * conversion rate = total profit/ number of visitors = profit per order * orders/ visitors

• Circling back to the examples in the previous point, if price goes down, profit per order goes down but CVR goes up. If price goes up, profit per order goes up, but CVR goes down. So the magnitudes of these changes (i.e. price elasticity) help you to figure out where to maximize PPV. And again: maximizing PPV will maximize your total contribution profit!

Note: we're talking about gross profit (revenue minus landed COGS + shipping)

Takeaway

While people often give priority to revenue and conversion rate, focusing solely on these metrics can be misleading. Profit per site visitor takes into account both revenue generated and the cost of acquiring new visitors, providing a more comprehensive understanding of consumer behavior and optimizing profitability

By maximizing PPV, businesses can effectively balance revenue and costs while ensuring sustainable and profitable growth. When measuring success in pricing strategies and A/B tests, profit per site visitor stands out as the ultimate metric to guide decision-making and drive financial success.

With the powerful analytics provided by Intelligems A/B tests, you can easily see these metrics to gain a better understanding of your business and where it can be improved.