Deal with Fun

In the recent scenario, paid search confiscates too much of a website's value. Consider a site where the average order is $1,000 (quite modest) and has a conversion rate of  10%. That is, for every 100 users, the site closes one sale (either directly on the site, or indirectly after passing the lead to the sales channel). This amounts to sales of $10 per visitor. If we further assume a contribution margin of 40% after deducting COGS (cost of goods sold) and other marginal expenses, the site makes $4 per visitor. Now, experience shows that the average website can double its conversion rate by doing user testing and redesigning for increased usability. If our sample site runs a good usability project, it can therefore expect to see a conversion rate of 2%. Thus, dealfun.com will close two orders and make $2,000 in sales and $800 in contribution margin. As long as the competing sites stay the same, the managers of our sample site are happy: they still pay only $3.99 per click, so they pay $399 for the 100 clicks and their profit increases from $1 to $401 as a consequence of site improvements. If your search bid stays the same, your ad will sink off the page as more and more competing sites improve their design enough to afford higher bids. Our site therefore has no choice but to increase its own bid to $7.99 per click if it wants to stay in business.