Conversion Ratios Part 2

Contrarian Example
In the CPFL analysis in one of my previous post I shared a business case that demonstrated the leverage of conversion ratios. Conversion ratios do indeed provide the greatest amount of leverage for your ROI. In the example that I shared how a mere 1% increase in conversion ratios would have netted my client a 245% increase in their ROI. But I also want to share a contrarian example of why conversion ratios can’t be your sole focus either.

This is a real example. It did take place back in the height of the refi boom and it also deals with the home equity product, so numbers in this example are not indicative of what is typical in the more popular refinance product, but it is a compelling story nonetheless.

I had a client that was hitting the cover off the ball with a new home equity product that I represented. They were seeing about an 11% conversion ratio on the home equity leads I represented. They were getting about 70 per day. Their average yield point spread grossed about $1500 in income per home equity loan. Based on their phenomenal success, they decided to tighten their filters quite a bit to see if they couldn’t optimize their performance even more. The net result appeared to be very positive, their conversion ratio went from a great 11% to an astounding 23%. However, in tightening their filters, their volume went from 70 leads per day to about 20 leads per day. Their initial reaction was typical. They expressed, “we are much more efficient with our spend because we more than doubled our conversion ratio, so it is OK that our volume went down.” So, I did a simple income analysis for them.

As you can see in the chart above, the metrics performed as expected if you look at an ROI per loan. Origination costs go down and net income per loan increases due to the sharp increase in conversion rates. But look at the key here which is the “Originations P/Mo.” Because of the decrease in lead volume due to the tightened filters, the number of leads decreased dramatically and even with the sharp increase in conversion ratios, the number of originations decrease by almost 70 loans per month. That resulted in a net loss of $102,300 per month by increasing their funding ratio from 11% to 23%! Bottom line, they realized they were leaving a ton of money on the table and abruptly loosened their filters once again so as to recapture the lost revenue.

So, once again this represents another illustration of the need to be able to look at the entire picture. If you try to look at the components of ROI – Costs, Conversion Ratios, and Income – on their own, you are not going to be able to see the whole picture. You need to look at them in relation to one another or you, too, are most likely leaving money on the table.

.

.

.