Conversion Rate & Brand Impact Analysis

To understand our conversion rates for the metaverse, we can use theoretical probability models to analyze how many conversions (purchases) we can expect given our number of anticipated visitors. We know in the luxury market the conversion rate is relatively low given the market size and high-end prices. We know currently Flourish has an average conversion rate of about 1% in their online stores and physical stores. We will assume the conversion rate in the metaverse is lower, at least initially, given current luxury brands information and the number of users on various metaverse platforms, though we expect the number of users to grow in the next 5-10 years, meaning there is potential for increased conversion rates with an increased user base.

In our distribution, our random variable of interest (X) is the number of customers who convert (make a purchase). This number can then be converted into the conversion rate which is number of conversions / total number of visitors.

We decided normal distribution would fit best given:

• There are only two outcomes, a success (a purchase) or failure (no purchase)

• The large number of trials (visitors) is very large (250,000) while the rate of success (0.25%) is very low

• The conversion of one customer is independent of the conversion of another customer

To help build our decision tree with accurate probabilities, we will want to define what Flourish views as low conversion rates, moderate conversion rates, and high conversion rates. We also believe the range of conversion rates does have an upper limit of 1,000; we do not expect to see number of conversions over this number in the metaverse.

We can then use these parameters to estimate our probability of outcome for low, moderate, and high number of conversions and their associated expected conversion rate, which we will use to estimate our brand image impact (BI)

The low conversion rate of 0.12% has a relatively low probability of 15.84% of achieving conversions above 0 and below 600, where few visitors convert, or make a purchase. The probability of 600 to 650 significantly to 68.33% and represents the most likely scenario where the a large range of outcomes fall. A conversion rate of closer to 0.25% indicates a more stable predictable performance in the metaverse. This moderate conversion range provides the primary basis for forecasting, managing costs, and making decisions as it relates to the metaverse investment. The high conversion scenario has a less likely outcome at 15.84% and represents a very optimistic outcome that is very unlikely to happen relative to the market and selling space. 

The overall distribution of the probabilities indicates that while the metaverse market is growing and the customer base for luxury goods may still be in its early adoption phase, where customers are hesitant or unsure about purchasing high-end luxury digital goods. This is important to consider in the short-term planning for this investment. This scenario is not expected to be the same over the long-run as consumers become more comfortable with virtual environments. Today, the short-term outlook will be more conservative on expected conversions. With this understanding of distribution and using moderate conversion rates as their basis, Flourish managers can mitigate risk and position themselves to be successful in predicting and managing conversions in the metaverse. 

We can calculate the expected brand image impact for each scenario.

Flourish managers have defined brand image impact as 

BI = Traffic to Metaverse Shop * Expected Conversion Rate * Brand Image Coefficient (BIC)

We can use the weighted average to calculate the total expected BI for the metaverse investment

Total expected brand image impact is defined as (P(Low)*BI(Low)) + (P(Moderate))*BI(Moderate)) + (P(High)*BI(High)