Conversion Rate Definition

Cite this article as:"Conversion Rate Definition," in The Business Professor, updated March 12, 2019, last accessed July 6, 2020, https://thebusinessprofessor.com/lesson/conversion-rate-definition/.

Back to: ECONOMICS, FINANCE, & ACCOUNTING

Conversion Rate Definition

Conversion rate, also known as Exchange Rate, is the rate at which one unit of a country’s currency is exchanged for another.

A Little More on What is Conversion Rate

The amount of currency within a system generally controlled by that country’s central bank. Individuals from foreign countries can purchase that country’s currency in a currency market or the Foreign Exchange market (FOREX).

Depending on whether the central bank intervenes to establish its price, the exchange rate can be either fixed or floating.

Fixed Conversion Rate

To establish the value of its national currency, the government of a country associates this value with that of the currency of another country. The fixed exchange rate has several exchange rate regimes that are dependent on the performance of the central bank. They are as follows starting with the strictest to the most flexible:

  •         Convertibility regime or currency board. This is the most stringent category, and it is established by law. Since the same rules govern it as gold, the central bank has a mandate to immediately convert the currency linked when a citizen coverts this money to cash. However, one must have his total money supply backed by dollars saved in his reserves.
  •         Conventional fixed-rate regime. This is when a country decides to fix its currency with margins of (+, -) 1% on another currency or basket of currencies. An individual can utilize direct intervention policies or indirect intervention policies.
  •         Exchange rate within horizontal bands. This provides for better flexibility when compared to the previous one. It is an exchange rate with a target area.
  •         Mobile exchange rate. This is an exchange rate that is adjusted frequently. Usually, it adjusts for higher inflation which affects the linked currency. It can be carried out passively or actively.
  •         Type of change with mobile bands. This is a type of change where the width of the bands is increasing bit by bit unlike that with horizontal bands — typically used as a step to the floating exchange rate.
  •         Floating Conversion Rate. This is an exchange rate that is determined by the forces of demand and supply in the market. There are two types, one completely free and the other intervened.
  •         Clean float. This is the exchange rate which is purely obtained from the forces of demand and supply without the intervention of the central bank.
  •         Dirty float. This is an exchange rate obtained from the game of supply and demand, but the central bank intervenes by buying or selling to stabilize the currency and achieve its economic goals. It is also known as a managed floating exchange rate.

The Conversion Rate in the foreign exchange market

Taking the exchange rate between the euro and the dollar as an example (EUR / USD), the euro is the base currency since the currency of the numerator is always the base currency, while the dollar is the quote currency.

The forex market has two prices, the bid price which is the price at which one must sell and the asking price at which one should buy. The offer price is lower than the demand price at all times. The difference realized between the bid and ask price is referred to as the spread. A small spread means a market is liquid. However, many agents try to increase this spread to reap benefits.

When an individual takes a position in the financial market, he must do the opposite of what he did in the beginning to close the operation, that is, if one buys, he has to sell. The price of selling has to be lower than buying at the time the operation is opened because if at the time of the operation the sale price is higher than the purchase price, everyone would sell a product at $5 and then buy it immediately at $3 to close the position and have an assured profit of $2.

For example

EUR / USD

Sell = 1.0826

Buy = 1.0828

The offer price means that one will receive $1.0826 for the sale of 1 euro. This is the amount of the quote currency to be received in exchange for the sale of a unit of base currency.

The price of demand means that an individual pays $1.0828 to receive one euro. This is the amount of quote currency to be paid to receive a unit of base currency.

Different ways of seeing the conversion rate

  •         Direct types.  These are when the dollar is the base currency. E.g., USD / JPY
  •         Indirect types. When the dollar is the quote currency. E.g. EUR / USD
  •         Cross types. The dollar is not a base or a quote currency. They operate with one currency against another which is not the dollar. However, the dollar is taken into account since even though it does not appear in the final crossing, it is used in the calculation. Very few currencies, however, are exchanged directly.

References for Conversion Rate

Academic Research for Conversion Rate

  • From web analytics to digital marketing optimization: Increasing the commercial value of digital analytics, Chaffey, D., & Patron, M. (2012). Journal of Direct, Data and Digital Marketing Practice, 14(1), 30-45. This paper conducts a review of the opportunities for companies to better apply web analytics in the improvement of digital marketing performance. It describes the techniques that can be used in setting up a digital marketing optimization program.
  • The Atlas rank report: How search engine rank impacts traffic, Brooks, N. (2004). Insights, Atlas Institute Digital Marketing. This paper presents a study carried out by the Atlas Rank Report in examining whether the search engine rank impacted the traffic to a marketers website.
  • The Atlas Rank Report—Part II: How Search Engine Rank Impacts Conversion, Brooks, N. (2004). Seattle: Atlas Institute. This study shows how the volume of traffic falls according to the rank of paid search listings and then combine the lessons learned from this traffic analysis with the impact of rank on the click-to-conversion rate.
  • The role of digital and social media marketing in consumer behavior, Stephen, A. T. (2016). Current Opinion in Psychology, 10, 17-21. This paper explores a recently published research on consumers in digital and social media marketing settings and identifies five themes which shed light from different angles on how consumers experience, influence and get influenced by the digital environments they live in as part of their daily lives.
  • Spamalytics: An empirical analysis of spam marketing conversion, Kanich, C., Kreibich, C., Levchenko, K., Enright, B., Voelker, G. M., Paxson, V., & Savage, S. (2008, October). In Proceedings of the 15th ACM conference on Computer and communications security (pp. 3-14). ACM. This paper explains how it developed a methodology of measuring the conversion rate of spam through the use of a parasitic infiltration of an already existing botnet’s infrastructure.
  • Four ways to get more value from digital marketing, Edelman, D. C. (2010). McKinsey Quarterly, 6, 1-8. This article identifies four ways through which companies and other organizations can get more value from digital marketing.
  • Understanding the digital marketing environment with KPIs and web analytics, Saura, J. R., Palos-Sánchez, P., & Cerdá Suárez, L. M. (2017). Future Internet, 9(4), 76. This article has an objective of surveying various DM metrics to determine what are the most relevant metrics and KPIs that corporations need to understand and manage to increase the effectiveness of their DM strategies.
  • The effects of the social structure of digital networks on viral marketing performance, Bampo, M., Ewing, M. T., Mather, D. R., Stewart, D., & Wallace, M. (2008). Information systems research, 19(3), 273-290. After deconstructing the process, this paper investigates the formation of the activated digital network as separate from the underlying social network and then considers the impact of the social structure of digital networks and also of the transmission behavior of people on the campaign performance.
  • More than words: The influence of affective content and linguistic style matches in online reviews on conversion rates, Ludwig, S., De Ruyter, K., Friedman, M., Brüggen, E. C., Wetzels, M., & Pfann, G. (2013). Journal of Marketing, 77(1), 87-103. This study utilizes text mining to extract the changes that affect the content and linguistic style properties of customer book reviews on Amazon.com. It also employs the use of a dynamic panel data model to reveal whether the influence of positive affective content in conversion rates is asymmetrical.
  • Proof that online advertising works, Song, Y. B. (2001). Atlas Institute, Seattle, WA, Digital Marketing Insight. This paper suggests that if companies advertise to build brands and increase traffic sales, then they should measure the brand metrics, traffic volumes, and the sales to evaluate how effective their online campaigns are.
  • The third wave of marketing intelligence, Burke, R. R. (2006). In Retailing in the 21st Century (pp. 113-125). Springer, Berlin, Heidelberg. This article presents how marketers were able to assess the performance and profitability of the marketing investments by modeling data as a function of the causal variables like the product price, display activities, and feature advertising.

Was this article helpful?