A conversion funnel shows the rate that users complete each step of a user journey to reach an overall goal. It is an important part of understanding how a website is performing and should be one of the core elements of measuring user interactions with your site. It is known as a funnel because it tends to start with a large number of users at the top, tapering to a smaller number at the bottom (though your aim is to get it to look less tapered).
It will show you over time whether users are doing what you want them to do. This usually means reaching a goal that is important to your business, like sign up to a form, download some content, make a purchase, etc.
It will also show you where they are having difficulties on the way to reaching that goal. It may give you details of where users are going instead of your intended next step in the funnel.
Depending on the software you can set it up to measure how many users are going onto different pages/URLs or you can measure different events that have been triggered, such as button clicks/taps.
Before getting into the temptations of picking your tool, you should define the user journey you want to track. This can be just a case of sitting down with a pen and paper and working out the ideal user journey you want someone to go through to reach your business goal.
If you are in the very early days of a project this might mean you are deciding the shape of your entire product at this stage. If you have a site that already is up and running, you probably have a clear idea of the steps a user goes through. Either way, this journey will form your funnel.
To make sure you're not including unnecessary stages, it's a good idea to start at the goal itself and work backwards, defining the fewest steps required to reach it. This represents the ideal journey of a user, sometimes known as the ‘happy path’. You can have several of these per site/product for each different goal you want users to accomplish.
Then it's a case of picking your weapon in terms of software, which will be dependent on what you're looking to track (see below). It will likely be the same tool you're using to gather page data and audience data. You install the code tag for this on your website so it is present on every page, which should be a quick dev task. Once you've checked this is up and running properly you can then set up your funnel to collect your data.
In several pieces of software the funnel will only gather data from the day it is set up, so it's a good idea to get it up and running as soon as you know what you want to track. You'll want to gather data for a few weeks to get a sense of what is 'normal' on your site (a.k.a. your baseline).
Once you have data you can look at improving your user flow by starting redesign efforts on the steps that have the lowest conversion rate.
Almost all software tracks user journeys and funnels like this in a different way (some look at sessions, others at users, some at events and there are other variants besides). Thus it is quite common to have different funnels giving you different numbers for your conversion rate. You should learn how different software tracks users and what is most important to you and then stick to one.
For designers, conversion rates (the number of converters divided by number of visitors) are better to follow than the absolute numbers completing your goal. This is because in an ideal world, as traffic goes up and down on your site, a well-functioning design should still be converting at a consistent rate.
It is pretty common for different types of traffic to warp your conversion rates. If it suddenly drops, a good first port of call is to check with your marketing team if they have been buying in or gaining from social traffic that behaves differently (often this is less likely to convert).
Be aware of seasonality, as pretty much all businesses are affected by it, in particular ecommerce ones. There are times of the year when people are less likely to buy and it can be hard to know that if you are a startup who is just setting out.
Once you've got a year's worth of data, it can be a good idea review it to see if there are any patterns you should keep an eye on in future. You can then compare it against future years.
As with all quantitative data it is just going to tell you what is happening on your website but it is never enough information to make design decisions. You're going to need to use other pieces of evidence like session recordings and user tests to learn why users are behaving that way, before you are in a position to make the right changes.
There are many pieces of software that offer conversion funnels. The classic Google Analytics (free & paid) is best for measuring URL visits at different steps and is often a good starting point for web projects.
Mixpanel (free & from $150/mo) measures user events that you specify, like clicks and taps, making it better for apps and non-URL based funnels. Hotjar (free & from £29/mo) also offers funnel tracking functionality as well as the likes of Kissmetrics (from $120/mo) and many more.
Setting up your funnel should only be an hour's work—these tools will all have help pages/videos to guide you. After that I find checking the data on a weekly basis works well.