How to Calculate SEO ROI: Should You Invest into SEO Services?
by Mike Khorev
SEO is, after all, a very important marketing investment.
Before we decide to invest on a channel, we have to answer two very basic questions:
How much is it going to cost me?
What is the ROI of SEO campaigns?
However, calculating both the cost of SEO and the generated ROI can be quite complicated. On the one hand, there can be many variable costs tied to content creation, link building, site optimization, and so on. On the other hand, the actual revenue generated from organic search engine—as the result of SEO—, might not be so obvious on the surface.
In this guide, we will discuss how we can calculate SEO ROI, but let us first begin by discussing the initial framework.
The Basic Framework of SEO ROI
First, what actually is ROI—a term we often take for granted—?
Although we can use all the technical terms and jargon, In its most basic sense, ROI (Return on Investment) is how much profit you generate with an investment, measured in percentage.
Let’s say you invest $100 in a business, then you get a profit of $20 after a year (the money grows from $100 to $120). In this case, the ROI after a year is 20%.
ROI is calculated with a fairly simple formula: Profit of investment divided by the total costs of investment.
So, to really answer the ROI for SEO, we have to first determine the profit generated by the SEO efforts, which can be calculated as follows:
SEO profit=Revenue generated by SEO results – Total costs of SEO
These two variables: the total revenue generated by SEO and total costs tied in SEO, will be integral in determining the SEO campaign’s ROI. Below, we will first discuss how to calculate the total costs related to SEO.
Calculating SEO Costs
It’s important to note that SEO is a very versatile marketing channel, and generally, the answer to “how much will SEO cost me?” would be “up to you.”
The search engine, by nature, is an “organic” channel. Meaning, you essentially don’t need to pay anything to get organic traffic from Google search. Compare this to, say, advertising, where we’ll need to pay a set fee to the advertising publisher.
Thus, it’s important to note that if you are willing to learn and do everything by yourself. SEO can be 100% free.
Wait, so why do I need to pay for an SEO expert, then?
Because keyword research, content development, technical optimizations, and other activities of SEO aren’t easy, and it will take a lot of time
With that being said, there are two different ways to calculate SEO costs:
- If you do everything by yourself or with an in-house team.
- If you outsource to an SEO expert.
For the latter, the cost will be fairly transparent and obvious: the fee you pay to the SEO agency. They might charge you by the hour or monthly, and the price will vary between agency to agency.
In general, however, if you are planning to work with a top SEO company and expert in the US, it will typically cost you around $500-$1,000+ per month, while a national or global campaign will require at least $3,000 to $5,000 a month.
If you want to do everything by yourself, here are the common variables that are tied to SEO cost:
(note: understanding these costs will also help you in justifying the cost of hiring an SEO expert.)
- Cost of SEO software and tools for keyword research, link analysis, and monitoring among other activities (starting from $0 to over $1,000/month)
- Content creation cost (starting from $0 if you write yourself to over $10,000/month)
- Content promotion costs (will vary greatly)
- Technical optimizations cost (starting from $100 to $180/hour if you hire a web developer to help)
- Link building—influencer outreach, PR campaign, etc. — (starting from $0 to $500/link)
This is not an exhaustive list, and there are certainly other activities/tasks that can add to your total SEO cost. However, this can be a good start to give you an idea of how much the SEO campaign can cost.
As we can see, the total costs for SEO can vary greatly depending on many different factors, and especially how much you actually want to spend.
Thus, it’s sometimes better to first check out the potential ROI (as we’ll discuss in the rest of the article) before you decide on how much you are going to spend on monthly or annual SEO costs.
to learn and implement all these by yourself. You are essentially buying time.
Revenue Generated By SEO
Calculating the number of revenue generated by the SEO campaign is a little bit tricky, mainly because different businesses can have different revenue models, and SEO—organic search—can contribute differently for each revenue model.
In general, however, we can differentiate businesses and websites into three main categories:
- Businesses selling ‘one-time sales’ products/services on their website. For example, blogs reviewing and selling physical products on the website (i.e. smart home products), blogs selling affiliate products will also belong in this category.
- Businesses selling products/services on their website with a recurring-revenue model. For example, SaaS companies selling subscription-based software (i.e. HubSpot or Moz).
- Non eCommerce businesses that are not selling products/services on their websites. For example, a standard “old-school” business like a cellphone repair company. Here, the website—and SEO— acts mainly as a lead generation device so it doesn’t directly contribute to revenue.
Below, we’ll discuss them one by one.
Revenue Type 1: ‘One-time sales’ Businesses
Arguably the ‘simplest’ revenue model to calculate. Here, one sales conversion is going to generate revenue, so organic search traffic—and SEO—directly contribute to SEO.
A tricky part in this revenue model, however, is that we shouldn’t solely calculate a single sales conversion, but rather the customer’s lifetime value.
Customer lifetime value, or CLV, is the amount of projected revenue of a customer over their relationship with your business.
There are many different ways to calculate CLV, but here is a common one. First, calculate these four variables:
- Average customer lifespan: averaging the number of years customers purchase from your company. (i.e. if you are a company selling baby diapers, then the average customer lifespan might be around 5 years)
- Average purchase value: dividing the business’ total revenue in a time period (i.e. a year) by the total number of purchases. (i.e. $10,000 in a year with 100 purchases. Average purchase value is $100)
- Average purchase frequency: dividing the number of total purchases by the number of unique customers who made any purchase during the same time period. (i.e. the number of total purchases is 100 with 50 customers. Average purchase frequency is 2)
- Customer value: multiplying the average purchase frequency with the average purchase value. (2 times $100, then $200).
Then, Customer Lifetime Value (CLV) is calculated by multiplying the average customer lifespan with customer value. Using the above example, then it is 5 years times $200, so the CLV in this example is $1,000.
So, in this case, we can track the number of leads generated via organic search, and the conversion rate of these leads. For example, if we can generate 100 leads via organic search with a conversion rate of 10%, then the generated revenue is $10,000 (10 converted customers x $1,000.
Revenue Type 2: ‘Lead-Based’ Businesses
In this revenue model, calculating generated revenue is a little bit trickier, since the website activities—including SEO performance—won’t directly contribute to revenue.
In this type, we have to figure out all the possible actions the website visitors are doing on the website, and figure out how much these actions are going to contribute to revenue. We call this process creating a marketing attribution model.
So, how can we determine the contribution of SEO in this marketing attribution model? Let’s use an example to illustrate this.
Let’s say you successfully generate 1,000 new leads each month via organic search. 1,000 people sign up for your email newsletter after they stumbled upon your content via a high-ranking content.
200 of these 1,000 prospects end up purchasing your product (which you figured out via an in-store survey.), then the conversion rate here is 20%.
Let’s say based on the CLV calculation as discussed in the previous section, the CLV for each of these 200 customers is $5,000, then your total sales coming from them is $100,000.
Finally, divide $100,000 with the number of original leads generated from SEO, which is 1,000 people. In this case, we can determine that each lead generated from SEO is worth $100.
Revenue Type 3: ‘Recurring Revenue’ Businesses
In this revenue type, we are mainly calculating the customer lifetime value (CLV) in a different way, mainly via metrics we call monthly recurring revenue (MRR) and annual recurring revenue (ARR).
Again, let’s use an example to better explain this.
Let’s look at the SEO for SaaS and technology companies, the average MRR from one customer is $5,000, and the goal is to generate 100 new customers every year.
Through organic search and content marketing—SEO results—, we successfully generate 50 leads every month. Also, the average lead to sale conversion rate is 30%, so these 50 leads per month will translate into 15 sales per month.
With this example, we can calculate the generated revenue from SEO as follows:
- MRR/customer= $5,000/month
- Conversion rate (lead to sale)=30%
- SEO generated leads: 50/month
- SEO generated sales: 50 leads per month x 30%= 15 sales/month, 180 sales/year
- Additional ARR from 15 sales/month= $900,000/year
Setting-Up Conversion Tracking
As we can see, revenue generated by SEO is mainly related to website conversion.
So, in practice, the first step we should do to calculate SEO ROI is to track these conversions.
Various tools including the free Google Analytics allow us to track conversions fairly easily. Go back to the previous section and determine what revenue type your business is generating, and track the corresponding conversion according to the type.
Calculating SEO ROI
Let’s go back to the very beginning: how should we calculate SEO ROI?
The formula is fairly simple:
SEO ROI= (Revenue generated from ROI- Cost of ROI)/Cost of ROI x 100%
Now that we’ve defined how to calculate both variables in the previous sections, calculating ROI for SEO is now very simple.
Let us use the calculation we’ve used to calculate the revenue type 3 for this example, where we’ve figured out that SEO will generate $900,000 each year by generating 15 sales a month.
So, let’s say this same company invests $5,000 every month, or $60,000 a year in SEO. The SEO ROI, in this case, is: $840,000/$60,000 x 100%= 1400%.
The key to calculating SEO ROI is to figure out your business’s revenue model and especially how SEO activities—organic search traffic, traffic from content marketing, traffic from inbound links, etc. — will contribute to revenue after you’ve carefully considered your customer’s lifetime value (CLV).
Once you’ve figured out SEO’s contribution to revenue, then calculating ROI for SEO is simply about dividing the profit generated from SEO activities by the total costs invested on SEO.
Properly understanding the potential ROI for your SEO campaign can help you in making an informed decision on how much you should spend on SEO initiatives.
August 9, 2020