Calculating ROI on SEO: Why and How

Posted by David Sanchez on Dec 21, 2015 | Tagged as: Tags: , ,

One of the most significant benefits of digital marketing is that the results of digital campaigns can be measured much more accurately than those of traditional marketing.

In the past, one could only gauge the effectiveness of millions spent on something like billboard advertising, by calculating the increase in total sales. You had no real way of telling which components of a campaign contributed the most to the increase in sales. Digital Analytics, however, provides marketers with an accurate and detailed analysis of which channels (or even areas) are producing the biggest ROI (Return On Investment). Sure, TV advertising, billboards and other traditional media still generate that much-desired brand awareness, but these media are also far more expensive than digital marketing.

Calculating the ROI of SEO

Online marketing encompasses a broad range of different channels, and at times, it can be difficult to quantify the ROI of a specific activity vs. the rest. As a general rule, PPC (Pay-Per-Click) is the easiest to measure, since its results are immediately visible in analytics. In the case of SEO though, accurately measuring ROI is not that simple. Well-executed SEO still consistently leads to the lowest cost per acquisition among the major digital marketing techniques, so it certainly can’t be abandoned because it’s effect is difficult to quantify.

So, how can SEO expenditure be justified to investors and stakeholders in a compelling way, in order to promote bigger budget allocations to SEO? We need to start by forecasting the anticipated ROI and then comparing the actual ROI during/after the campaign.

 

Anticipated ROI

Anticipated ROI is simply the expected ROI for a given campaign. As marketers, this calculation is an essential part of the planning process, when laying out or pitching for a new campaign.

Anticipated ROI can only be calculated based on historical values, traffic figures available for the relevant keywords and industry benchmarks. It also usually draws from previous experience with similar/related campaigns in the past. There are many tools that can help us make informed calculations, but that is fuel for another post.

The most important metrics that we will need to take into account are:

  • Organic sessions for the defined period
  • Organic Average Order Value (AOV) for the defined period
  • Organic Average Conversion Rate (ACR) for the defined period

 

Let’s look at an imaginary business with the following figures, measured over the last 12 months:

  • Sessions: 500,000
  • Average Order Value: £30.00
  • Average conversion rate: 0.5%

Based on the figures above, this businesses organic revenue would total £75,000 (Sessions x ACR x AOV), with £2.500 worth of conversions in total (Sessions/ACR).

If we were to propose an SEO campaign with a monthly budget of £3,000 (£36.000 over the next 12 months), how much money would we need to make our client in order to show a positive ROI?

£75,000 (current turnover) + £36,000 (SEO budget) = £111,000

Thus, to see a positive ROI, we would need to earn at least 1,200 additional conversions:

£36,000/£30.00 (Conversions = Revenue/AOV) = £1200

To achieve that figure at the current conversion rate, we would have to generate an additional 240,000 visits

£36,000/0.5% x £30 (revenue/ACR x AOV)

 

So for the investment to pay for itself, the SEO campaign would need to generate a total of 740,000 organic visits within the next 12 months, generating a total revenue of £111,000.

However, breaking even seldom justifies any investment, so how much additional revenue could this campaign generate for the business to make it worth its time and money? The more ROI you’re able to generate, the more likely you are to secure those budgets, so let’s say you’re aiming for 2 x ROI. That would require 480,000 additional sessions or £147,000.

Is that feasible, given the available traffic, level of competition and current status? If the answer is no, you may want to propose a more realistic figure.

Remember, case studies of work done for clients in a similar situation will play an important role in convincing the bill-payers to invest in SEO, so make sure you have you’re a few of those in your proposal arsenal. And here’s a pro tip; don’t say “give me X and I’ll bring you Y visitors” but rather say “give me X I’ll make you 3X”. That is a language much more meaningful to investors.

During any proposal SEO proposal, remember to explain that SEO is now an essential aspect of managing any website. Sure, it generates additional revenue, but it also serves to sustain the revenue being generated by previous activities. Since competitors will most likely dedicate part of their budget SEO, and considering that any changes to your own website (e.g. discontinued products, redirected URL’s etc.) will have an impact on your rankings, it is important to remain ahead of the curve when it comes to optimising your website for search.

 

Actual ROI

Calculating Actual ROI will always be simpler than estimating Anticipated ROI, since all figures are available in your preferred analytics tool.

In principle, it is as simple as calculating the revenue generated by your SEO campaign and deducting the cost of it, then dividing it by the cost again:

ROI = (Revenue – Campaign Cost)/Campaign Cost

 

However, calculating ROI in this way will ignore the fact that the business would be making X revenue, even if the SEO campaign was not deployed. So you can come to a more accurate figure by using the following formula:

ROI = (Current period revenue – Previous Period Revenue – Campaign Cost)/Campaign Cost

 

Furthermore, if we take the attribution models into consideration, there will be a portion of revenue that SEO generated indirectly. It may, for example, act as an assisting channel in the conversion, so one further step in the formula would be to add this revenue before the calculation:

ROI = (Current Ecomm. Revenue + Assisting Conversion Rev. – Previous Period Rev. – Campaign Cost)/Campaign Cost

 

The results of these calculations will usually determine whether the campaign will continue or not, so this is the real moment of truth. Since SEO can take up to a year to show results, it is likely that, in the beginning, ROI may be negative. So never forget to manage expectations in this regard, to avoid difficult conversations during the early stages of the project.

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