SEO ROI Analysis – How to do ROI calculations for SEO Praveen Mishra We often talk about ROI during reporting and esp. during pitching a new client. ROI is a very important metric, even more important than sales or conversions. This is because it takes into account the cost of the investment. Common business sense dictates that If an investment doesn’t yield a positive ROI or if there are other marketing channels with a higher ROI then the investment from a particular marketing channel should be withdrawn. This can happen with SEO too as it is not easy to calculate the ROI of SEO campaigns. If a business doesn’t see any apparent ROI from SEO or find other marketing channels more lucrative in terms of ROI than it may either choose to cut down the SEO budget or stop the SEO campaign altogether and invest the money somewhere else. This can happen in companies which run multi channel marketing, where SEO is not playing a very big role in revenue generation or where the SEO has failed to prove the ROI of its efforts. It becomes very important that we calculate and report ROI of our SEO campaign even if the client hasn’t asked for it. This is because if we don’t report the ROI, the client will calculate it himself (often inaccurately) at some point esp. during the decision time (whether to continue or discontinue SEO). Every time we report ROI, we give solid reason to our client to continue to invest in SEO. For clients, ROI always mean ‘dollar returns’. ROI should not be confused with raw organic traffic, organic conversions, rankings, number of links built etc. Majority of businesses can’t really understand ROI in these terms. They want to know if they spend X, then what they are getting in return in dollar value. Is it 2X, 3X ….??? You need to do show the ROI for your own business sake. Types of ROI There are two types of ROI which I think are worth mentioning: Anticipated ROI and Actual ROI. Anticipated ROI is the ROI we report when we are pitching a new client and actual ROI is the one we report during the tenure. Anticipated ROI Anticipated ROI = (Anticipated Revenue from SEO efforts – Proposed Cost of the SEO Project)/Proposed cost of the SEO project Before you calculate anticipated ROI, you need to know three things in advance from your prospective client: Average monthly visits E-Commerce Conversion Rate of the website Average order value If you don’t have these values beforehand than you can’t do ‘anticipated ROI’ calculations. Let us suppose that you have got following data from your prospective client: Average monthly visits – 50000 E-Commerce Conversion Rate of the website – 0.68% Average order value – $176 Let us suppose that the proposed cost (or fee) of your SEO project is $20000. Now you need to justify this spend to your prospective client. So you need to generate an additional sale of at least $20K during your contract period. $20k will only be a breakeven point (point at which there is no profit and no loss) for your client. So you need to generate much more than $20k through your SEO efforts in order to generate a reasonably positive ROI. You now need to determine the number of additional orders required to generate an additional sale of at least $20k on the client website: No. of additional orders required for $20k sale = Proposed Sale/Average order value = 20000/176 = 114 So when you will generate an additional 114 orders on the client’s website during your contract period through your SEO efforts, your client will break even. If you fail to generate at least 114 orders through your SEO efforts during your contract term than you will generate a –ve ROI for your client. Your client will actually be in a loss. The next thing that you need to do is to determine the additional traffic required to generate 114 orders on the client’s website. Additional Traffic required to break even = number of orders required to break even / e-commerce conversion rate = 114/0.68% = 16765 visits So you need to generate at least 16765 visits to the website through organic search just to break even. Here I am assuming that e-commerce conversion rate of the website will remain constant (if not improved) during the contract term. In order to deliver a reasonable positive ROI, you need to generate much more than 16765 visits. So let us just double this traffic estimate to 33530 visits. Now we can expect to get around 228 orders (144*2) through our SEO efforts which in turn could result in $40k ($20*2) in sales. So, Anticipated ROI = (Anticipated Revenue from SEO efforts – Proposed Cost of the SEO Project)/proposed cost of the SEO project = ($40000 – $20000)/$20000 = 100% 100% ROI means if your client spend X, he earns 2X in return. I think it is pretty reasonable to consider delivering at least this much ROI. Because if your client spends X and he earns X or less in return, then what is the point of carrying out SEO on the website in the first place. It is simply a waste of time and money. Now at this stage you need to decide whether or not you can generate additional 33530 visits through SEO during your proposed time frame. This will require additional calculations which are beyond the scope of this post. But just to give you an idea, you can do this by estimating the traffic you could generate through your chosen keywords in the proposed time frame. You can always go back and revise your proposed fees and time frame for the project if you think 33k visits is too much to deliver. Once you have done your traffic projections and ROI calculation then it is up to the client to decide whether he can trust you on your ability to generate proposed traffic to his website within the timeframe. In any case, you now know how ‘Speculated ROI’ calculation is carried out and why it is so important. When you talk about ROI, you speak in a language which businesses understand very well: ok I will give you X, how much I will get in return?….. Please don’t say I will get rankings and traffic in return. Tell me how much I will get in dollar value so that I can justify ad spend. Note: If you want to know how to charge for your SEO campaign then check out this post: SEO Pricing – How to Charge for Your SEO Campaign Actual ROI Actual ROI is the one which eventually decides the fate of our future engagement with a client. Actual ROI = (Total E-Commerce Revenue through SEO + Total Goal Value through SEO)- cost of running the SEO campaign/ cost of running the SEO campaign I calculate ‘Total Goal Value through SEO’ as the sum of ‘Assisting Conversion Value’ and ‘Last Interaction conversion value’. I am taking multi touch attribution into account here because SEO not helps in generating organic visits and sales but also help in completing sales through direct traffic, PPC, Display etc. So you must report the role of organic search campaigns in the overall conversions occurred on the website. I have talked more about these calculations in the post: How to Analyze and Report the True Value of SEO “ SEO not only helps in completing a conversion but also help in initiating and assisting the conversions which are completed by other marketing channels (like PPC, Email, Display, Direct, Referral etc). “ Remember the real magic is in what you report. If you have got it, flaunt it. It is critical that you show the value of your SEO efforts. Never blindly assume that the client already know about your great work. I can even go ahead and prove a business that if you do cost cutting on SEO, how it will impact your PPC, Display, social media and email campaigns. I expect the same from you. Best time to report ROI I am often asked this question. The best time to report ROI of your SEO campaign is when you start getting positive ROI. Never report –ve ROI. It is common for SEO campaigns to show –ve ROI for the first few months and this is something you can educate your client in advance. Once you starting getting positive ROI, no matter how small, just report it. Even 10% positive ROI is worth reporting.
Posted on: Fri, 04 Oct 2013 08:24:42 +0000
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