How To Correctly Calculate ROI On SEO
One of the most commonly mis-understood elements when it comes to SEO, is how do you effectively calculate your ROI on SEO?
Why is this generally so difficult to calculate? Simple. The data isn’t all what it appears.
You see, with SEO, your active campaign (The period you are paying or working on it) is the ‘building’ portion of your SEO, and often over 60% of the value comes AFTER you finish paying.
Because SEO is a long-term game. It takes time for the results of your SEO to truely shine through. Its been stated that the power of a backlink can take upto 12-months to fully release to a website! That is, your website will keep gaining power for upto 12-months after you stop actively investing time or money into your SEO.
So with this many unknowns, how can you effectively calculate your Return on Investment?
In this blog I’m going to be walking you through the process that I personally use to calculate the Lifetime ROI from our own internal SEO efforts, and Its the same process that I recommend to our clients also.
There are three steps, with several elements in each one.
Now, before you get started, it is important that you have access to the following data:
- Your average order value
- The average number of repeat orders per client
- Your website traffic before and after an SEO Campaign
- Website to lead conversion rate
- Lead to customer conversion rate
- Your total SEO investment over the lifetime of your campaign.
Once you have these core pieces of business data, you’ll then be ready to go. If you don’t have these, ask your marketing company & sales team and they should be able to provide them for you.
For this blog, I’m going to walk you through an example of a client who calculated their numbers like this:
“ New leads acquired during time paying for SEO: 12 X initial spend with business (400) = $4,800 in revenue. SEO Cost: 9,000 Therefore SEO LOST MONEY”
Where on the surface this looks ok, if you dig deeper into the numbers behind their business, what we found is that they actually were set to generate upto $44,000 in new lifetime revenue from the same investment. Needless to say, this is a massive difference, by simply looking deeper at the numbers behind the business.
Knowing how to do this is exactly how your competitors who are crushing it with SEO, and have been for years look at things, and its exactly how you need to look at your numbers if you want to sustainably grow and take the share of the market you deserve.
So here we go!
Section 1: Calculating Your Lifetime Value Of A Client
What is lifetime value? Its a simple number which is…
Average order spend X the number of repeat purchases = life time value
Why do we use lifetime value rather than initial order?
Most small business owners only look at the initial order which puts them in a really tough spot. You see, if your average customer spends $400 with you, and your acquisition cost is $200, then it’s going to be very tough to justify spending on SEO or marketing.
Where when you dig deeper, you may find that this custom on average will buy with you 5-times, which means that their spend with you over their ‘lifetime’ is actually $2,000, yet the acquisition cost still remains at $150.
In the first scenario you are spending 50% to acquire, in the second you are spending only 7.5%. Massive difference!
This phenomena of lifetime value is why most businesses grow over time even if their new clients each month remains the same, all because they build up a returning customer stream.
So, your turn, what is your average order value? Not multiple that by the average number of times a customer purchases with you (Could be over 5,10 or 20 years!). The number you get, that is your lifetime value. Keep this written down, you’ll need it soon.
Section 2: Calculating The New Lifetime Leads
The goal of SEO or any digital marketing strategy is to ultimately generate more leads. While SEO is only responsible for bringing in additional traffic, as long as your website has been professionally optimized for conversions, you should see a nice increase in lead flow.
One thing to keep in mind, if your website, your marketing, your X-Factor and your social proof isn’t strong, no amount of traffic will be able to increase your lead flow dramatically. If you feel this is the situation that you are in, I highly recommend that you review your marketing fundamentals before embarking on a SEO or paid search campaign.
Now that is out of the way, lets jump into calculating the lifetime new leads.
Sp what is this number? Its the total number of new leads that can be directly attributed to your SEO efforts over the LIFETIME of the results your campaign generated.
The reason why we calculate over the lifetime, is often many SEO results flow through after you have actively finished investing in SEO. Without doing the calculations, on the surface it could be easy to think that your SEO campaign wasn’t profitable, or indeed lost you money. However, if you dig deeper and do the calculations below, you’ll nearly always find the exact opposite!
So here is how we calculate it:
Step 1: Calculate the NET traffic increase (during your active campaign)
This is found by subtracting the initial monthly search traffic from the final monthly search traffic.
So, if your website started with 200 visitors a month, and SEO got you to 280 per month, then your NET increase was 80 visitors.
Step 2: Calculate the Projected Traffic Growth.
This step is one where you need to use an educated guess. From our experience we have found that clients SEO campaigns can grow anywhere from 20-40% more traffic over the following 12-month period after their SEO concludes.
Calculation: Projected traffic – initial traffic = Lifetime website traffic.
For our example, if we add a conservative 20% extra traffic to the 280 that the client ended with, it would be 336 visitors a month.
336 – 200 (their initial traffic) = 136/mo new visitors.
Step 3: Projected maintenance period.
We find that most clients websites maintain this higher traffic level for 9-24 months.
Decide on what you would like to do your predictions based on.
Step 4: New Lifetime Traffic
This is: Projected new traffic lifetime X Projected New traffic = Total new traffic.
In our situation – 9 X 136 = 1,224 new lifetime visitors from their SEO (On the conservative side).
Step 5: New lifetime leads
This assumes all things remaining equal. So multiple the conversion rate of your website by the new traffic.
In this situation, the client’s website converted at 4.5%, so our numbers would be:
1,224 X 4.5% = 55 new leads.
Step 6: Calculate Total New projected sales:
This is where you multiple your new leads, by your closing ratio, by your lifetime value. This is where you get the REAL Attributed revenue from your SEO campaign.
In this example:
55 X 40% (Closed 40% of new leads) = 22 new sales
22 X $2,000 (Life time value we calculated in section 1) = $44,000 new lifetime revenue.
So in this example, the client should generate $44,000 in new lifetime revenue from the SEO they invested in.
Section 3: Calculating the ROI!
The last and final section is to calculate the ROI of their SEO campaign. This is the multiple of how many dollars back the client will get over the lifetime (Not immediately or during the campaign) that the client could achieve.
This number is simply…
Total lifetime revenue ($44,000 / Total SEO Investment (1,000/mo * 9 months = $9,000) = 488%
That is a 488% Return On Investment!
This is very different to the $4,800 that they thought they would generate from their campaign.
If you haven’t been doing your own numbers as you go along, then I highly recommend taking some time, gathering the data you need, and crunching the numbers – you may be pleasantly surprised with what you find.