SEO ROI Analysis – How to do ROI calculations for SEO

 

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there are other marketing channels with a higher ROI then the investment from a particular marketing channel should be withdrawn.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:

  1. Average monthly visits
  2. E-Commerce Conversion Rate of the website
  3. 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:

  1. Average monthly visits – 50000
  2. E-Commerce Conversion Rate of the website – 0.68%
  3. 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.

Now it is your turn. How you do ROI calculations? Is there anything you would like to add to my calculations. Please share your views and insights.

Other Posts you may find usefulHow to analyze, interpret and report data trends in Google Analytics

 

 

About the Author:

My business thrives on referrals, so I really appreciate recommendations to people who would benefit from my help.Please feel free to endorse/forward my LinkedIn Profile to your clients, colleagues, friends and others you feel would benefit from SEO, PPC or Web Analytics.

 

 

  • Aleksandr

    Great post. Thank you for that.

    By the way, i’ve used information from your post “How to Analyze and Report the True Value of SEO” in my presentation and had received good rewiews.

    • http://www.seotakeaways.com/ Himanshu

      Glad you find my post so useful.

  • http://www.tushargp.com tushar purohit

    With that traffic figure in mind, a good SEO will work with you to identify potential keyword targets to drive that volume, the level of competitiveness for those terms and the strategy and tactics that will need to be adopted to improve your search engine (and wider digital) presence for those terms.

  • http://www.nayabharat.co.in ganesh

    I think your observations & comments are 100% accurate.
    There’s no content without keywords , he best keyword tool is whichever one you’ll use regularly. But ideally, you’ll have a handful of keyword tools in the rotation to consult for different purposes. Some good options include:

  • http://www.setalks.com/author/mmhemani/ Moosa Hemani

    I mean I have go through this kind of title for like 100+ times and I never even bothered to click on the post and even this time it was not the title but the writer of the post that I trust and this was the reason I decided to go through the blog post…

    You know what… unlike most of the blogs who talks on this topic this post actually talk some real shit… I mean a simple ROI math on the initial level (Anticipated ROI)

    I guess the best part about doing some research on Anticipated ROI is because this way you will exactly know how much work you need to do on one website and how much you can deliver in return… This way you will be able to ask for more budget from the client and he possibly agree on that because of the fact that you presented him the figures and numbers instead of promising rankings and traffic.

    Great stuff sir!

    • http://www.seotakeaways.com/ Himanshu

      I am glad you like the post. ROI calculation is very important to retain clients.

  • http://www.ascentinternet.com/blog/ Jason Nelson

    Nice work on this post Himanshu. The metrics of ROI for SEO need more focus, and continue to evolve with all the recent changes.

    • http://www.seotakeaways.com/ Himanshu

      Thanks Jason.

  • http://www.beetleweb.com/magento-developers-uk Jeremy McDonald

    Interestign post. I always try and report ROI in every report to my clients but struggle when a buying cycle is longer and the keyword traffic I attract is in the discovery phrase.

    How do you tackle this?

    • http://www.seotakeaways.com/ Himanshu

      Once i start getting +ve ROI, i report it on the monthly basis. Before that i don’t report ROI and you will get +ROI only when your SEO efforts are taking into account the buying cycle.

  • http://www.kpmrs.com iliyas

    Thanks…How to calcupate ROI for content based website or small business website that have only 1K visits or less.

  • http://inboundmarketingnj.com Jason Diller

    Great post. Or you could just use the inbound marketing calculator from hubspot. I like math, but clients dont

  • http://seotrainingppctraining.com Byomkesh Kumar

    Hi Himanshu,

    Great post.

    For ROI calculation, it is great to connect the money spent to the additional organic visits required.

    I would just like to add that we should make absolutely sure that additional organic traffic an agency talks about is because of agency effort.

    I think the biggest challenge for any SEO agency, and for an in-house online marketing manager coordinating with an agency, is how much of the SEO jump is actually attributed to the agency’s SEO work (whether first touch, last touch or assisted)? IMHO, it is very difficult to segregate the effects on organic traffic due to,say, some new pages added;Or Google algoritm updates affecting site positively;Or effect of offline /social media marketing which leads to lot of linking of root page, so boosting Page Rank of root page and that of inner pages etc. etc.) from SEO agency efforts.

    This is the last and that elusive piece of puzzle which if done correctly can unequivocally make the case for SEO efforts in board room. In the absence of that ROI for a single SEO activity will always remain inexact science.

    Thanks for the nice insight.
    regards

  • http://www.northsideseo.com Anthony D. Nelson

    I think you need to consider taking this a step further and figure out what your clients actual profit margin is on their average order. Using your example above, let’s say the average order value is $176. But what if the cost of goods, storage and shipping is $100 on that order. That means they make $76 profit on each order.

    Would you pay someone $20,000 for SEO if they considered $20,000 of total sales a break even point? They’d actually be paying $20,000 in marketing for $8,636 in return money. Essentially, you’re making them a lot busier but no more profitable.

    When you look at it this way, you’d realize that you need to help this client achieve 263 additional orders to actually break even or an additional 37,707 visits to their website.

    • http://www.seotakeaways.com/ Himanshu

      Hi Anthony! Great comment. But what i think will create a lot of problem is the actual computation. Here you are assuming that profit margin will remain the same for each order. But this is never the case. E-Retailers sell tons of products. Anywhere from few hundred to several hundred thousands. Product price range can vary from anything like $20 to $20k+.

      So if you are taking profit into account, you need to do separate ROI calculation for each product category and for each product which doesn’t fit into any known category. If we are talking about profit then why not talk about net profit. So you also need to take into account the various taxes the business has to pay. This is going to be a computation nightmare and you actually need detailed financial reports from a client to do such type of analysis. Certainly not worth the hassle for speculated ROI. Even for actual ROI i wont go down this route because it just make calculations too much complicated.

      But you have raised a good point about profit margin. And here is my answer. In this post i have calculated Immediate ROI which doesn’t take into account life time value of the SEO efforts. I have done this to keep calculations simple. A client will continue to get solid returns from the SEO efforts for at least a year after the expiration of the SEO contract. So whatever money he will generate through SEO, multiply that amount by 2. So in my case $40k *2 = $80K. This is the least amount he will get back as i have not taken into account incremental increase in sales (due to increase in brand awareness) for years to come . This is certainly not a perfect calculation and you may ask why 2 and not some other number.

      But remember the benefits of SEO last for several years. So at no point will the client be at loss. That $20k breakeven point is perfectly justifiable because of the long term gains of SEO. So if a client says that $20k is not his breakeven point, you can always remind him of the long term gains of SEO through this calculation. This is what i do. Trust me, i have spent lot of time figuring out how to do ROI calculations for SEO and this is the most practical solution i have found so far. It is easy, simple and effective.

      • http://www.northsideseo.com Anthony D. Nelson

        Hey Himanshu-

        I completely agree that there is long-term value for SEO campaign and that can’t be dismissed.

        I do disagree though on the first part. Even large e-comm retailers have an monthly/yearly average margin percentage they can give you. Some products make 10% and some make 70%. They may sell more of the 70% products. Average order margin is 54%. You can find the average profit margin of each order and go from there. Knowing this level of detail (what are your most profitable products) will also help you figure out what keywords to go after in your SEO campaign.

        • http://www.seotakeaways.com/ Himanshu

          Hi Anthony! ‘Average order margin’ is a lame metric. This is because it tells you nothing about the actual profit margin of each order and gives you a misleading big picture. Bigger the website, more lame this metric becomes as it just can’t deal with great variability in profit margins across hundreds and thousands of products. Moreover it still makes calculations complex. It is not easy to calculate profit margin of each order. There is one more thing. I think you didn’t understand the context in which i used the words ‘break even’ point. I am not talking about gross or net profit here. I am talking about recovering the entire marketing cost. You paid ‘X’, you got ‘2X’, ‘3X’ etc. It is as simple as that. The amount a client will actually take to his bank (after all the cost deductions, taxes, employees salary, business overheads etc) is not our concern as a marketer. Our concern is that he is able to recover his entire marketing cost and earn much more than that. And i think i am pretty reasonable in my approach here as almost all traditional media companies (from newspapers, Radio to TV) offer nothing in terms of dollar returns (zero accountability) let alone taking profit margins into account. What they offer is a promise of gains which can’t be easily quantified. For example, you can never fully justify spending $1 million on TV, newspaper or billboard ads. I hope you got my point.

          • Andrew

            Oh really such an fantastic post by Himanshu, and agree with him to. I don’t need to see the margin if we calculate the average value of our sale.

  • http://seo-mentoring.ca Reg NBS SEO

    If your client’s company understands their financials, you are but a question away from determining net income.

    Therefore, it is an easy step to determine the differences in net profit for a set period before the SEO plan and during.

    An increase in PR has no effect on SERPs, but it *could* have an impact on income if you sell advertising.
    This could be tracked separately, but is not much use. PageRank is not an actionable metric.

    One thing I have to wonder at is HOW is a $20k contract satisfied?
    How do you account for about 200 hours for onpage work?

    Reg

    • http://www.seotakeaways.com/ Himanshu

      Just make sure that your client is able to recover the entire marketing cost and earn a decent amount on top of that.

  • http://theseoconsultantservice.com Scott

    Thanks for your great blog. I’m just setting up a business trying to get some clients for SEO and the information that you provided will be invaluable to me in knowing how to report ROI to my clients. Thanks again.

  • tahir

    Thanks Himanshu it is really great post.i am clear all things about ROI.

  • Spook SEO

    Every business wants to generate more return on investment (ROI) and it’s also necessary to check ROI in the SEO so that they could better adjust their budget for each activity. ROI analysis goes under many different steps as you mention in your post so carefully perform each step and get the best outcome.

  • Vanrajsinh Bihola

    Would u add your Marketing cost to measure the Actual ROI…!!

    • seohimanshu

      Yes

      • Vanrajsinh Bihola

        If Client has 20k PPC Budget and if we take 1k for Manage the Campaign or create the add then the total amt is 21k..so can we count the ROI now..

        • seohimanshu

          yes. the total cost to your client is 21k.

  • bagwag82

    Slightly off topic but does anyone know how do I calculate how many conversions I will get in Google Analytics for a certain PPC budget?

    • seotakeaways

      There is not way of estimating it in advance in Google Analytics. However in Google Adwords you can get such type of data.

  • http://dionlovrecich.com/ Dion Lovrecich

    Yo Himanshu, this is a great post! One question (sorry if it’s been answered previously) But how do you account for the ongoing / long term benefits of SEO? For example, a new high volume ranking will continue to deliver traffic long after the cost of the campaign has been absorbed. Do you depreciate the cost into upcoming months? If so how many and how what % of the cost is diluted?

    • optimizesmart

      I use another type of ROI calculation for that which is 12 * Actual ROI

      Here 12 is the number of months. This number is based on the assumption that a client will continue to get seo benefits at least for the next one year even without any seo.

  • Manchacho

    Sorry for such a delayed comment, but I stumbled onto your post, and it’s all very sound and logical. However, to what extent can this formula attribute to concrete results. It estimates how many visits you will need, but (correct me if I’m wrong) there is no way to determine that X + Y efforts will yield Z result, is there? Clients don’t just want to know if we can do the math, but if the results can be delivered. Therefore, there is no calculating ROI until after the fact when everything has been already done for the project, right?

    • http://pedromatias.co.uk/ Pedro Matias

      Right totally, also it is futile to compare ROI with for example PPC, or other “one off – paid media” as if you do SEO right as a long term investment your rewards will come after a year or even two when you built a resource with meaningful content.

  • http://www.theclippingpathindia.com/ Clipping Path

    Just what I was looking for. Clipping Path Clipping Path Service

  • Naveen Kumar

    I appreciate it and it is useful for me and SEOS

  • http://www.twotreesmarketing.com twotrees marketing

    Great write up Himanshu, thinking of writing something up for our site to save repeating to clients over and over!
    I think a lot of clients want the immediate roi but fail to look forward for the following years roi from the same and ongoing work..