Calculation of ROI in SEO

We have to think about SEO with the right way of thinking: it is a valuable marketing investment and a long-term investment.

Thus, as with any other investment, it is very important to consider two important elements: Cost and ROI.

However, because of the complexity and intangible nature of SEO, calculating both the initial cost and ROI of SEO is quite difficult. In this guide, we will discuss how to do so.

1. How to calculate the cost of SEO
2. Calculation of ROI in SEO
3. Calculation of income from SEO
4. Calculation of income for “traditional” business
5. Calculation of Revenue for E-commerce Websites
6. Calculation of income for e-commerce sites with recurring income
7. Conclusion

1. How to calculate the cost of SEO

We cannot determine the return on investment without knowing in advance how much we will have to pay for SEO promotion. However, SEO is actually a very universal channel, which can be 100% free if you want, but at the same time can be paid if you decide to give the site to an expert in SEO.

There are generally two ways to calculate SEO costs depending on:

1. DIY SEO
2. You hire an SEO expert or agency

If you outsource SEO to an agency or hire a freelance SEO expert, then the cost of SEO will be pretty obvious: expert/agency fees.

However, if you’re going to implement SEO with your in-house team (or on your own), you should consider several factors:

1. The cost of SEO software
2. Content creation costs
3. Costs of content promotion
4. Costs of technical website optimization; you may need to hire a programmer to help
5. Costs of link building

This is not a complete list, however, you can calculate all of the costs associated with these five items to determine the base cost of your SEO campaign.

Calculation of ROI in SEO

How can we calculate the ROI of SEO promotion?

Here’s the basic formula:
ROI SEO = (Income received from SEO – Cost of SEO) / Cost of SEO x 100%

It remains to know how we can calculate the revenue from the SEO campaign.

Calculating revenue from SEO

Different businesses have different revenue models, and different ways in which SEO can increase sales revenue (directly or indirectly).

In general, we can divide companies into three different types depending on how SEO will contribute to their revenue:

1. Companies that don’t sell products or services directly on the site. Any “traditional business” gets into this category
2. Companies that sell products or services on the site. For example, cell phone sales. Blogs that sell affiliate products would also be here
3. Businesses that sell products or services with a recurring revenue model (subscription-based)

Calculating revenue for a “traditional” business

In this type of business, SEO and site performance will not directly affect income, so calculating the resulting income can be quite complicated.

So, in this type of income, we basically calculate the number of potential clients attracted and the potential revenue generated from those potential clients. For example:

1. If we can generate 100 leads each month with a regular search and 30 of them end up buying the product/service, the conversion rate will be 30%
2. Assuming the customer lifetime value (CLV) for those 30 customers is $1,000, then we get $30,000 in total revenue from them. (We’ll talk more about how to calculate CLV below)
3. Finally, divide $30,000 by the total number of leads generated (100), then we can determine that each lead generated through SEO generates $300 in revenue

Calculating income for e-commerce sites

In this type of income, site traffic from regular search – the result of an SEO campaign – will directly contribute to SEO.

However, in the previous revenue model above, we briefly discussed CLV or customer lifetime value . In this model, we must calculate not only the sale of a single product/service, but also the CLV.

Although there are different ways to calculate CLV , the most common is to first calculate these variables:

1. Average Customer Lifespan: the average number of years a customer maintains a relationship with your business. For example, let’s assume that based on a customer survey, you find that the average life expectancy is 2 years.
2. Average Purchase Cost: The average of the company’s total revenue over a period of time divided by the total number of purchases over the same period. For example, if $10,000 per year divided by 100 purchases, the average purchase cost is $100.
3. Average purchase frequency: dividing the total number of purchases by the number of unique customers. For example, a total of 100 purchases were made by 10 different customers, then the average purchase frequency is 10.
4. Value for the customer: the average frequency of purchases multiplied by the average cost of the purchase. In the above example, we get 100×10=1000 dollars.

Last but not least, the formula for calculating CLV:

CLV = customer lifetime X customer value
In this case, with the above example, the CLV is 2 years, multiplied by $1,000, we get $2,000.

Thus, if the conversion rate of a potential client from conventional search is 10%, then each potential client attracted from SEO will be worth $200.

Calculating income for e-commerce sites with recurring income

In this type of income, we will calculate CLV as the basis for calculating income, but because the business model is more complex, the way we calculate CLV will be very different.

In this model, we will be dealing with two important metrics: monthly recurring revenue (MRR) and annual recurring revenue (ARR).

So, we can calculate the generated revenue from SEO as follows:

1. MRR / customer = $1,000 / month
2. ARR / customer = $ 12,000 / year
3. Conversion rate = 20%
4. Number of leads with SEO: 100 leads per month
5. Sales generated by SEO: 100 leads per month x 20% = 20 sales per month, 240 sales per year
6. Additional ARR from 20 sales per month = $240,000 per year

Conclusion

Back to the SEO ROI formula:

ROI SEO = (Income generated from SEO – Cost of SEO) / Cost of SEO x 100%

Now that we’ve discussed how to properly calculate the revenue generated from SEO and the cost of an SEO campaign, calculating ROI should be fairly straightforward.

So, properly understanding the potential ROI of your SEO campaign can help you make a better decision about whether you should invest more in SEO or change your strategy in favor of another traffic source.