SEO Return On Investment

I am pretty active on LinkedIn and have been for quite some time. I really do my best to try to answer one question per week and participate heavily in that community. It’s a good way to connect with others, make contacts and also use it as a sounding board for input to my ideas and thoughts on SEO, Search Marketing, Internet Marketing and what I do for a living both with Honeypot Marketing and with my own projects.

I figure since I am posting there I should also share some that with this audience. So the question that was posed from LinkedIn was this:

“How can you calculate the ROI of further SEO Investments for online project? Is there a model that can be used?“

That is a darned fine question since typical ROI models do not stand up well when it comes to SEO and Organic Search for a couple of reasons:

  1. Investments are indirect. You invest in link programs, content etc and it doesn’t directly drive traffic. The engines drive the traffic but the investments are there to help increase your authority in those engines. It confuses alot of people as to the logic.
  2. Most companies fall flat in terms of customer acquisition models. They are not correctly tracking a converted visitor from search, which makes it impossible to optimize your converting terms from the engines. I have seen many instances where terms which you wopuld not think are big converters in fact are massive converters (especially in tail of search). If you dont know this information then throw out your ROI model, you’ll be guessing anyhow – you could lie I suppose but then again that would be even worse and since SEO’s never ever lie (I’m ducking from the lightening!) that would never be a problem. :mrgreen:

Given those two factors I’ve come up with a fairly decent model that I find works and here for your viewing pleasure is the overview. If you disagree with me or if you think I’m wrong then register and comment or email me.

One of the key things to consider is that calculating ROI on Organic Search is different than traditional media. Here is the layout I utilize:

A Total Amount of Search Traffic
B Total Amount of Converting Search
C Conversion Rate from Search
C Life Time Value of a Conversion (is it CPA or LTV)
D Converting Terms (focus on these)

Determine total Search Traffic = 1000
Determine the Converting Search Ratio: B/A (10/100) = 0.10
Use the Total Converting Search Numbers = 100
Determine the value of the Conversion: C = $200

You have profited $20,000 from organic search.

Total current budget : Link Building $1500 per month plus other monies spent (I am not sure what these are)/

[poll id=”4″]

Your profit of $20,000 from all search engine optimization programs is being generated by $1500 of spend to acquire 200 customers. Your cost per customer is $7.50

Your spend is generating a 13:1 profit to cost ratio. Now you know your budget to work with and you can shift your overall tactics to increase the overall number search joins as you wish.

I’ve used this model (with much more detail) successfully in the past on numerous projects in the online gambling industry including online sportsbooks, casinos, generic ecommerce sites, online dating, lead generation and ebook marketing industries. It provides for a strong ROI model, justifies SEO budgets and keeps the business people happy since they understand what the goals of the program really are.

I would love to get your input, comments and suggestions on expanding the ROI model for Search Engine Optimization. Please comment below and let know, even if you think I’m completely wrong!

Cheers,

Dan

About the Author Dan Nedelko

A human being spinning around on this big blue marble with the rest of you, interested in Media // Music // Art // Family // Business // Founder of http://hny.pt

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  • Jeff D Wyatt says:

    From what little I remember from my Finance Degree, your ROI mathematics look solid. The biggest challenge (especially for a new business) is figuring out what the true lifetime value of a customer is. There are a couple of snags that people can run into:

    1) The business is too new to know what the true lifetime value is. If this is the case, always round your expectations way down so your plan takes into account those pesky worst case scenarios.

    2) The Lifetime value of a customer varies depending on the marketing channel the customer came from. Be wary of applying a Lifetime Value that was obtained from other channels. Each method of customer acquisition can have a very different lifetime value. For example, someone who was referred to you by a friend will probably have a different lifetime value than a customer obtained from a promotional coupon. It is best to get some information about the customers obtained through the online channel to get a good estimate before making big assumptions.

    3) The numbers don’t line up. Some companies think they have nailed their numbers but are still losing money. Make sure to reevaluate how much your customers are actually spending with you on a periodic basis to make sure you are using accurate info.

    Once you have an accurate lifetime value estimate, Dan’s formula above will lead you down the road to calculating an ROI that will have the executives drooling and your client list full!

  • Jeff D Wyatt says:

    Also, be carefull when using the acronym LTV, as this means more than one thing in the financial world. In this example it means LifeTime Value, but it is also common to use LTV to mean Loan To Value when speaking about money.

    Make sure eveyone you are communicating with is on the same page!

    • Dan Nedelko says:

      Excellent point Jeff. It’s easy to get into a groove with your own acronyms. Generally I try to define those before getting into any kind of calculation. As a side note any Lifetime Value Calculation is extremely difficult to define.

      In my experience it has always been an estimation which is agreed upon by all business units (sales, marketing, operations, etc.)

  • Bart says:

    What about branded searches? Do you include them in your SEO analysis? They are mostly driven by other marketing.

    Also, what periods do you look at for comparison? You dont start with zero visitors. Obviously there are cyclical trends, but also as your site ages it gains in authority (which will give more organic traffic but has nothing to do with your seo efforts).

    I am really struggeling with this, is there an SEO (software) system that can approach a reliable ROI meassure? Something like omniture wont do because a. it doesnt have seo cost and b. cant distinguish between what you’ve paid for and what not.

    • Dan Nedelko says:

      Hi Bart,

      When putting together my SEO ROI I always break out branded search into a separate calculation, my reasoning behind this is that any branded search is a result of our overall branding efforts not simply any SEO program. Additionally ranking for your own brand name does not generally require any additional effort or resources (that is debatable however with any ROI calculation we have create a definition) – I am focusing on the ROI of your search team and resources for programs.

      Since developing an ROI for SEO is generally a baseline operation you need to set reasonable targets for a 12 month period, after that initial 12 month period you can then begin to integrate your SEO ROI with the other ROI calculations your organization will perform.

      As a site ages it will not by default gain authority – there are many old sites which do not gain authority and do not have rankings. I would argue that gaining in authority in large part due to a strong search program (this includes advising design teams, campaigns and ongoing online promotion). So I don’t think your assumption is 100% accurate 🙂

      As for tools to measure ROI on Search and SEO programs Google Web Analytics and Omniture can be setup to manage this type of calculation on a daily basis, both through funnels, goals and targets.

      Hope that helps!

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