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November 21, 2010

Calculating the ROI of SEO

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As search marketers, one of the most common questions we get asked is: How do you calculate the return on investment (ROI) from a search engine optimisation (SEO) project? These questions come from a number of sources including those looking to:

  • Justify spend on a new SEO project.
  • Increase spend on an existing SEO project.
  • Transfer funds from other marketing channels to SEO.
  • Reduce their spend on paid search and increase spend on SEO.

It is great when we are asked this question, as generally the ROI for an SEO project is high and out-performs other marketing channels. We believe that all marketing channels should be subject to detailed scrutiny and we encourage rigorous ROI analysis where all available strategies are evaluated on a level and transparent playing field.

In this article, I will outline how we approach the ROI calculation and identify some of the common pitfalls in the process. In general, the process is as follows.

Photo by ansik via Creative Commons

Baseline current traffic

Having a representative baseline is key part of accurately measuring your progress. Use non-brand SEO traffic as the key measure, as total SEO traffic is impacted significantly by changes to brand SEO traffic from other marketing initiatives and non-brand SEO traffic is the cleanest measure of an SEO project.

Identify a baseline traffic number that is representative of the average current state of the non-brand SEO traffic. For example, if the traffic has recently increased, should the baseline be the average of the past 2 months or 6 months? Ensure any recent changes to the website that may impact SEO are taken into account in determining the baseline. Then, if less than 12 months are being used, consider if any seasonal factors need to be taken into account.

Estimate potential additional traffic

The potential traffic can be estimated by using data from your analytics program, Google Webmaster Tools, ranking monitors and search engine search volume data. The process involves calculating the search volume available per keyword, and then adjusting that for the change from current rankings and click-through-rates to estimated rankings and click-through-rates achieved by the SEO project. We use a combination of company specific, industry and general search engine click-through-rates as part of our calculations.

Ensure that the anticipated rate of implementation of the recommendations and a time lag to account for the search engines to index and understand the changes, are factored into the traffic timing.

Remember to adjust for natural growth in search volume and company growth from baseline. These growth rates should be excluded from the estimated additional traffic, as this traffic would be expected even if the SEO project were not completed.

If your calculation of estimated traffic has been based solely on Google numbers then gross up the estimated traffic increase to reflect the estimated traffic from all search engines

Potential additional traffic per month less the monthly traffic baseline will give you the projected increase in traffic per month.

Value new traffic

There are 2 key valuation methodologies that we use. The first is based on identifying the additional value of the SEO traffic driven to the site. In this method, apply a conversion rate to the additional traffic generated and then multiply that number by the value of a converted click. If this data is not available, it is still worth estimating these numbers based on the best available data, in order to get some indication of the value of the traffic. Also, consider that there may be multiple conversion points and ensure this is factored into the analysis.

The next key decision is to identify the time period over which the SEO project will continue to provide the additional traffic. This varies between projects, companies, industries and the level of competition and will require judgement and analysis to identify the most appropriate period. We generally use a number between 12 and 24 months to calculate the total additional SEO traffic.

The value of the additional traffic less the cost of the SEO project is the ROI. The cost of the SEO project should only include additional directly attributable internal and external costs, but should exclude sunk costs (costs that would be incurred regardless).

The second methodology is based on the replacement value of the SEO traffic. This is valued based on traffic from other channels (e.g. paid search, banners, affiliates etc), or whichever is deemed the most appropriate representation for your business.

As an example, let’s use paid search. In this case, take the additional SEO traffic estimate and adjust for the different conversion rates between paid search and organic search. Generally, organic search traffic converts at a much higher rate than paid search due to the higher level of trust associated with organic search traffic. We generally use a multiple of between 2 and 5 to gross up the traffic estimate required. This means that you will have to buy between 2 to 5 times more traffic to replace the SEO traffic.

Then calculate an average cost per click to apply to the estimated traffic increase. This will need to be based on the current average cost per click across non-brand keywords but also take into account the uplift in cost per click that may be required to purchase more traffic and the level of optimisation of the current paid search campaign. The cost savings from not having to purchase the SEO traffic less the cost of the SEO project is the ROI.

In the above analysis, it may only be possible to do the analysis on a sample of keywords. Ensure that the results from this sample are correctly extrapolated across the entire population.

Depending on the timeframes and size of the numbers, it may be necessary to use traditional net present value calculations to identify the true ROI.

We recommend using both the above methodologies, if possible, and coming up with a range of results based on different levels of investment. This will assist in determining how aggressive to be when it comes to SEO.

It is important to note that the above methodologies do not measure the full value of the SEO project as there will be corresponding increases in brand SEO traffic, as well as increased referral traffic (from building links and online brand presence), which are not included in the above calculations.

I am sure you will find, as we do, that SEO projects normally have a very strong return on investment and are one of the best performing channels.

Recent changes to the algorithm will have a significant impact on the above analysis. For example, the impact of the recent changes to Google Places will impact historical rankings and click-through-rates .

A robust forecasting and ROI process with clearly outlined assumptions and analysis will assist with supporting the case for SEO investment.





2 responses to “Calculating the ROI of SEO”

  1. Maciej writes:

    I think too many businesses are simply hung up on rankings when it comes to justifying and marketing spend on SEO. I think they fail to realize how many other important factors can and should be used to determine whether an SEO campaign is successful and it really boils down to analyzing your analytics data consistently.

  2. Eric | Starcraft 2 Strategy writes:

    Interesting article, but I wonder if it really works. We’ve tried to plug into google analytics to estimate future traffic, but it wasn’t accurate at all – we were hugely disappointed.



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