CLV=The prediction of total revenue generated by a single customer over their relationships with your brand
There are various different ways to calculate CLV, but generally, here are the common ways to calculate CLV for these two types of revenue models:
1. For one-off sale eCommerce
CLV is calculated by measuring four different variables:
Average purchase value=total revenue in a time periodtotal purchase quantity
Average purchase frequency=total purchasesnumber of unique customers
Customer value=Average purchase valueAverage purchase frequency
Average customer lifespan=average length of customer relationship with your company
Finally, CLV is Average customer lifespan customer value
2. For recurring-revenue eCommerce
The main principles in calculating SEO contribution to recurring-revenue is similar to one-off sale. However, calculating the revenue itself is a little more complex due to its recurring nature.
We mainly deal with four (or five) important metrics here:
MRR (Monthly Recurring Revenue) = the total subscription revenue in monthly value
ARR (Annual Recurring Revenue) = the total subscription revenue in yearly value, typically MRR times 12
ARPA (Average Revenue Per Account) = pretty self-explanatory, the average revenue for a single customer
MRR Churn Rate = in percentage. Churned MRR/last month’s MRR
Gross Margin = Total revenue in calculation time-COGS
In general, customer lifetime value (CLV) in a recurring revenue model can be calculated in two basic ways (note: there are certainly more ways to calculate CLV):
CLV=ARPU Average customer lifetime
CLV=ARPUMRR Churn Rate
In general, the higher your ARPU and the longer the average lifetime, the higher your CLV. On the other hand, the higher your churn rate, the lower your CLV.
Calculating Contribution to Revenue
For these eCommerce sites, we can calculate contribution to revenue by:
Tracking the number of leads generated via organic search. We can set up conversion tracking, for example in Google Analytics for this purpose
Calculating lead-to-customer conversion rate
Calculating the CLV of these converted customers
For example, if we generate 1000 leads in a year with a lead-to-customer conversion rate of 20%, then we get 200 customers/year in total. If the CLV is $100, then the contribution of SEO to conversion in a year—in a rough calculation—, is $100 x 200= $20,000.
3.For Lead-Based Businesses
In this revenue type, calculating revenue and SEO’s contribution to revenue are trickier than the previous two models. This is mainly because SEO performance in this business model won’t directly contribute to revenue.
In this revenue model, we have to consider all the potential actions a website visitor can take on the website, and find out how each of these actions will contribute to revenue. This can be done by assigning values to these different actions via a marketing attribution model.
Since this is quite complex, let’s use an example to illustrate:
500 leads are generated via organic search every month
100 of these leads end up purchasing your product or service (20% conversion rate)
Let’s assume the CLV is $100 per customer, then your total sales coming from SEO is $10,000
Thus, we can determine that each lead generated via organic search—as SEO result— worth $20 ($10,000 divided by 500 total leads). If you invest more than $20 in SEO to acquire a lead, in this example, you are losing money.
Calculating SEO Cost
The second variable we’ll need to consider is SEO cost.
If you are outsourcing your SEO to an agency or consultant, then this process is fairly simple: the SEO cost is what you pay this agency/consultant. However, if you do your SEO yourself or you have an in-house SEO team (or an in-house SEO expert), we must also consider additional costs like:
Investments in SEO software and tools
Web development and web optimization costs
Link building costs
The idea is, calculate all costs that might be related to SEO. The more details you can include, the better.
End Words: Calculate SEO ROI
Finally, we can use the two variables to calculate our SEO ROI.
To reiterate, the formula to calculate ROI for an SEO campaign is:
SEO ROI =(Total Revenue Generated From SEO-Total Costs of SEO)Total Costs of SEO
Now that we’ve properly calculated the revenue generated from SEO and total costs related to SEO, we can simply insert the numbers to the above formula.
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