SEO ROI: The Formula

How should we calculate the ROI of our SEO campaign? The formula is actually quite simple:

SEO ROI =(Total Revenue Generated From SEO-Total Costs of SEO)Total Costs of SEO

Depending on when you calculate the ROI, we can arguably divide SEO ROI into two different types:

1. Anticipated ROI: the “prediction” of SEO ROI we calculate before the SEO campaign, often calculated to justify the cost of an SEO campaign
2. Actual ROI: the calculation of actual SEO ROI after the SEO campaign, usually to evaluate the performance of the SEO campaign by comparing it with the anticipated ROI.

Calculating these two won’t essentially change the initial formula, just the variables:

Anticipated revenue and costs VS Actual revenue and costs

As we can see, there are only two variables to calculate, and you can read more on how to properly calculate or anticipate SEO revenue, SEO costs and SEO ROI.

Figuring Out SEO Contribution To Revenue

SEO’s contribution to generally comes from organic search traffic—a direct result of an SEO campaign—, which is the number of visitors that come to the website by clicking on a search engine result. 

It is important, however, to understand that organic search traffic can contribute differently to revenue, depending on how the business generates revenue, business model or revenue model. 

While there can be many different types of revenue models, generally in relation to SEO we can divide them into three types:

1. Businesses that sell products/services on their website (eCommerce) with a one-off sale model, or simply non-recurring eCommerce model
2. Businesses that sell products/services on their website (eCommerce) with a recurring revenue model, for example, SaaS products with a subscription-based model
3. Businesses that don’t sell products and services on their website, so website mainly performs as a lead generation device

For the first and second models, we can calculate contribution to revenue by calculating customer lifetime value (CLV). 

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

Or

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

Voila!

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
• Content creation 
• Content promotion
• 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.