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Cracking ROI Calculations for SEO and AdWords

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9th August 2017 in

In the scheme of all your marketing efforts, “digital” offers unparalleled levels of accountability. It’s surprising then, how many marketing managers and business owners don’t accurately measure the real ROI of their efforts.

To assist with this, I’m going to provide a quick and easy breakdown on how to correctly measure the ROI of your campaigns, and more importantly help you assess the real value of your organic (SEO) and paid (AdWords) search strategy to your overall business.

So first up.

What is your SEO or Google AdWords investment?

When considering your investment in any marketing channel, you should factor in all soft and hard costs associated with setting up, optimising, analysing and reporting on your activities.
If you’ve engaged a digital agency, their activities involve a lot more than just updating some meta data, creating content, building links, writing some ads or adjusting bids.

There’s preliminary research, competition reviews, strategy sessions, mapping and planning campaigns, and that’s before they’ve even set anything up or started optimising the campaigns. On top of that, a good agency will be spending time on testing, analysing, interpreting and reporting results back to you. Not to mention the meetings, emails and calls needed to manage your account ongoing.

And if you’re managing the campaigns yourself, then these activities should be tracked and measured even if they’re just soft costs to your business.
Whether you’re working on your agency’s fees, or your internal costs (or mix of both), this represents your marketing total marketing investment.

How many conversions (leads and/or sales) are being delivered?

In the realm of search marketing, our primary focus is on delivering increased leads and sales. While traffic, rankings and ad impressions are the pathway to achieving these goals, they’re not a meaningful measure of digital marketing performance in isolation.

Leads (Web Form Completions, Sign Ups or Phone Calls) and Sales (transactions) are what drive bottom line impact in a business.

When you’re setting up your web analytics it’s important to have your “goals” set up correctly. Setting them up properly is a whole other blog post. If you need help, here’s a quick guide from the clever people at Loves Data.

If you’re running an ecommerce business, it helps to connect your cart system to Google Analytics so you can get actual sales numbers and revenue. It makes the ROI calculations much easier.

With your Goals in place, Google Analytics does all the hard work for you. It tracks how many leads, sales or micro conversions were generated by each of your traffic sources. This information can be found either in the Acquisition > Overview area of Google Analytics, or in the Conversions > Goals > Overview area.

So whats your ROI?

With most of the critical data points at hand, it’s now time to get down to the nitty gritty of your ROI calculations. These will vary depending on whether you’re working with Leads or Sales.

Working with direct Sales ROI – Ecommerce ROI Calculations.
Firstly, you need to know the average margin on your products. There’s no point working out your ROI based purely on revenue, as you need to consider the Costs of your Goods (COGs). You need to work on the profit of your products to get an accurate picture.

Once you have your margin (as a %), then we can do the ROI calculations.

Gross Profit ROI = ([Total Revenue ($) x Margin (%)] – Investment ($)) / Investment ($)

Here’s an example. Let’s assume you’re an ecommerce store that sells homewares.

  • Assuming your SEO costs you $2,500 per month.
  • And it generates $7,000 in sales during the month at a margin of 60%.

Gross Profit ROI = ([$7,000 x 60%]-$2,500) / $2,500 = 68%

This gives us the most fundamental ROI calculation. Where businesses have the data available, a more relevant calculation would be to use lifetime value (LTV) of clients. As we know that many customers go on to make repeat purchases and are more valuable to the business than their initial transaction.

Assuming the $7000 worth of sales equates to a LTV for customers of $11,000. Then the calculation looks like this:

LTV ROI = ([$11,000 x 60%]-$2,500) / $2,500 = 164%

Which would be a pretty impressive result. Anything positive ROI is (questionably) a good result for the business.

Working with Leads based ROI.
When your SEO and AdWords campaigns are focused on lead generation, we need to consider some other variable in the absence of end to end sale tracking.

As leads represent an opportunity for your sales team to close business, we need to understand what their average close rate is, to determine the ROI. And the calculation (which looks a bit more complex) is done like this:

Gross Profit ROI =
([Leads (#) x Close rate (%) x Sale Value ($) x Margin (%)] – Investment ($)) / Investment ($)

We can also use the Lifetime Value concept for leads based campaigns to get a more accurate picture.

LTV ROI =
([Leads (#) x Close rate (%) x LTV of client ($) x Margin (%)] – Investment ($)) / Investment ($)

As you can see, while the calculations look a little cumbersome, they’re quite easy to work out. And more importantly provide a valuable insight into the value that your SEO or paid search activities are delivering to the business.

Before I finish up, I’ll make a caveat that these calculations are not the perfect picture as they’re all based on what we call “last click” attribution. And in the new world of analytics, where we have access to multi-channel attribution, it doesn’t tell the full story.

But I’ll save attribution modelling for another post.

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