Selecting the right SEO budget for your business can be a tricky task. Let’s first assume that you will select the correct SEO company and they will, at least, do an decent job on getting you rankings. We will save the selection process and expectations for another time. You need to determine your SEO budget before you go out and hire a professional SEO agency. The right SEO investment for good search rankings varies for every company. Let’s follow an easy procedure that you can plug in and use in your business. We will have to make some assumptions about your website and your ability to read analytics and understand some fundamental business ratios and terms. If we are shooting over your head, contact us and we will walk you through it. This formula is dynamite for your profits when applied correctly.
Step 1. First we need to determine what a visitor to your website is worth. Let’s assume you sell sunglasses. Look at your Google Analytics (GA) account and see how many visitors were at your website in the past month. Let’s assume it was 5,000. Let’s also assume from the 5,000 visitors we received 100 orders. That means 2% of the people visiting the web site placed and order and our conversion rate is 2%. Let’s assume that the average sale was $125. Your gross online sales were $12,500 for the time period we are using.
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Step 2. We now need to determine the gross margin on the sales that were made. The gross profit margin on a sale is the difference between what you paid for the product and what it sold for. Let’s assume the average pair of sunglasses cost you, the merchant, $50, and you sell them for $125. That means you have a gross margin of $75. The gross margin percentage is $75/$125 or 60%. If we apply 60% to the $12,500 total sales figure we come up with a rough gross margin for the month of $7,500.
Step 3. Now that we have some of our basic numbers we can determine the gross profit margin before fixed expenses, per visitor. Divide the total $7,500 by the number of visitors 5000 and we get $1.50 of gross profit margin per visitor. This $1.50 can now be applied to fixed overhead and profit. We can assume, if we make any additional sales, that they will contribute to our fixed expenses and profit after cost of selling expenses. The cost of new sales or selling expenses will be our SEO Budget.
Step 4. The pivot number we will create our budget from is the incremental break even number. If each added visitor from our SEO budget creates $1.50 in new gross margin then we can break even on an incremental basis, which means fixed costs that you pay with or without the extra sales remain, at $1.50 spent per new visitor to our website. That also means that we are most likely adding new customers at that investment level at break even. The reason we can assume that is because SEO brings people in that are searching for your products. The searcher has not decided on your company yet. Our clients normally see 90% of non-branded SEO created customers (non-branded search terms are ones that do not include your brand name). They are new, and since SEO also helps rankings of brand variations (terms that include some or all of your brand name), some branded searches bring new business as well. It is fair then to apply 100% of non-branded SEO search create new customers.
Step 5. Finally let’s figure out your SEO budget! Well that is not quite as easy as just picking a number. We have done all the hard work, now we need to put that work into your business model. What is the value of a new customer to your business and how quickly do you want to get your money back. Let’s assume that your sunglass buying customer buys 4 times a year and normally keeps buying for 5 years. We then apply those metrics to determine the life time value or LTV of a new customer. If we make $1.50 every time he buys, we get $6 a year for 5 years or $30 in profit margin. That means that after our initial investment we start seeing profits in about 3 months or on the second order. If you are ok with getting your money back in 6 months you can increase the SEO budget to $4.50 per visitor. At his third order we will be break even and on order number 4 you are in the profits.
This is a lot of information in determining your SEO budget. I went into more detail about business metrics than most Internet Marketing agencies do because we think it is very important to use the Internet as a tool to drive business growth. We help our clients by helping them understand the metrics of their customers and how to supercharge their sales and profits. These are some of the basics you need to know to build your business into a customer acquisition and profit machine. If you have more questions or need more information on this topic you can post in the comments section on the site or contact us directly. We would be pleased to help.