How do we decide the budget for SEO? A detailed guide

There is a common grudge I hear in my conversations with many business owners/marketing heads about SEO. And I want to address at least a part of it today.

The grudge is that unlike Ads, which give an instant calculation of ROI, SEO efforts do not have anything like that. So, it is incredibly difficult to decide on the SEO budget.

The questions typically are some variation of the following:

1. How do we know SEO effort is going in the right direction i.e., help in selling more?
2. How do we convince ourselves and the management team that SEO is worth the money?
3. How do we decide the right budget for SEO that gives positive ROI in the bottom line?

Then they say, “Do not give me an increase-in-traffic/clicks story. They matter, yes. But I want to see how it correlates to sales and, eventually, the bottom line. Otherwise, I get pressured by the Sales team to invest in Ads.”

This is a common problem, esp. for companies who haven’t done the right SEO long enough to see its benefits. So, let’s tackle this grudge today. At least, partly.

In this blog, I will tell you how to calculate your SEO budget – so that it gives you a positive ROI.

Just this one blog should help you tackle a good chunk of the above questions.

Let’s begin.

SEO budget and ROI

Let’s start from the big picture. Most marketing efforts have an end goal to impact the top line or bottom line. (Except for some like advertising before an IPO or PR campaigns trying to repair reputation damage).

So, if we are able to show a direct link between SEO efforts and bottom-line benefits – it will convince even the strongest of critics. This means that if we can show that putting $100 in SEO can result in $200 to the bottom line – it will be a no-brainer. Correct? Ok.

Let’s then, redefine the problem differently:

How much will $100 of SEO efforts give the business in additional gross profits?

If the number is greater than $100, then it makes sense. If the additional gross profit is less than $100, then we can’t spend $100 in SEO. Does it make sense so far? Cool. Let’s take the logic further now.

SEO-efforts-to-Sales flow

Let’s take a hypothetical sales funnel.

VISITS: Let’s say you get 2000 visitors per month on your website.
LEADS/SIGN UPS: Of the 2000 visits, say about 5% sign up and share their contact details. These are new leads for you.
CUSTOMERS: Now, you will nurture and qualify these leads and pitch to them your products/services. Say for every five leads you get, you are able to sell to 1. This means you are able to convert 20% of leads into customers.

Now, if you are able to get say 5% bump in traffic every month from SEO – this means 100 additional visits per month. Based on our previous numbers, this is how the sales numbers look like:

So now, we have how many new customers you can get from 12 months of SEO. Note that these are conservative numbers.

We are not taking 5% month-on-month increase over the increased base. We are assuming just 100 additional clicks every month even as the base increases every month. I am doing this to adjust for any sudden drops in traffic that happen due to Google algorithm changes. Doing SEO the right way will rarely have such issues. So, these numbers are easily achievable.

Calculating Customer Lifetime Value (CLTV)

This is the most important step. We need to know how much one customer is worth in the entire journey with us. This is called CLTV or Customer Lifetime Value. Now, some CRMs give this number directly but many businesses I interacted with did not have this number handy.

So, here is an easy way to calculate the CLTV. Just keep your customer and order data for the last two Financial Years (FYs) ready before you start.

Avg. order value per year per customer

First step, we need to calculate how much a customer brings in on average.

For this, let’s start with Avg. order value in the business. Take a full year, say last FY numbers, to accommodate for seasonal changes, if any.

Avg. order value = Total revenue of last FY / Total no. of orders in last FY

Next, we need to know how many orders does a customer give, on average in a year.

Avg. no. of orders per customer per year = Total no. of orders in last FY / Total no. of unique customers in last FY

Let’s take some hypothetical numbers here as well. Say, avg. order value is INR 50,000/- and avg. orders per customer per year is 2. This means, the business gets about INR 1,00,000/- per customer per year on average.

Customer life span

Now, in many businesses, a customer remains with the business for many years. This means you can sell to the customer multiple times across different years. But for some customers, you will never be able to sell again. So, we need a list of customers who are actively buying with us.

For this, take the list of all customers in the last two FYs (current FY and last FY). We will assume this is our ACTIVE CUSTOMER BASE. Now, we need to find their life span with our business. For this, list their date of the first invoice with us. We need that to find their age.

Once you have that, segregate the customers as per their age. We just need the count of customers for each age. Do this for up to 10 years.

Here is an example list:

The last step is to take a weighted average. Here is the formula:

Avg. lifespan of a customer (in years) = SUMPRODUCT(# of customers, Age) /  Sum(# of customers)

In our example, it is coming to 5.7 years.

CLTV formula

And you have the CLTV as

Customer Lifetime Value (CLTV) = Avg. Order value * Avg. no. of orders per customer per year * Customer life span

In our hypothetical example, it comes to:

Calculating ROI for SEO efforts

Ok, now we have everything needed to calculate the ROI for our SEO efforts.

We multiply the CLTV with the number of additional customers we expect to get from SEO efforts in a year. This gives us the additional lifetime revenue we expect from our SEO efforts. That’s the effect on the top line.

Additional LIFETIME REVENUE after 12 months = New customers in 12 months of SEO * CLTV

And then take the gross profit margin to see the effect on the bottom line. Here’s how the numbers look for our hypothetical scenario:

Deciding the SEO budget

So, in our example, the additional profits expected from 12 months of SEO efforts is INR 20 lacs.

That is the maximum you can spend on SEO in a year without losing money. Anything less than this number is a good SEO budget.

Max SEO budget for a year <= Additional LIFETIME PROFIT with 12 months of SEO

Since most billing for SEO happens monthly, divide this number by 12 to get to your monthly SEO budget.

That’s it. You now have a budget to work with.

FREE SEO Budget and ROI calculator

You can use my Budget calculation sheet for this calculation if you wish. Open the SEO budget and ROI calculator sheet and click on “Use Template”.

Other benefits of this calculation

This calculation also tells you if your SEO efforts are working or not.

You would know how much additional traffic you need every month to hit your targets. In our example, you know anything less than 100 additional visits (i.e. clicks) every month is not up to the mark.

This also tells you if other aspects of your sales funnel are working well.

If you are not getting 12 additional customers in a year, but you are hitting 1200 additional visits in the year from SEO, you know you have a problem further down the funnel.

In our example, you can check if you are getting 5% of traffic as sign-ups. If not, you know you have to improve the copy of the top pages, introduce better CTAs, and so on for better conversion rates.

If you are getting the desired sign-ups but not getting the leads to buy – you now know where the problem is. You can talk to the sales team and find the issues.

Conclusion

With this process, you can easily have clarity on the SEO budget and also figure out if you can invest in it long enough to get the results.

Things to note

There are a few important things to note here.

One, if you are new to SEO – start it only if you can commit yourself for 2 years and hire a trustworthy agency. Do not cut corners in hiring. In 2023, it typically takes at least INR 1,00,000/- a month for a good agency. This is just to give you a reference point. Actual retainers will vary depending on scope of work, reputation and expertise of the agency.

Two, SEO works typically on the Top of the Funnel. SEO brings you traffic. Do not magically expect customers to start flowing because you are investing in SEO. If your website copy is not optimized for conversion, you will not convert traffic to leads. If your sales funnel does not nurture the leads enough and do not have good sales scripts to convert, you will not convert the leads to customers. Do not blame SEO for that.

Three, do not blindly use AI to develop content and copy. AI tools are powerful only if you know how to use them right. When in doubt, ask your SEO agency. They use it daily to know how to use it well.

Further reading

I made this method with my own experience of working with hundreds of clients. It is simplified to a level that any business owner or a marketing person can use without help.

There are, of course, many more things you could consider. In case you are interested in reading more about this, here are some recommendations:

1. Ahrefs on SEO budget and ROI
2. SEMRush on SEO ROI
3. Search Engine Journal on calculating ROI from SEO

I hope this helps.

Until next time,

Shyam

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About the author

Shyam Govind

I do SEO and help companies rank high on search results. It increases their traffic and gets them more customers online.

I feel good when I see businesses achieve their full potential organically via marketing. I also read, sometimes regularly. I work with good music & caffeine, almost regularly.

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