by Kevin Bailey
So what is the true value of organic rankings, and why have they helped so many companies rush from oblivion into the stratosphere so fast? Companies, such as Zappos.com, a business less than 10 years old that sold over a billion dollars in merchandise online last year. In Part 1 of this two-part series, “How Do I Value SEO Rankings, Part 1,” we began to answer this question with a conservative estimate of the value of a 1st page Google organic ranking; lets call this conservative estimate the “annual base value.” Now that we know this base value, in part 2 we are going to cover the premiums. After you’ve gotten a new car from your latest promotion; a promotion based on the profits reaped from your recent SEO success, lets cover the parts that will get you your next raise. Take a sip of coffee and focus as you read on because…
(okay, that was cheesy…)
It is my conservative recommendation that you do not target an organic ranking that costs more to attain than the annual base value we previously calculated in part 1. For instance, if the annual base value of a Google organic ranking for “Vintage Cash Registers” is $978, but associated SEO costs are upwards of $1,200, you should consider pay-per-click or get a new business model. In marketing, paying more than something is worth is a wasteful practice. Conversely, if your base value is more than the associated SEO costs, these characteristics of SEO campaigns will bring wheelbarrows of future ROI (return-on-investment). First, I will cover how to estimate the value of long-tail derivative rankings, and then I will cover the perpetual nature of organic rankings (huh?).
But before I get into the beef of this blog post, I would like to briefly refresh everyone on the type of valuation we are performing in this post and the last. The valuation technique we are using is a comp analysis, similar to the way you would value your home, a car, or an engagement ring. In a comp analysis you value an asset (organic rankings) based upon what individuals are willing to pay for a comparable asset (PPC rankings). In this case, the comparable asset to a 1st page Google organic ranking is a 1st page Google AdWords pay-per-click ranking, which happens to have a value clearly defined by Google. Different keywords have different costs-per-click and they range from pennies to over a hundred dollars a click. The reason traffic or clicks are so valuable is because clicks convert into sales, and sales convert into profits, lots of profits. The assumption of this comp analysis is that an organic ranking is worth no more than what you could pay Google for the same website traffic using AdWords.
I should also mention that there is another effective way to value organic rankings, and with some slight adjustments it fits perfectly into the equations within this post and the last. If you happen to already know your website’s sales conversion rate and average gross profit margin per sale for the keyword phrase you are valuing, you can use that data to determine value, rather than AdWord’s cost-per-click. Basically, you take your estimated visitors from search engine rankings and multiply by your conversion rate and then by your average gross profit margin per conversion. This valuation technique will be discussed further in future blog posts, but for the sake of this post and the last, we will assume that you do not have accurate data on conversion rate and gross profit margin by keyword phrase. For comparison purposes, in the “Health Insurance” example if you use an average conversion rate of 3% and an average gross profit margin per conversion of $300, the estimates from both valuations are quite close (I do not know what the average gross profit margin per individual health insurance enrollment is). Now I’m going to discuss the most valuable secret in SEO, long-tail derivative rankings.
How You Determine the Value of Google Long-Tail Derivative Rankings
Below we calculated the annual value of long-tail derivative rankings for “Health Insurance” to be worth an additional $7,678,450. When we combine this with our previously calculated annual base value for “Health Insurance” of $7,471,194, we get a total value of $15,149,644. Wow, so what are long-tail derivative keyword phrases anyway? I apologize for the coined phrases we’ve constructed at Slingshot SEO to cover topics not formally defined. Many of you likely know what a long-tail keyword phrase is. A long-tail keyword phrase is a keyword that has a root keyword within it (typically 3 or more words). To stick with the “Health Insurance” example, a long-tail of health insurance is “individual health insurance.” A long-tail derivative ranking is, as the name implies, a long-tail ranking derived from an SEO campaign for a root keyword phrase. These are what we call around the office, “Icing on the cake.”
Here is a screen shot from an SEO campaign I’ve been working on since August of 2008 for “Furnace Filters.” As the chart implies, this site was driven from page 13 to page 1, position 3 on Google in approximately 5 months. You’ll notice that over this timeframe Google has sent 7,872 non-paid visitors for “Furnace Filters” (Approximately $42,430 in PPC value @ $5.39/click). The key detail in the screen shot below though is that over this same timeframe, Google has sent 11,567 organic visitors for keywords containing the phrase furnace filters. Approximately 32% of the organic visitors for “Furnace Filters” keywords, are from long-tail derivative rankings. So an SEO campaign for “Furnace Filters” helped this website rank for 1,863 additional long-tail derivative phrases, like “Hepa Furnace Fileters.” The value of these long-tail rankings is easy to calculate in retrospect: 3,695 long-tail visitors x $5.39/click = $19,916, for a total value of $62,346. But you’re not here to learn how to calculate the value of rankings once they are already attained; you want to calculate future estimates to help you make strategic decisions.
Let’s get back to our “Health Insurance” example. In part one of this post we calculated a first page organic Google ranking for “Health Insurance” to be worth $7,471,194 a year. So, how many more millions will be added to this pie when we factor in long-tail derivative rankings? First, I must tell you that this is one of the more volatile estimates, so I prefer to calculate a range.
Using a statistically significant client sample set, I’ve calculated that 1.08% is the average percentage of all long-tail search volume that a 1st page ranking for a root keyword receives. Long-tail search volume is calculated by taking Google Keyword Tool phrase search volume for a root keyword minus the exact search volume. The standard deviation around this 1.08% average is quite large though. I’ve calculated a standard deviation of .92%. For a college refresher, a standard deviation represents roughly 68% of the outcomes. Therefore, approximately 68% of my clients receive between .16 and 2% of long-tail search volume for a target keyword. It’s probably worth mentioning that a client of mine with a first page ranking for “Buell” generates 98% of their Buell traffic from long-tail derivative rankings. The amount of long-tail derivative traffic your website receives is influenced by many factors, but the most important one is how much unique keyword rich content is on your website. In many cases, if you have an effective SEO campaign for a root keyword, ranking for a long-tail derivative keyword requires just one mention of the keyword within body content somewhere on your site. Outside of their millions of natural backlinks, this is one of the reasons Wikipedia seems to rank somewhere for almost any keyword you search for. Blogs and wikis with the right SEO architecture do fare quite well…
The practice I use to determine the future value of long-tail derivative rankings is to calculate a range based upon the standard deviation of .92%. Before I get into the calculation, here’s a quote from Stephen Hawking:
“Equations are just the boring part of mathematics. I attempt to see things in terms of geometry.”
If you’re a future astrophysicist, maybe you took something away from that. So lets try and see this equation in terms of geometry and maybe it’ll be less boring for us. In part one of this blog post we used Google’s keyword tool to find that the monthly exact search volume for “Health Insurance” is 823,000. Google’s keyword tool also shows monthly phrase search volume for “Health Insurance” of 7,480,000. Phrase search volume includes search volume for the root keyword and all long-tail derivative keywords. To calculate the long-tail search volume, we just take the phrase volume minus the exact volume.
Step 1 (Calculation of Long-Tail Search Volume)
7,480,000 Monthly Phrase Search Volume for “Health Insurance”
823,000 Monthly Exact Search Volume for “Health Insurance”
6,657,000 Monthly Long-Tail Search Volume for “Health Insurance”
Step 2 (Calculation of Average Annual Visitors from Long-Tail Derivative Rankings)
Now we must calculate how much of this 6 million plus monthly long-tail traffic will turn into website visitors:
6,657,000 Monthly Long-Tail Search Volume
1.08% Average Traffic from Long-Tail Derivative Rankings
862,747 Annual Long-Tail Visitors
Step 3 (Calculation of Average Annual Value of Long-Tail Derivative Rankings)
We can now use the range above to calculate the lower and upper bounds on long-tail traffic. If you recall, with a .92% standard deviation we calculated a range around the average of between .16% and 2%. Using these figures in the calculation above, we see a range of between 127,814 and 1,597,680 annual visitors from long-tail derivative rankings. Using the average Google AdWord’s cost-per-click for “Health Insurance” of $8.90 we calculate the value of these visitors below:
862,747 Average Annual Long-Tail Visitors
$8.90 Google AdWords Average Cost-Per-Click
$7,678,450 Average Annual Value of Long-Tail Derivative Rankings
Using the range calculated at the bottom of Step 2 we can determine that the value of long-tail derivative rankings of “Health Insurance” will likely fall between $1,137,545 and $14,219,352. My advice at this point is to, as always, be conservative. Expect that the value will fall somewhere between the lower bound of $1,137,545 and the average of $7,678,450. Keep in mind though that with the right content solution and external SEO strategy the upper bound of $14,219,352 is possible.
Adding the $7,471,194 annual base value of “Health Insurance” calculated in Part 1 to the average value of long-tail derivative rankings, we get an estimated annual value of $15,149,644.
How You Value Google Organic Rankings Over the Long Haul (5 Years)
Many of the SEO campaigns I’ve seen have maintained 1st page organic rankings on Google for over 5 years now. Google’s algorithm is constantly changing, and Google may not be the next Google, but an effective SEO campaign should be able to maintain organic rankings over the long haul. For the sake of this analysis, we’ll assume that the long haul is five years. We’ll assume that search engines that can be optimized for will exist for at least the next five years. At Slingshot SEO we think that search engines that can be optimized for will exist far longer than that, but you’re a conservative business decision maker that tries not to assume anything beyond five years.
We will be valuing a first page Google organic ranking for “Health Insurance” as an annuity that will generate $15,149,642 in value every year once it is attained. In this calculation, we will be deriving the net present value of the ranking; taking into consideration the associated SEO costs. No matter what your IT department tells you, competitive organic rankings are never free and they cannot be attained by placing a meta keywords tag on your homepage. In fact, Matt Cutts just told the SEO community what we already knew, keywords tags are no longer a factor in Google’s algorithm. Earning 1st page organic rankings on Google requires lots of time, effort, patience, and foresight.
A net present value calculation takes future earnings and investments and discounts them to account for the time value of money. For this calculation, the discount rate will be your company’s cost-of-capital. The cost-of-capital is the rate of return required to meet the cost of financing a project. Since I cannot guess your company’s cost-of-capital, for this calculation I’ll use a figure I’ve seen before as General Electric’s cost-of-capital, 7.3%.
From my experience it never costs as much to maintain a ranking as it does to obtain it, and the most competitive rankings I’ve targeted have been attained within 12 months. For the sake of this present value calculation, we will assume that it costs approximately $200,000 to obtain a first page ranking for “Health Insurance” and $50,000 a year thereafter to maintain the ranking. In future blog posts I will explain what costs are included in an effective SEO campaign circa 2009, but for the sake of this calculation we’ll rely on the above estimates. This calculation will utilize the following set of assumptions:
- The annual value of a first page Google organic ranking for ‘Health Insurance’ is $15,149,644
- The campaign will start at the beginning of 2010 and a page 1, position 4 ranking will be attained by the middle of the year. Therefore, the first year will accrue half of the $15,149,644 annual value, or $7,574,822.
- The estimated investment required to obtain a first page ranking is $200,000 with $50,000 a year invested thereafter to maintain the ranking
- The estimated cost-of-capital is 7.3%
- Traffic inflows and investments will occur evenly throughout the year. Therefore, mid-year convention has been used to assume that cash flows happen in the middle of each year.
The formula for obtaining the net present value of a 1st page organic Google ranking for “Health Insurance” is as follows:
The net present value of this 5-year Google SEO campaign for “Health Insurance” is $56,162,205, equivalent to the cost of approximately 200 General Electric CAT Scan machines. Now take into consideration the fact that Google comprises only 65% of the search market share and that when you optimize for Google, you also optimize for Yahoo, Bing and other search algorithms. Further, consider the fact that a top 4 position pay-per-click ranking costs materially more than the average cost-per-click, due to its higher click-through-rate and implied conversion rate. In fact, if the maximum cost-per-click on the Google Keyword tool is recalculated for $100, you get a cost-per-click for “Health Insurance” of $10.06. Theoretically, as with a top pay-per-click position, a top organic position will also have a higher click-through-rate and implied conversion rate. Therefore, the maximum value of a visitor generated from a top 4 position organic ranking could theoretically be worth up to $10.06 per click. Below, I recap all calculations covered in these last two blog posts using these less conservative metrics for traffic from all search engines, and derive a five-year value for “Health Insurance” of $97,927,645. To download the below screen shot as an Excel spreadsheet to help you calculate the value of organic rankings you are targeting, please click here. I am also available for any questions you may have. Best Regards.