The Economics of SEO: Why SEO Belongs in Your Marketing Investment Portfolio
Why should big companies invest in SEO and content marketing and not only rely on paid traffic? In this article, I explain the economical advantages of search engine optimization when making your marketing investment budget. Get prepared for some SEO economics!
Law of diminishing returns
In economics, diminishing returns is the decrease in the marginal output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.
Let’s say you only run advertising campaigns. First, you have an upfront cost (A) you should invest that provides little value, then there’s a rapid increase in profit (B) as you implement quick-wins and do efficient marketing campaigns. Then you increase spending (point C). But the marginal returns on your ad spend will decrease as your CPC is getting higher or your customers have already seen your ads so many times. At this point, you may consider investing an additional euro in doing something else.
As you can see if your budget is substantially big, you can gain the biggest profit by combining different strategies!
The Multiplier effect of SEO
In economics, a multiplier refers to an economic factor that, when increased or changed, causes increases or changes in many other related economic variables. For example, the invention of the smartphone can boost productivity and make it possible to create new innovations. In Africa, smartphone means a boost in exchanging money. So, the economic value lies not only in selling smartphones and smartphone producers.
SEO can generate a marketing multiplier effect and make other marketing campaigns more effective. Google is rewarding useful content and useful websites, and your users may reward this too.
- When all the questions of your users get answered on the website, you will rank better in SEO. But you also will have a really helpful website for your future customer.
- When your pagespeed improves, you gain SEO positions. But in the meantime, your user may convert more.
- When the navigation is structured and clear, Google understands your website better and the users do too.
- Separated specific and optimized SEO landing pages can be used for search advertising campaigns. Your quality score may improve
So the good thing is some SEO improvements can make your existing campaigns more cost-effective. Spill-over effects should be considered.
Net present value and the Long-term advantage
Net present value (NPV) is a method used to determine the current value of all future cash flows generated by a project, including the initial capital investment. It is widely used in capital budgeting to establish which projects are likely to turn the greatest profit.
Imagine an economic crisis (it may not be hard in these times). You run out your budget to advertise. Then you will lose all of your clicks. SEO works in the long term, you won’t lose all your SEO traffic immediately.
In order to calculate the net present value of any investment, you should calculate all future profits of your efforts and use a discount rate.
Risk diversification
Risk diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk.
It’s riskier to buy a share of 1 company vs a portfolio of 4 companies. The chance all 4 shares will decrease at the same time is considerably lower than just 1 share. You should think the same way about your marketing strategy. By investing in 4 marketing channels, you reduce risk.
If you for example only invest in ads you may become a victim of rising ad spend, ad blockers, or other external risks you may run into your campaign. A marketing strategy using diversified channels decreases your total risk.
SEO Scale matters
Economies of scale occur when more units of a good or service can be produced on a larger scale with (on average) fewer input costs.
If a website already has 10000 SEO visits by day, it will be easier to get an additional 1000 SEO visits than if you start with 10 visits by day. Let’s say a visit is worth 1 euro, then big websites attracting SEO traffic already will get generally a better return on SEO investment.
So in SEO, scale does matter. Often SEO improvements have relative effects (e.g. going from position 4 to position 3 will attract you 35% more SEO clicks for a certain keyword) rather than the absolute increase in clicks you gain by buying more advertisement.
Companies that already attract a considerable amount of SEO traffic without a SEO strategy should immediately take care of defining a SEO strategy
The innovation advantage
In the Solow model of economic growth, innovation is the key for sustained growth. Also, for businesses, investments in innovation tend to be more profitable than other investments (capital, labor), e.g. according to this study: https://www.nber.org/papers/w1562 2.
SEO is an excellent way to keep up to date with trends in Google (which is how people find products), trends of the customer (which questions do your customers have, what are they looking for), and competitor trends (what content is your competitor producing). If you can spot and identify those trends and can translate this to new services for the customer. SEO can contribute to your overall business success.
Conclusion: economics prove SEO is great
A diversified portfolio of marketing investment should include SEO as a marketing channel. Investing in SEO offers advantages in reducing risk, is long-term oriented, and even delivers multiplier effects which make other campaigns more effective.