SEO Business: Getting The Numbers Right

Jul 17th
posted in

What were the reasons you started your SEO-related business?

Perhaps you're thinking of starting one up.

A survey published in New Business UK found the following:

  • 41% went into business because they were passionate about their idea
  • 39% wanted the freedom that came with being their own boss
  • Only 7% cited money as being the reason

It's interesting to note that the biggest obstacle people faced with starting their own business was a lack of money. 44% cited lack of money as being the biggest obstacle.

Whatever your reason for starting, it's clear that money is important. The one thing that is guaranteed to kill any business dead, no matter how good the idea or how many customers a business signs up, are bad numbers.

How Are You Going To Make Money?

In a previous post, we looked at SEO business planning.

In short, a business plan doesn't need to be complicated, it's just a plan of where you're aiming, and how you intend to get there.

Here are a few further important points to consider.

Obviously, the most important thing to do in business is earn more than you spend. Fail to do so, and the business fails. That means flash offices, expensive chairs, flying business class, etc all must wait until profits allow such expenditure.

So it's a good idea to model oneself on Scrooge McDuck, at least in the early days!

The one thing you'll have the most control over is costs. Keep these as low as possible. Pay yourself the bare minimum you need to live. If you're hiring staff, offer them low salaries and revenue share. You may have noticed there is a start-up culture where fun, hip-ness and enthusiastic participation is emphasized. This is almost always because the owners are trying to keep their costs down. The benefit to the employees is seldom coming from wages, so the job has to be made attractive in other ways.

Keep a look out for hidden costs. What is the true cost of attending that conference? What does it really cost to hire and keep employees? What is the cost of scaling up? Does your office equipment need regular servicing? What are the costs of maintaining a lot of customers? Hidden costs are, of course, hard to spot, and hard to generalize. Be aware that any new variable you introduce to your business will incur costs of some description.

Economic rent, or making a profit over and above the cost of the inputs, is the key target you should aim to be above in your forecasts. If you make $100,000 a year from your business, and take it all in salary, that means that your business makes nothing. Your salary is a cost.

Do your projections allow you to make a profit over and above the salary you pay yourself, after all other expenses are deducted? If so, you've got a business that is likely to thrive, and you you may one day be able to sell.

It's surprising how many business owners don't include their salary as cost.

Break Even Analysis

Here's the meaty bit.

How can you determine, very quickly, if your idea will fail?

You need a break-even analysis. A break-even analysis shows you the amount of revenue you'll need to bring in to cover your expenses, before you make a profit.

Knocking up a break-even analysis is a great way to trial an idea before you put it into practice. After mapping out a simple, back-of-the-envelope business plan, it's the first thing you should do. If you can make these numbers work, then the rest of your detailed business plan can flow from there. If you can't get past a break-even analysis, then the rest of your plan will likely fail.

Here are the components of a break-even analysis:

  • What are your fixed costs? i.e rent, insurance,power and other set expenses and overheads.
  • What is your sales revenue?
  • What is the gross profit on each sale? i.e. the money left over after the selling costs are taken out
  • What is your average gross profit percentage? Divide your average gross profit figure by the average selling price.

You should now be able to easily calculate your break even point. Divide your annual fixed costs by your gross profit percentage to determine the amount of sales revenue you'll need to bring in to break even.

Is your break-even point higher than expected revenues? You'll need to change your cost structure (make cuts), or increase the profit potential of your sales.

Can you do without employees? Work from home? Sell your product for a higher price? Target a more lucrative market?

If you can make the numbers work at this point, move on and create a fully fleshed-out business plan. If you can't make the numbers work after a few tries, then dump the idea and try another. Pat yourself on the back for being smart enough to run a few numbers, before wasting a lot of time and effort executing a bad idea.

Most people jump straight to the latter.

Published: July 17, 2009

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Comments

July 17, 2009 - 7:48am

Thanks for sharing this, especially the business plan. It's great to have the passion and the interest to start your SEO business. I think the main reason why people fail is the lack of planning. Especially when it comes to the numbers and the estimated revenues people are too optimistic. It takes some time to get your business noticed and build a name. Especially in a highly competitve market like SEO you should plan in at least 1 year where your business is running slow.

Gunter

July 20, 2009 - 10:24am

^^^ SEO Fail!

Love it!

July 21, 2009 - 12:58am

That comment spam had to of been automated. No way a human would have been that stupid.

Thnx for highlighting it...we have deleted it.

July 20, 2009 - 1:59pm

Its very important to that knowing SEO is one thing - but selling SEO is a total differant ball game, and much harder!

July 20, 2009 - 10:23pm

I think that SEO is not that hard to sell SEO-Doctor. It depends on the kind of success that you previously had. In my case I am not focusing on selling my services, but sometimes I receive some new companies asking for SEO Services which were forwarded from previous clients. I think word of mouth is the best advertising ever and of course, when they come to you, you are the one who set the rules and rates.

July 21, 2009 - 12:58am

I think SEO can be quite hard to sell profitably (at least when compared against the profits from running your own publishing websites). Here are a couple data points

  • This site takes up 90%+ of my work time and represents well under 50% of my income.
  • We have sold SEO services TO leading search engines, and even when doing that we only got under 1% of the 1st year lift in business profits we generated for them. And since they were slow to pay they actually were already in the green on that investment before they were even done paying for the services. And in spite of producing such amazing returns they still pushed back on pricing!!!
July 21, 2009 - 12:09pm

Thanks for sharing good idea about SEO subject. This is very useful information indeed for newbie like me

July 27, 2009 - 2:37am

A very informative and encouraging article on SEO business launching. It is such a lucrative business model, and you are right on point that many startup entrepreneurs fail to understand SEO to its max and miscalculate business costs and operations. From personal experience, what did you find was the best way to market yourself and your business in order to stick out in the large market? What percentage of your business would you say is strictly word of mouth (free) marketing?

July 27, 2009 - 4:47am

It is hard to estimate how much of our marketing is word of mouth...though it is easy to say most of it is :)

A few years ago Google implemented a filter against having too much similar anchor text. And for about a month this site was not ranking in Google for "seo book" (until they tuned back that anchor text filter).

Even while we were not ranking for our own brand (while selling a "how to" ebook on ranking in search engines) our sales that month were 85% of their prior all time peak.

July 29, 2009 - 5:30am

Thank you so much for the insight Aaron. I would agree most of the marketing is indeed word of mouth. No matter the amount of technology we have, it's hard to beat the old-fashioned way of promoting your business. How did you go about launching a word of mouth marketing campaign? I am curious how you focused your attention right at the beginning as I am in the beginning stages of launching my own SEO business model here in Seattle.

Thanks Aaron!

Joel Gross
http://www.joelx.com

July 29, 2009 - 7:02am

Hi Joel. I think if I analyzed what I did well early on I would say it amounted to

  • writing guest columns for sites with audiences
  • analyzing the Google Florida update
  • starting one of the first SEO blogs

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