Ben Cathers just posted a piece entitled: "Why you can't calculate an ROI in social media -and that's okay." I would argue, if you can't calculate an ROI for Social Media, you shouldn't be participating.
Let's go back to the basics.
Companies advertise to sell products/services. Period. Metrics like brand affinity, brand recall, etc. look great on paper. But you can revel in secondary metrics all day long, as long as you didn't increase sales of your product/service, your advertising/marketing has failed. Social Media should be treated the same way.
All divisions of your brand spend 100% of their time to generate revenue: Call Centers, R&D, Sales Department, Marketing, PR, Accounting, Advertising, PR. Each resource has a specific cost, each resource yields a specific result. Spending time on Social Media for any of these departments might cost you immediately in efficiency and productivity. As a CFO, you would be a fool to allow any division to spend productivity time on Social Media if it decreases your bottom line. A Social Media budget doesn't just show up, it has to be funded by investing less in other areas of the enterprise. That's the reason why each brand needs justification to invest in Social Media. If there's no ROI, why bother?
ROI is calculated by subtracting the gain from investment by the cost of investment and dividing the sum through the cost of investment. However, many brands and agencies regard ROI as a media metric. It's not. It's a business metric. ROI doesn't care about media, it measures the holistic value-chain of a business. ROI is not limited to any form of media.
An investment in any kind of media results in action, a reaction from people, non-financial impact of the initial investment and, ultimately, a financial impact to the business. Most marketers focus on non-financial impacts such as visitors, fans, followers, positive WOM, negative WOM, delivered emails, Retweets, coupons delivered - the list is endless. The problem is: non-financial impacts are not tangible results. They're just potential results. ROI equals actualized potential. Meaning: You look at your investment and evaluate the financial impact it resulted in.
So, how do you do measure the ROI of Social Media?
- Establish a baseline. Evaluate your business metrics before you launched Social Media initiatives, how did they change when you launched Social Media?
- Create Activity Timelines. Detail any marketing/communication activity in your timeline
- Evaluate frequency (transactions), reach (how many people are you reaching) and yield ($ per transaction)
- Measure transactional precursors (Sentiment analysis, NetPromoter, store visits, web visits, Twitter feed to website conversions, etc.) In addition, align with Life Time Value (LTV) of your customers. Use NetPromoter scores to calculate ROI of your Social Media initiatives: increase LTV of promoters by 25% and LTV of detractors by 50%. That helps you determine the impact of your Social Media plans very quickly.
- Create a holistic view of all your timelines (Activities, Social Data, Web Analytics, Transactional Data, Loyalty metrics, etc.)
- Find patterns and find proof of concept for relationship building. Why did this initiative work so well with that demographic and why did this platform didn't perform at all?
This is only one path to determine the ROI of your Social Media initiatives. There are others. Let's just make sure to stop talking about soft metrics already. It's time to get down to business. And make money.