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Counterpoint: Why you can calculate an ROI in social media – and why you should do it

Posted by Uwe Hook on July 20th, 2010 at 3:46 am

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?

  1. Establish a baseline. Evaluate your business metrics before you launched Social Media initiatives, how did they change when you launched Social Media?
  2. Create Activity Timelines. Detail any marketing/communication activity in your timeline
  3. Evaluate frequency (transactions), reach (how many people are you reaching) and yield ($ per transaction)
  4. 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.
  5. Create a holistic view of all your timelines (Activities, Social Data, Web Analytics, Transactional Data, Loyalty metrics, etc.)
  6. 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.

8 Responses to “Counterpoint: Why you can calculate an ROI in social media – and why you should do it”

  1. 1. Clearly in the context of ROI as a purely financial calculation, this post has merit. Given time, controls, and resources, the financial impact of social media can be calculated and Return on the Investment understood. This transactional ROI framework serves SEO / SEM, email, and ecommerce investments well. The difficulty with typical ROI calculations relative to social media is in the distance from the media tactic (action) and financial results - (reaction or impact). There are simply to many "hops" from Fan-ship to transaction for anything other than a correlated ROI calculation.

    2. Alternatives to transactional ROI can consider the cost savings associated with customer/consumer insights gleaned from the social conversations relative to brands and products.

    3. Considering typical ROI with respect to social media, as the author suggests, seems to miss the mark. Social media feeds on and from the transparency and shared control between brands and people. Attaching a transactional value seems to somehow undermine the core values of social media...I can't articulate this point more or more clearly at this time but exploration by others in this forum may advance the case.

    • Uwe Hook says:

      John,
      I agree with you that Social Media has many more advantages than a pure ROI calculation. My point was to provide a framework for ROI calculation because soft objectives such as transparency, co-creation and collaboration often don't cut with financially-focused executives.

      • Understood and appreciated. Lets shift the approach by defining a framework that helps old-minded curmudgeons understand the hard-value and necessity of transparency and customer engagement with dollars as a result, not an end. We can start by eliminating the negative connotation of KPI's that are conjured buy the "soft-objective" classification. There's nothing soft about being loved as a brand.

  2. Kip says:

    What does this mean?

    "many brands and agencies regard ROI as a media metric. It's not. It's a media metric."

    Despite the redundancy and double negative...or whatever that is, I always thought ROI was a financial metric.

  3. Jeff Cannon says:

    Uwe -

    While I understand some of your argument, I have to disagree with how you are describing ROI. You seem to think of it only in terms of a direct relation to sales [i.e., direct marketing]. But there are other extremely valid metrics that brands live and die by - consumer awareness, brand positioning, market penetration. Each of these are vital to the life and death of a brand - and each of these can be built up through social media.

    For most brand professionals, creating an ongoing dialogue with consumers is far more important than driving a direct sale from an interaction. Effective dialogues can turn consumers into customers and customers into brand loyalists who communicate your brand to their friends. In the long-term, this is far more important to a company's success than direct sales.

    Think Nike, Think Budweiser, Think Apple. These are brands who measured their success through their customer relationships. And yes, they won in the end.

    Jeff Cannon
    http://www.thinkcannon.com

  4. Matt says:

    I was struck by how similar the 6 steps to measuring ROI are to the views espoused by Olivier Blanchard, http://thebrandbuilder.wordpress.com. Like, REALLY similar. Like one of you was clearly "inspired" by the other, sans attribution. Monsieur Blanchard has been on about this stuff for quite a while...

    Matt

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