Social Media ROI Idiocy
Wednesday
Jan 27, 2010
It’s time to counter a growing sentiment among social media types – including some nationally recognized practitioners who really should know better - that trying to justify your company’s decision to pursue a social media strategy based on ROI is somehow foolish.
Now, these same high priests of social media don’t ever suggest a better alternative or method to determine whether or not your company should pursue a social media strategy, they just insist that you’ve got to do social media because it’s just so darn important, and besides your competitors are.
If their argument sounds like your teenager’s argument insisting that you’ve just got to let him stay out til 2am because everyone else is doing it, well, you’re right.
However, unlike gullible parents, the executives who make investment decisions aren’t easily duped, they don’t jump on every trendy b-school bandwagon and they’re not scared of your newfangled technology. They want more than breathless claims. They want proof.
Twitter is that thing Ashton Kutcher and Oprah play with. Facebook is the place where their teenagers waste their entire evenings. And your preoccupation with these platforms doesn’t convey cutting edge marketing savvy as much as it does pointless obsession.
If you want corporate buy-in and investment, you’ve got to demonstrate how your social media strategy will generate positive returns for the company. In real dollars, with real timelines.
The ROI opponents claim that there’s simply no way to really measure ROI. After all, they claim, How can you put a dollar value on a blog post, a blog comment, or a single tweet? As if that level of granularity is the measure that anyone is looking for.
Or they simply attempt to redefine a financial metric that has been commonly defined and routinely accepted for decades.
Reading just a few recent posts by legacy ROI opponents, I’ve seen ROI redefined as:
- Return on Impact
- Return on Impressions
- Return on Importance
- Return on Influence
And, my personal favorite for its absurd complexity and impenetrable formula: ROI should really be referred to as Return on Conversation whose formula is:
(B • I) (m+s • r)/d] / [O/(b + t + e)]
Brand Equity times the Intent of Communication times (Message plus Suitability times Reach) divided by Sustainability OVER Outcomes divided by the Cost times (the Budget plus Time to Produce plus Experience)
I believe the result is actually measured in Schrute Bucks.
The reality is that ROI is much simpler than that. You only need to know two numbers: how much you gained from your investment, and the total cost of the investment itself. That’s it.
ROI = (Gain – Cost) / Cost
If you spent $1000 and saw an increase in sales of $1500, then your ROI was:
ROI = (1500-1000)/1000 = 50%
I think I know where the disconnect is. Social media engagement typically generates an action that is non-financial in nature. You collect Twitter followers, generate retweets, get comments on your blog, add new Facebook fans, attract YouTube viewers or generate click-throughs to your website.
However, These aren’t ROI. How do I know? Because my banker won’t take Twitter followers in lieu of a check. Clear enough for you?
I don’t want to diminish the importance of engagement with your clients and your prospects. I’m a huge adherent of social media and I recognize its transformative potential, but only if it’s used strategically, with specific objectives that you can track and measure.
ROI doesn’t become ROI until it does one of two things: increases revenue or reduces costs. Those are financial impacts that are real, measurable and put a grin on your CEO’s face.
Determining ROI isn’t a laughing stock metric in the corporate world. Calculating potential ROI demands that you create a strategic plan, consider alternatives and project likely actions and returns from your program. It compels you to define precisely your plan’s objectives, put them down on paper and support them when challenged.
Simply saying that we need a social media program because our competitor has a social media program is absurd. What if their program is drains their marketing budget without any noticeable effect? Do you want to copy that?
If you want funding, you need to justify your program with more than intemperate claims that we’ve just gotta do something. What’s your goal? To increase revenue or decrease costs? How will you do it? Who will be involved? How much time is necessary to invest? What technology platforms will you support? How will your program fit into your current operational structure? What do you want your conversational partners to do? How will your success be tracked and measured?
If you don’t know the answers, you don’t deserve the funding. Social media marketing is no different from any other marketing, it just uses new channels and has interactivity built-in. If you can’t tell me how you intend to leverage the medium and generate a positive return you can always try again next quarter after you learn.
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Comments
markclayson
January 28th, 2010 at 3:51 am
Thanks for your post, great post! It’s very nice and informative. Thanks a lot for helping me know more about this field
[Reply]
Mark W Schumann
January 28th, 2010 at 11:17 am
John, thanks for this very clear statement. Here’s my question though.
I’m sure you’ve thought this through, it’s actually very basic, but as someone who doesn’t know much about corporate marketing I have no idea how one can attribute sales numbers to any specific marketing campaign.
How do I know that this sale came from a tweet and that one came from a TV ad? Even if I run things like, what do you call ‘em, split URLs or whatever… how do I know someone was or wasn’t inclined to buy because of the TV ad, but then the Facebook fan group gave them a place to go before they committed money? Even though perhaps a direct email piece actually made the sale.
I think you can measure the last step in the sales chain pretty easily: If they bought the product via this particular 800 number or a certain URL, you know they came from Source X. But then aren’t you overweighing the significance of that last step?
What about the two or three things that made them notice your brand and be interested in it and decide they want it first? How do you measure that?
Wow, that’s not one question, that’s like five. But I’m really interested in what you’re saying here.
[Reply]
John Heaney Reply:
January 28th, 2010 at 3:14 pm
Great question – or actually 5 great questions. First of all, when analyzing the effectiveness of a social media marketing program, it’s essential to note that the ROI will not necessarily be calculated to the same level of precision as a direct mail campaign or a targeted mass e-mail whose results can be identified almost immediately by monitoring a specific phone number or URL. That’s pretty easy. Social media ROI requires that you establish a timeline and track specific SM activities: blog posts, podcasts, press releases, webinars and twitter chats, for example. Then examine the activities whose movement you’ve identified as your objective and identify the correlations. If your overall objective is to generate website sales of your product and your sales have increased 15% since the start of your SM program, then you need to examine your timelines more closely. Was there a surge in traffic after your webinar? Did your mention on the industry’s leading blog generate a burst in traffic? Did your post of the how-to video on Facebook result in website visitors that were converted into sales? What you can identify are transactions, their precursors and their results. If, after six months of SM activity you establish that your average customer is now purchasing from you once every four months instead of once every six months and that their average purchase has increased from $12 to $15 then you can calculate an ROI from your SM activity. And, by monitoring and analyzing the transactions and their precursors, you can adjust your SM strategies to reach the most people with the most impact.
[Reply]
Mel Aclaro
January 28th, 2010 at 1:14 pm
Hi John,
I find myself agreeing with the gist of your post… but on one point I feel compelled to clarify…
“The reality is that ROI is much simpler than that. You only need to know two numbers: how much you gained from your investment, and the total cost of the investment itself. That’s it…ROI = (Gain – Cost) / Cost… If you spent $1000 and saw an increase in sales of $1500, then your ROI was: ROI = (1500-1000)/1000 = 50%”
While I agree with the gist of the underlying formula, the devil in the details is in that piece where execs “…saw an increase in sales…”.
The challenge for consultants is in the facilitative process required to map specific financial metrics to specific activities that are mostly the result of social media. Else, a simple application of the formula risks over-stating (or under-stating) the return due to non-social media effects on revenue. (For example: economic effects, mergers/acquisitions, new lines of business introduced in the same period, etc. all can affect the revenue picture.)
But, I don’t want the above comment to detract from a great post that I think hits the key points of this debate. Thanks for sharing.
[Reply]
John Heaney Reply:
January 28th, 2010 at 3:23 pm
Mel, you’ve identified the complexity of determining precise ROI that can be applied to a specific event or activity, whether social media or otherwise. That’s why it’s essential to start with a strategic objective (to increase revenues or decrease costs) that can be measured and monitor your activities across a timeline. That timeline doesn’t have to be limited to your SM activities. If there were a merger or a new product line introduced, that would also be included on the timeline to determine correlation between transactions and their precursors. The SM gurus who claim that you can’t assign a dollar value to a single tweet or blog post are right. You can’t. However, you can track activities and transactions that occur over time and map them against specific SM engagements. What activities caused a surge in traffic to your blog, to your website, to your store? If you’re not tracking them you won’t be able to discern what platforms and tactics are most effective in achieving your objectives.
[Reply]
Heidi Cool
February 3rd, 2010 at 3:43 pm
John,
I really liked how you approached this so directly. I’d also add that the murkiness of measuring ROI isn’t a new problem.
Measuring sales from direct mail is easy, the order cards come in, you see which campaign they came from, you log it accordingly and within a few weeks you can see exactly what your percentage sales were.
Other channels are more ambiguous. Brand advertising for example. Who doesn’t love the winter Coke commercials with the frolicking polar bears getting refreshment from their coke bottles? Can Coke measure exactly how many units were sold as a result? No. But they can track how sales increase or decrease over the course of time, they can correlate increases with the timing of various marketing efforts, and their research can show them how positive perceptions and brand loyalty contribute to long-term sales. (I for one don’t drink Pepsi.)
Some of this stuff is more difficult to measure, but that’s always been the case, and we still find value in these activities because we know how they are contributing to the ROI. An increase in name recognition and brand reputation will (generally) lead to an increase in sales, repeat business, etc. We just have to work a bit harder or measuring how that happens. It may not be in exact dollars, but we can certainly measure correlations in activity. When we do X, sales go up. When we stop doing X, sales go down.
In many ways social media makes this easier. I can track how many visitors came to my site from Twitter, LinkedIn, etc. I can measure how much time I spend in those places (and what I do there) and see first when traffic increases and then how much of that converts to leads and sales. If I were advertising on T.V. I couldn’t track that as closely. I’d just need to see correlation in the timing of the ads and the responses.
I can measure sales leads from LinkedIn just as easily as I could a direct mail campaign. Measuring the impact of my blog is a bit more vague, but the blog gives me the foundation to make my LinkedIn strategy work. So it is still contributing to the ROI. I can’t quantify it as specifically but I can measure the time costs of my blogging and social media activities to see how it all works collectively.
[Reply]
John Heaney Reply:
February 3rd, 2010 at 4:36 pm
Heidi,
Your approach is the sensible and sane way to approach social media ROI. It doesn’t attempt to apply a return on a specific action, but on a series of actions or an entire program. If you spend an hour per week on a social media chat moderated through Twitter and you see an increase in your blog traffic and website traffic immediately after, the odds are that your participation and engagement in that regular chat session is responsible. If those website visits result in a new website development project worth $5000, then you can calculate an approximate ROI. If you also engage in a weekly LinkedIn group that you determine generates no spike in visits, then you can adapt your strategy to focus on Twitter-based discussions. But without an objective and the ability to track specific metrics, you’d be flailing around the social media space like most companies do. Actually, I feel kind of silly discussing things that appear to be so fundamental and basic, but as long as there are social media “experts” who claim that ROI justifications are impossible, foolish or so business 1.0, I guess I’ll just keep on taping.
[Reply]