How to: Calculate Social Media ROI

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How to: Calculate Social Media ROI

November 17th, 2009 Leave a comment Go to comments

Dell Computers announced last June that it has surpassed $3 million in sales via links from one of its Twitter accounts, making one of the most high profile examples of social media Return on Investment (ROI).

But, will this be enough, telling your reluctant boss that social media is worth using because Dell made $3 million on Twitter!

socia media ROI cloud In social media, we have a few very powerful mechanisms like customer referrals, customer advocacy, customer content contribution and several other contributing factors which all help a company financially to make substantial improvements, when done right. Everyone knows that trying to measure Social Media ROI is not that easy! Here is what I found…

The talented Peter Kim, a former Forrester analyst, outlined a framework for measuring Social Media and said:

“Although social media channels seem to be mostly qualitative in nature, user activities can be easily quantified. Although users interact with channels in different ways, four common factors quantify social media success: Attention, Participation, Authority, and Influence.”

Here is his framework for measuring Social Media benefits:

Attention. The amount of traffic to your content for a given period of time. Similar to the standard web metrics of site visits and page/video views.

Participation. The extent to which users engage with your content in a channel. Think blog comments, Facebook wall posts, YouTube ratings, or widget interactions.

Authority. Ala Technorati, the inbound links to your content – like trackbacks and inbound links to a blog post or sites linking to a YouTube video.

Influence. The size of the user base subscribed to your content. For blogs, feed or email subscribers; followers on Twitter or Friendfeed; or fans of your Facebook page.

He says that “There’s an “x-factor” that comes into play well: sentiment”…. but a lot of CEO’s will not buy into the sentiment game. They will still be insistent…. saying “I don’t care about these sorts of soft numbers show me the hard facts ..show me the ROI on Social Media Marketing and I will give you the budget.” It’s chicken and egg scenario all over again, so how do you approach it.

It seems therefore that developing these high-value links (which will enables you to easily rank prominently for targeted terms in search engines and increase your long-tail traffic which will stabilize at a much higher number than the pre-social marketing campaign number), as a result from placing your content on the highly trafficked social media sites is not enough. So, how do you then measure financially the social media ROI?

Olivier Blanchard captures the essence of ROI from social media in a humorous, easy-to-understand way:

Marketing professionals need to understand this: If the investment (the “I”) is $$$, then the return also has to be $$$. It can’t be eyeballs or impressions or clickthroughs. You have to tie your results to a $ amount. Anything short of that, and you’re not proving your value to your boss or client.

It isn’t to say that eyeballs, impressions and clickthroughs aren’t important. They are. But they’re one link (of the action-reaction-outcome narrative) shy of ROI. (They don’t tie the investment to the actual return.)

The relationship between a company’s investment and the return on that investment pretty much looks like this:

$ Investment by company –> Action –> Reaction –> Non-financial impact –> Financial impact $

What happens between the investment and the financial impact (the return on that investment) is VERY important (as explained in his video). As well as the importance of monitoring and measuring it in order to tie the investment to the associated financial impact (and ROI) in future posts.

So the Financial ROI = measuring the investment in a given currency and compare it with the corresponding profitability or margin in the same currency. Dollars on both sides of the equation!

Axel Schultze early this year has posted a similar formula than the one described above by Blanchard.

A = Contribution margin in currency generated from externally referred customers
B = Cost in currency for human interaction and other cost to manage and engage in the ecosystem
C = Social Media ROI
A/B = C

With this formula for social media ROI we have US$ or “currency” on both sides of the equation. And guess what we have benefits from the investment for both: the business AND the customer community. Of course this is only possible if you know your ecosystem and if you did your “customer mapping” as we call it, but with the tools we have today this is easily possible.

Unlike traditional marketing and PR, Social Media actually provides a way to calculate an ROI, that can be taken into the books by a CFO.

The latest in date on the subject is the video by Socialnomics which showcases examples of Social Media ROI on campaigns and companies that have thrown themselves into the Social Sphere.