Home  › Social › Social Commerce

How to Calculate the Net Present Value of Social Commerce

  |  June 15, 2010   |  Comments

Using the Net Present Value formula, you can show your CFO the value of consumer-generated content on your site.

How much is your customer-generated content worth?

Social commerce measures the impact of social interactions on your brand, bottom-line sales, and business success. One great way to assign a true monetary value to your brand's user-generated content (UGC) - like reviews, customer forums, and ask-and-answer entries - is to measure its net present value (NPV).

NPV is a metric widely-used in the financial world, and the management at your company (especially the CFO) will appreciate seeing the value of your social media program. NPV is commonly calculated as the profit your company gains from an investment is equal to sum of that investment's impact over time. When the NPV number is positive, financial teams will usually decide to make the investment; when the number is negative, it's not a good investment. There's more to the calculation then we're representing here, but the current value of future impact is the important concept to grasp.

Customer-generated content has a high NPV, because its positive impact on bottom-line sales increases over time. As social content grows - especially on purpose, through designing a participation chain - it drives a larger and larger amount of revenues. The more content your customers create, the more places you can leverage it (such as in e-mail and other marketing campaigns, in-store signage, etc.) and the more "findable" your site will become in natural Web searches, driving even more revenue. Each interaction, each piece of customer-generated content, is an annuity - and money in the bank for your company. This builds over time, and an original investment pays off handsomely in an NPV calculation.

If you compare social commerce to traditional advertising, you'll see the difference in NPV immediately. Traditional advertising isn't going away, but campaigns can cost a lot of money and return diminishing value over time. These campaigns have less and less impact on sales as time goes on. On the other hand, social commerce programs cost little to implement, grow organically with no further investment, and influence more and more sales over time.

The good news is, if you calculate the NPV of your proposed social media program and present it to your financial teams, they'll be eager to fund the project. Measuring the NPV of your social commerce program is relatively easy. You just need to do some basic financial calculations. Below, I'll walk you through a hypothetical NPV calculation for a social commerce program.

Say you generate $10 million in online sales annually.

  1. You've got a 20 percent return rate, resulting in $8 million total in net sales.
  2. You've got a conversion rate per session of 3 percent.
  3. You're processing 100,000 orders per year with an average order value of $100. That's an average of 8,333 orders per month.
  4. With 3 percent conversion resulting in 100,000 purchasing sessions, your site gets roughly 3.3 million total sessions a year.

Now, assume a few more things that I've learned from years working with large brands on their social commerce programs.

  1. Customer-generated content often raises conversion rates by 20 to 30 percent. Let's assume 20 percent, so your new conversion rate, after implementing social commerce, would be 3.6 percent.

  2. Customer-generated content can also reduce returns by 10 to 20 percent. Let's assume 10 percent, so your new return rate would be 18 percent.

Now, let's take all the above information and calculate the NPV of your social commerce program.

  1. With customer reviews, you'll average 10,000 orders per month instead of 8,333. This will gross you $166,700 in revenue per month, or an additional $2,000,400 annually.

  2. You'll also reduce returns from 1,666 orders returned to 1,500 orders returned monthly. This will net you an additional $16,600 per month, or $199,200 annually.

All in all, after one year of having customer reviews on your site, you would increase your total sales by 27.5 percent to $2,199,600. That is your core NPV number.

If you wait to implement a social commerce program, however, you'll lose out on substantial revenues, since the impact of user-generated content on sales grows over time. For example, if you only have a social commerce program live and running for three months of your operating year, you'll increase sales by 6.8 percent to $549,900. Six months of UGC would increase total gross sales by $1,099,800, or a 13.7 percent, while nine months of UGC would deliver a 20.6 percent boost in sales to $1,649,700.

If you don't add some high-NPV social commerce programs to your marketing portfolio, and your competition does, where will you be a year from now? The answer is clear: out tons of money you could have made.

ClickZ Live New York What's New for 2015?
You spoke, we listened! ClickZ Live New York (Mar 30-Apr 1) is back with a brand new streamlined agenda. Don't miss the latest digital marketing tips, tricks and tools that will make you re-think your strategy and revolutionize your marketing campaigns. Super Saver Rates are available now. Register today!

ABOUT THE AUTHOR

Sam Decker

Sam Decker is founder and CEO of Mass Relevance, the leading enterprise social curation company. He speaks and consults on digital growth strategy, based on years of experience in technology and social markets. He has written two books on word-of-mouth marketing and is an award-winning blogger (www.deckermarketing.com). As former chief marketing officer of Bazaarvoice, the market leader in hosted social commerce applications that drive sales, Sam worked to help brands present the right user-generated content at the right time in the purchase path, bringing real value to the consumer and the business. Prior to Bazaarvoice he drove Dell's customer segmentation, their customer-centricity strategy, and led Dell's consumer website, building Dell.com into the largest consumer e-commerce site at $3.5 billion in annual sales.

COMMENTSCommenting policy

comments powered by Disqus

Get ClickZ Social newsletters delivered right to your inbox. Subscribe today!

COMMENTS

UPCOMING EVENTS

UPCOMING TRAINING

Featured White Papers

Google My Business Listings Demystified

Google My Business Listings Demystified
To help brands control how they appear online, Google has developed a new offering: Google My Business Locations. This whitepaper helps marketers understand how to use this powerful new tool.

5 Ways to Personalize Beyond the Subject Line

5 Ways to Personalize Beyond the Subject Line
82 percent of shoppers say they would buy more items from a brand if the emails they sent were more personalized. This white paper offer five tactics that will personalize your email beyond the subject line and drive real business growth.

WEBINARS

    Information currently unavailable

Jobs

    • Lead Generation Specialist
      Lead Generation Specialist (The Oxford Club) - BaltimoreThe Oxford Club is seeking a talented writer/marketer to join our growing email lead-generation...
    • Health Marketing Editor
      Health Marketing Editor (Agora Inc.) - BaltimoreCome flex your intellectual muscle as part of Agora, Inc’s (http://agora-inc.com/) legal team...
    • Technical Business Analyst
      Technical Business Analyst (OmniVista Health) - BaltimoreOmniVista Health is looking to add a Technical Business Analyst to our expanding team...