Calculating ROI in social media is a hot topic. As companies have rushed into the elusive social media marketing gold mine, many are left trying to figure out if all the time and effort is paying off.
The problem is that social media is extremely difficult to measure. In a former life, I worked as a financial analyst at P&G, and a big part of my job was to measure the ROI of our different marketing efforts. In calculating the return on traditional media, we often found that we couldn't exactly calculate everything, so we resorted to some creative approaches.
There are many challenges to measuring the return from social media, most notably:
These are only a few of the challenges that you may face as a part of your social media marketing measurement.
Creative Ways to Measure (or at Least Validate) Your Social Media Efforts
Measuring ROI isn't always an exact science (unless you have a large measurement budget based on complex modeling), but there are some approaches to measurement that can at least validate your efforts.
1. The value of a customer backward math. One approach that may help validate social media efforts is to use backward math to determine if your social media efforts are likely to be profitable. The first step is to understand the lifetime value of a customer. Not what one purchase is worth, but the total profit of purchases that an average customer makes over the entire time that they do business with you.
Costs/lifetime value of one customer = # of new customers acquired in social media for neutral ROI
For example, if a new customer is worth $1,000 in profits over their lifetime and I spend $5,000 in social media per month, I would need to acquire five new customers through my social media activities for it to pay out.
2. Paid value of traffic. Social media often drives traffic back to your website. One creative way to look at the value from social media is to consider what that traffic would have cost if it had been acquired by running ads.
This method is based on using the pay per click market value of traffic to approximate the value of the website traffic earned through social media.
A Facebook ad for your target costs $2 per click
You received 500 unique visitors to your website from your Facebook marketing
That traffic is worth 500 visitors x $2 = $1,000
Using the paid value of the traffic is a way to approximate the value of the traffic. There are many differences between the quality of traffic that comes from paid advertising versus organic social media, but it can be used as an approximation.
3. Lost customer value. Many customers who have had a bad experience with a business take to Facebook or Twitter to vent about their experiences. This provides an opportunity for businesses to seek out customer complaints and respond to them.
Similar to the backward math used in the first approach, this approach looks at how many customers were not lost because of social media and is based on the lifetime value of the customer.
Lifetime value of the customer x 0.5 (to account for the portion that the customer has already spent with the company) = $$ not lost because of social media
But the value doesn't stop there. Angry customers have an amplification factor, which means that they tell others about their experience and cost you customers. Pete Blackshaw wrote the book "Satisfied Customers Tell 3 Friends, Angry Customers Tell 3,000" about this principle.
If you're able to satisfy an angry customer, you're probably also gaining additional new customers (or not losing additional ones) by limiting the angry customer effect. Based on your type of business, you can create an estimate of what the angry customer effect could cost you. It may be two customers or 20 customers.
Value of not losing customers = the number of customers not lost in the angry customer effect x the lifetime value of a customer x the number of formerly angry customers each month
4. Probable reach. Reach is one of the oldest measures of marketing and it's how traditional marketing is typically judged. Reach is the number of people who have been exposed to your brand. In the introduction I talked about the difficulties of using this metric for social media. That being said, understanding your reach and comparing it to what you might pay for that reach can help justify your social media efforts.
Many assume the reach is as simple as looking at the number of fans/friends/followers you have, but it's much more complicated. The key to understanding reach is to first estimate your true organic reach from your fans.
Many think that this is simply the number of followers they have, but it's probably somewhere between 5 percent and 20 percent of your followers, depending on your engagement levels. Facebook shows impressions in page analytics, which is a good way to determine reach, and on Twitter it might be 20 percent or less of your followers.
The value doesn't stop there. When others interact with your brand, they are also providing brand impressions to the people that they are connected with. This means that when someone interacts with your brand on a social network, their interaction gives you reach with their connections as well.
Brand reach = number of followers x number of posts x 5 percent actually seeing posts
Social network amplification = number of interactions x average number of followers x 20 percent actually seeing posts
Value = total reach x cost per impression of other media
What other creative strategies have you used to validate the ROI of your social media?
Meet Your Favorite ClickZ Contributors
Many of ClickZ's leading expert contributors will be at ClickZ Live, the new online and digital marketing event kicking off in New York (March 31-April 3). Hear from the likes of: Jeremy Hull, Lisa Raehsler, Andrew Goodman, Bryan Eisenberg, Mathew Sweezey, Aaron Kahlow, Stephanie Miller, Simms Jenkins, Jeanne S. Jennings, Dave Hendricks and more!
Krista Neher is the author of the bestselling Social Media Field Guide, an international speaker, and currently CEO of Boot Camp Digital, which is a leading provider of social media marketing training and consulting solutions. Krista is a social media pioneer, creating one of the first successful corporate Twitter strategies and corporate blogs - long before "social media" was even a recognized term. After spending nearly six years at Procter and Gamble working on some of the biggest and most successful product launches, Krista went on to become the vice president of marketing at an Internet start-up.
Krista started Boot Camp Digital in 2008 and has created training programs for hundreds of advertising agencies, marketing departments and small and medium business owners in social media marketing. Krista also works with a variety of educational institutions on their social media programs and is currently working on a textbook on social media marketing.
March 19, 2014