Social Media ROI: Does it Matter?

Let's just say for the record that ROI always matters. No matter what, any time you are going to take a client's or company's cold hard cash and invest it in a marketing or product development program, ROI matters. Maybe not today, maybe not tomorrow, but somewhere along the line, someone very high up will want to know what came of that $50 or $100K you "invested" into social.

This post is dedicated to those CMOs and clients from my past and present who demanded on ROI forecasting and tracking for every project, and for my budget as a whole.

I'm going to take a shot at offering a way to handle forecasting of social media ROI here, and hope to stand up to tracking in a subsequent post.

ROI Primer
Real quick primer on ROI, or Return on Investment. Another way to think of it is Return OVER Investment. It's best calculated using a conservative estimate of the actual profit to be generated by the project, over only the costs that will be incurred directly for the project.

(Revenue - Cost) / Cost

Put this way, it's a fraction that needs to be greater than 1 for a project to even be considered. Generally we want to see ROI of 2-3x or greater forecasted to even seriously consider a project.

ROI + Social Media
This turns ROI on it's head. The masters say don't worry about ROI and social. Barry Judge, CMO of socially adept Best Buy, stated at the Forrester Consumer Forum in Chicago, that social needs to begin with the customer, not the bottom line. And he is right.

This means that payoff will not come right away, if at all, at least not directly. Instead, you need to look for social KPIs that fit your objective with whatever project is at hand.

Forrester does a great job mapping POST objectives to metrics in Nate Eliot's recent report on measuring social ROI:

Raise awareness
  • Exposures to brand
  • Visits to fan page
  • Fans of brand
  • Comments, posts or submissions
  • Referrals or posts to user's news feed or status

Boost engagement
  • Participants in community
  • Suggestions or tips submitted
  • Active (repeat) users

The bottom line is to choose metrics that describe what actions your users will take on your

Calculating Social ROI
The added dimension here is engagement over time. Social is not a campaign, and results will not spike with a launch party. It's much more organic. Even "viral" social programs begin with a small number of first-finders who build over time.

Time of Engagement and Investment
This means that first, you must decide how long you can give yourself to succeed. Again, this correlates to your objectives. Generally social projects are not "campaigns" but require time to build over time. So you cut yourself some slack, perhaps. But the day of reckoning will come.

Next, use an ROI formula that keeps all assumptions clear and simple to understand. Here's one I use:

Audience x Engagement x Adoption x Value per User x Multiplier Effect X Time of Engagement
Investment X Time of Investment

Ideally, Time of Engagement cancels out Time of Investment top and bottom. But time on top might be
much greater than time on bottom: an evergreen success from a short investment. Or it might be much smaller: a flash in pan fan page that never goes anywhere else and does not inspire ongoing engagement.

The other parameters go like this:

Audience - total size of your segment. Say, 80 million moms in the US

Engagement - rate of participation on the platforms you've chosen. Say, 40% of moms aged 24-39 today are on Facebook. This is a stat you should be able to find

Adoption - rate you forecast your audience segment will find and use your app, widget, etc. Try to use a benchmark. Be conservative. One third of iPhone users download the Facebook app. Yours will not come close to this rate

Value per User - another forecast, this time based on whatever lifetime value the participant imparts on your business. Keep in mind that social participation typically does not match up directly with site conversion! The input here might simply be a PPC amount you would have spent using paid keywords to attract this user. Instead, she found you as a result of your presence on a social platform she's using. Now is she going to post on your / her wall, tell 3 friends or enter your contest? If so, what is that worth to your bottom line?  This is probably an offset of another, more expensive marketing channel, which would lower your overall Cost Per Acquistion figure (CPA).

In fact, this value offset is typically a supercharged by what's great about social:

Multiplier Effect
- this is the number of "friends" your participants will expose your brand to on your behalf. So that one participant who found you and offset your PPC spend also shares your brand implicitly with 120 of her friends on Facebook, when she posts to your wall. Channel choice can have a big impact here.

Investment - Here's where you factor all the time and costs you spent strategizing, designing, creating content, hosting micro-sites, curating a Facebook page, doing some SEM PPC to support your tool or offer, fulfilling coupons, administering contests, shooting video ...

So, there's a basic equation. The resulting ROI gives you a value in offset dollars, new brand equity or user enthusiasm over time, over some investment which should not be very large.

It's about planting seeds now that sprout and grow some other time
This participation is an expression of value moves your customers to either consider you at some point, or stick with you time and again. It may be delayed gratification. But if you have truly added value in terms of relevance to their lives, then you have built some esteem that will pay back on this social investment.

For now, let me know if this formula works, or how you might improve it. Especially the Multiplier Effect and the value and velocity of referrals it implies.

All in all, social ROI is all about


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