The ROI of social media

All over the world, corporate bean counters are wielding their scythes and salami-slicers as they settle down to plan next year’s budgets.

“Whooops, there goes the fleet of company cars – how careless of me! Oh dear, now I’ve fumbled the training programme, the PR agency and the company secretary. Butter fingers!”

At the same time, hapless marketers are begging their cantankerous CEOs for resources for social media programmes.

In the board rooms high above Wall Street and the City of London, something resembling the famous scene from Oliver Twist must be playing out many times a day.

“More? You want MORE?!?”

If they were cantankerous before, they’re steaming mad now. Why? Because they like money a lot and the profligate marketers are wasting it increasing ‘eyeball counts’ and the number of ‘likes’ on the current Facebook campaign.

Or that’s how it appears when the marketers haven’t explained how their social media projects will eventually make more of the green stuff.

Which is why the current hot topic in digital marketing and social media is something called R.O.I.

Eh? What’s R.O.I.?

It stands for ‘return on investment’ and it’s normally used to determine what elements of any organisation’s spend are the most effective in boosting its bottom line.

The simple equation to work out the R.O.I. of any business activity is ROI = (X – Y) / Y, where X is your final value and Y is your starting value. In other words, if you invest 5 carrots and get back 20 carrots, your ROI is (20 – 5) / 5 = 3 times your initial investment.

In these times of austerity, it is the key to – no, the only chance you’ve got of – convincing the money men and women to back your social media activities. It’s easy enough to identify the ‘I’ (although anyone who thinks ‘doing’ social media is free is ignoring staff time and costs, including pensions, equipment, possibly healthcare and endless other factors). But the debate is whether it’s possible to prove there is an ‘R’ for social media.

I’m writing this blog to tell you that I don’t entirely buy the notion that you can demonstrate the full effect on the bottom line of your investment in social media. Yet.

It’s also fairly obvious that the end goal of social media is not  always financial gain, as I’ll explain.

But if you work as a marketer in business, I implore you to get used to making a financial R.O.I. case or your efforts will go the way of the company car, the secretary and the other superfluous luxuries. You need to be able to draw a straight line between your social media programmes and the cash register.

What can the ‘R’ look like?

Here are five good case studies in which brands have seen huge returns as a direct result of social media activity:

1. The American wine supremo Gary Vaynerchuck famously told the New York Times last year that for every $15,000 he spent on direct marketing during a particular promotional campaign he got 200 customers. For every $7,500 he spent on billboard advertising in the same campaign, he got 300 new customers. Yet he got 1,800 new customers from Twitter, having given nothing except his time.

2. The pet supplies chain Petco, so says research firm Forrester (sorry, you have to pay for the full report), has realised that ‘products with reviews have return rates that are 20% lower than those without reviews – and the return rate is 45% lower for products with more than 25 reviews – saving on shipping, restocking, and customer service costs”.

3. Ford Motor Company launched its new Explorer model in July on Facebook. Online advertisements included two links: a “Like” button to the Explorer Facebook Page, and a “Learn More” button for FordVehicles.com. Each site then included content cross-linking to the other. According to Ford’s head of social media Scott Monty, visitors moving from the ad to Facebook then to FordVehicles.com bought at a 30% higher rate than those going directly from the ad to FordVehicles.com. Monty later said: “When people go to the Facebook and actually get good information and engage with somebody on the page, and then go on to the official site, they’re more likely to take action and do the things [a company is] looking for them to do.

4. BlendTec raised sales by five times with their viral “Will it blend?” YouTube videos.

5. Dell Computers announced last year that it had surpassed $3 million in sales via links from one of its Twitter accounts.

But what will my return be?

First, here’s what’s definitely NOT a ‘return’ on the investment.

YouTube views, web hits, blog comments, number of Twitter followers/Facebook fans etc, etc. Try taking these results into your CEO’s office to sate his wanton lust for cash. You won’t get far.

But let’s put them on ice because we can use them as success metrics to link our activity to the important money-related returns.

Okay, how about the softer, touchy-feely outcomes like building trust, passion, and brand awareness, raising interaction and satisfaction, building a strong community of customer advocates, listening to community concerns and discovering new business and product development opportunities?

No!

This sort of qualitative data represents good returns in sectors where your objective isn’t to make money. But they are not the ‘R’ we’re looking for in business.

This, bluntly, is money and it’s measured by more quantitative metrics, not only sales but things like new leads, new subscribers, savings in customer service costs.

By linking these returns to social media activity, you’ll prove to the boss that social media has moved beyond a business novelty and has become a legitimate corporate money-making tool.

Allow me to introduce you to the self-styled and brilliant ‘Brand Builder’, Olivier Blanchard, one of the world’s thought leaders on social media ROI.

He claims that if you can show how your activity has shifted the metrics described in the acronym ‘FRY’, you’ll kill the debate stone dead about whether you can prove the R.O.I. of social media.

Fry stands for:

Frequency – sales revenue increase by shortening the interval between customer transactions;

Reach – increase in sales revenue by increasing net new customer count (breadth) and increase in sales revenue by helping customers buy deeper into the product line?(depth);

Yield – increase in sales revenue by driving customers to want to increase their average per transaction spend.

Okay, so I know what metrics I need to shift – now how do I prove my social media engagement was the thing that shifted them?

Anyone who claims you can provide definite, absolute empirical proof of that link is lying or mistaken. Even with vouchers and coupons, you can’t say for definite the customer wouldn’t have bought the product anyway. But – this is very important – you don’t need to. All you need to do is show VERY strong correlations between growth (in the FRY outcomes) and the social media metrics we put on ice above. Overlay timelines of your year-on-year growth with timelines relating to intelligent social media success metrics like:

- number of Twitter followers in a specific demographic

- number of mentions by influential bloggers

- the exact moment of specific marketing activities on the timeline (for example a Foursquare swarm party)

As attention and conversation metrics increase or decrease, you want to see a corresponding effect on your sales and demand curve for the same timeframe (allowing for specific delays, as needed).

And finally…

Some very clever people say you shouldn’t obsess about showing an ROI for social media. Erik Qualman, author of the world bestseller Socialnomics has said: “When I’m asked about the ROI of social media sometimes an appropriate response is….What’s the ROI of your phone?”

He believes social media is more an extension of good business ethics.

But I prefer Olivier Blanchard’s analysis in a tweet he posted today: “Debating the ‘philosophy’ of the R.O.I. question is like debating the morality of your paycheck. Get over it.”

No, you can’t know for sure the ROI of social media. Let’s be honest about that.

Sometimes our social media causes a neutral outcome when lack of action would cause damage. For example when we correct lies about our brands on discussion forums. How do you correlate that to growth?

But we never really knew for sure the ROI of good traditional media coverage – and that didn’t stop us all agreeing on a likely monetary PR value, a financial return.

The point – my original point – is that you have to take your best stab at proving the effect of social media on the objectives of your organisation.

Because you don’t want to be left weighing up the other ROI: Return on Ignorance.

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  • Frankie Taggart

    I tried to follow this. I was riding high – like Boba Fett on the desert planet of Tatooine – in the user-friendly opening paragraphs. But my jargon-translating jetpack got shot at with a volley of ‘quantative metrics’, bounced off Jabba the Hutt’s ‘Sky Outcomes’ sail barge and and tumbled into the sarlacc of agonisin incomprehension.
    But that’s what you get for reading special interest blogs. Why don’t you do one about Peggy leaving EastEnders, or the best goalkeeper in the Premier League?

    • http://michaeltaggart.wordpress.com michaeltaggart

      I see and point taken. I think it was Oscar Wilde who said (something like): “I wanted to write you a short letter but I didn’t have time – so I wrote you a long one.”

  • Katie Fewings

    ‘having given nothing except his time’ – Michael, time is money ;)

    • http://michaeltaggart.wordpress.com michaeltaggart

      Hello Katie and welcome to our blog community (does that sound creepy?).

      Yes I make that point here:

      “It’s easy enough to identify the ‘I’ (although anyone who thinks ‘doing’ social media is free is ignoring staff time and costs, including pensions, equipment, possibly healthcare and endless other factors)”

      What Gary Vaynerchuck would say is that he probably put time AND money into the other things (approving ads, billboard designs, slogans, negotiating deals etc). And the returns were barely comparable.

      M :)

  • http://www.baseonegroup.co.uk/beyond John Bottom

    Really good post, Michael. I’ve seen this topic broached on many occasions and you’ve covered both sides of the argument nicely.

    Personally, I consider myself more an artist than a money man [with a background in copywriting], so I like the idea of comparing the ROI of social media with the ROI of a phone. [Incidentally, you can also draw the same parallel when people start worrying about 'what employees might say on Twitter'. They have been able to say it on the phone or in person for years - they just have to learn the new etiquette]

    But back on the ROI issue, we will always have to deal with those who need proof – or at least something they can present as such. And you are right that the best chance of that is to correlate peaks of sales with peaks of social media activity. And that can only happen with time.

    I think in a few years social media will be as easily justified as brand advertising. In the meantime, it is the pioneers who will get ahead. And if you don’t have any ROI to show, the fear of losing out to more adventurous competitors is easily the next best argument!

    Nice post, thanks

    John

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