Economic Decisions
Social Media ROI and when it makes sense
December 20, 2009
12
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ROI is a measure used to determine the efficiency of an investment, or compare investments with one another. The most simple way of determining ROI is to put up a formula such as this one:

Return on Investment

Source: Investopedia

How you can Use ROI in Social media

When I read posts such as the one by Thomas Baekdal I get seriously concerned. Especially when I look at how many shares it has got on Twitter and the lack of criticism in the comments of the post. The main problem is that most of these writers cannot determine the difference of consumption and investments.

The gain from an investment needs to be determined by the person making the investment. When you make your online marketing plan, or your online customer relations plan, or your online investor relations plan or your main online communications plan, then you need to set goals. Those goals need to be broken down into KPIs and measurable success events.

You need to think. What do you need to get the Gain you want? Then you need to look at what gives you that Gain. If you don’t know, hire a consultant that do. This differs between sectors and product. If you want this Gain to be the return of an investment you also need to have the ambition that it will grow over time.

If you need to sell fast moving services online that do not require transport but can be bought and consumed in the online environment. Then followers on a Twitter account might be such a metric you should pay notice to. However, if you work with industrial products that take time to deliver, then you probably should focus on other key metrics as the most important when looking at your choices for marketing spend. Especially if you are determining your marketing spend with ROI calculations.

To say, as Thomas does, that fans etc. is not a metric you can base an ROI calculation on is simply wrong. YOU determine what should be your Return, and then you determine what investment brings back the highest Return of that sort. The final goal in every business is to get the green, but in order to get it you need to work for it.

Marketing is not an investment

For me, marketing is not an investment at all. It is consumption. To make a distinction between the two, let me give you an example from real life:

When I buy food and clothes I do that as they make my stomach full and my butt warm. I buy them cause I need them for a specific purpose. Most likely, they will loose value from the second I pay for them until they are fully consumed. An investment is what I do when I put my money in the bank and invest in interest rates. An investment can also be buying something such as an apartment, which value will grow over time. I buy it cause I have money too and because I believe its value will increase over time.

With marketing you generally consume media, just as you consume a loaf of bread. It fits a purpose and it gives you a direct return. But just as the eaten loaf of bread gives you less utility over time (as you start getting hungry again), the consumption of media needs to be recharged as it’s value decrease from the second the ad spend was consumed by the media buy.

So when does it makes sense to measure ROI on Social media

And this is probably where you bump into most of the misconceptions of social media and ROI. People try to measure ROI on marketing activities and then compare it to the same money they put into their social media. THIS IS WRONG!

You cannot compare marketing spend with social media spend. Especially not through ROI measurements. You cannot measure ROI on traditional marketing as it is not an investment. You can measure how much you sold because of a media consumption, but as the value of that consumption goes down by the minute, it can not be seen as an investment.

Some activities in social media however CAN be seen as investments. Some activities should be seen as consumption. Consumption goes towards the marketing budget, investments goes towards the business development budget. A Facebook page or application engine is a typical investment. Just as a factory or an offline store it is a platform from which you launch products, build relationships etc. Investments in social media can also be seen as investments in a farm. If nurtured it has the ability to grow organically through the once in time planted seeds. (now you know you have to plant stuff more than once to make it effective and vary the crop, but it still has the possibility to grow by itself if you just let nature have its toll)

How to determine a Social media investment:

  1. The value of the spend is supposed to increase over time
  2. The object of the investment is a necessity for launching future activities
  3. It can grow organically
  4. The acceleration of your return slope is positive or zero (inclined line in a diagram)

constant returns diagram

How to determine Social media consumption:

  1. Your spend decrease in value once the money is spent
  2. The acceleration of your return slope is negative (sad mouth in a diagram)

sad mouth diagram

And to what should social media ROI be compared

First en foremost there is the notion that you should believe that social media is the way to build your business online. There is some of you out there who can get more value out of engaging in social media than others. Generally fast moving services that do not require delivery of a product of some physical weight, has more to gain directly. Here it is also extremely easy to measure the relationship between investment and return. Ie. HARD COLD VALUES measured by engineers.

YES there are soft values, and they do make a difference, especially when working with elastic demands for products. (ie. where price matters less and perceived value matters a lot.)

What you should compare your social media investments too are the manual costs of your sales unit and customer service. Ie. the cost of each phone call, each e-mail, each send out via snail mail etc. That is the investment you put into your existing customers. Ie. the infrastructure that carries your business. Then you should compare the Gain, minus the cost, through the cost of those investments to similar investments in social media. THAT is a true ROI calculation when it comes to social media.

Concluding these thoughts on Social media ROI

I must say Thomas post was the spark for this one. There is a lot of bull crap out there about ROI and social media but when trying to punch holes to the “myths” about ROI, then PLEASE talk about ROI and not the effect of consumption. That way we will finally be able to take the core numbers to the engineer decision makers and make some sense out of this mess.

And to those who wonder… Yes I still think a TV-ad is a REALLY good way to consume media. Yes I still think Outdoor Ads and Events have a greater wow-factor than a Facebook-application. It is the way we combine it all that makes the difference between online good and online great.

Best,

Jesper

Possibly related posts: (automatically generated)

About author

Jesper Åström

Jesper Åström is a digital tactician hired by people and companies all over the world to help solve their digital challenges. He is also a liked educator and business creator and currently develops educational programs in collaboration with Hyper Island in Sweden and Singapore, whilst building businesses in Sweden and Japan. Subscribe to Jespers YouTube Channel

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There are 12 comments

  • [...] This post was mentioned on Twitter by Jesper Åström, Jesper Åström. Jesper Åström said: Got annoyed by this http://bit.ly/6mwDQx, So I decided to write Social Media ROI and when it makes sense – http://bit.ly/8wMCuG [...]

  • [...] Social Media ROI and when it makes sense [...]

  • [...] Social Media ROI and when it makes sense – En riktigt bra artikel som tar upp skillnaden mellan Return of Investment och Consuption of Media. Är inte riktigt överens på vissa delar,men i huvudsak ett bra inlägg i den just nu aktuella debatten om ROI och mätbarhet i realtidswebben. [...]

  • Interesting article :)
    …I do not agree with all of it (only parts), but still, it is interesting to see other people’s opinions.

    Social media is largely about building a better relationship between you and your customers. As such, it is an investment, because you put something into it, and in return you get more out of it (e.g. a lasting connection, that can grow and expand on its own).

    Building a relationship is not about “consumption” of media, because there is nothing following it (once it is consumed, you are left hungry – metaphorical speaking). Consumption is about the short term goal of creating awareness, like what you do e.g. via TV ads or billboards.

    Social media is not about the consumption of media. It is about investing in your fans, so that the results are increased value over time. Which is exactly the effect you get via Twitter and Facebook.

    Each investment is added to the previous one, and as such your fan base steadily increase over time. And the things you invested in one year ago, is still providing a return – because they fans stick around. The value doesn’t drop once the investment is paid.

    Of course the biggest difference between my article and yours, is that I do not make a distinction between marketing and business development. In my world, marketing IS business development.

  • Jesper Astrom says:

    Agree. Social media can be about building relationships, and it is the purpose for which most people use social media. Companies should do this to the same extent, but we haven’t seen that many examples of relationship building on behalf of companies.

    My major concern with your post was that it seemed to state that there was only one return on an investment of any significance. I say it depends upon what gain you wish to get from your investment. If you are only measuring bottom line effect then you miss a lot of what builds value over time such as customer loyalty index, returning customers etc.

    I agree that spend of budget in social media that aims to build relationships is an investment. However, I believe you can effectively spend money in social media that is not. Media consumption that doesn’t build trust can still be highly monetizing. Just look at Dell Outlet. A great example of classic marketing using social media channels.

    I get what you’re aiming at when you say marketing is business development, but it is important to keep the definitions and labels apart. Marketing is not business development, but business development can/should occur if you use social media correctly when “marketing”.

  • [...] Under 2009 har många marknadsförare börjat/vågat testa på att bemöta kraften i sociala medier – där svårigheten legat i att definiera passande strategi och metod – samt att i steg två klura kring lämplig uppföljning och mätning (gärna med koppling till ROI). [...]

  • Jesper, I must admit that while I do agree that you can use social media for other things than building relationships, I do also think the social elements is what people should be focusing on. To build a connection.

    And, yes you can make money by using “classic marketing” like Dell is doing with Dell Outlet. But Dell Outlet is also only one of Dell’s 34 Twitter channels, 33 Facebook channels and several other channels on other platforms (YouTube, flickr etc.). Dell’s overall social media strategy is all about investing in social media.

    Not only that. Dell Outlet is actually 80% about building a long term relationship, because most of their tweets is replies to people questions. The success of Dell Outlet is as much about the customer relationship as it is about the discounts they offer.

    But still. Special discounts are an important part of anyones social media strategy. As Razorfish found in November, 44% follow brands to get special deals. But instead of just using social media as an ad platform for special offers – use the special offers to build a connection between you and your customers.

    - You wrote: “If you are only measuring bottom line effect then you miss a lot of what builds value over time such as customer loyalty index, returning customers etc.”

    My article was specifically about NOT *only* measuring the bottom line effect. In my article I point out that people’s social media efforts must, in the end, result in a bottom line effect – otherwise you have no meaningful return.

    But as I wrote in both myth 3 and 7, the way to actually get a bottom line effect is to focus on making remarkable products and experiences, and measuring your social media efforts as a whole (in the long term).

    So yes, there is only one meaningful social ROI – the bottom line. But to way to measure that, is to look at a lot of other things, and see how they contributes to the “return” as a whole :)

  • Jesper Astrom says:

    I like how this post is turning into a really good one through these comments and elaborations. :)

    I agree with all that you wrote in your last comment.

  • Social Media says:

    Jag förstår inte argumentet att social media handlar om att bygga relation.

    Ja, Okej – Och?

    Den relationen är till för att 1.) Den personen ska köpa mer 2.) Den personen ska se till att någon annan ska köpa mer.

    Allt detta går givetvis att mäta till direkt ROI.

    Har jag missat något?

  • Jesper Astrom says:

    Hey @Magnus or “Social Media”.

    Firstly, ROI is not good way to look at sales costs or consumption. My argument is that marketing isn’t an investment at all and thus you are unable to calculate return on investment. Some parts of social media spend can be counted as investments and it is important that you separate your work in social media into two different ways of viewing your spend in order for it to be compared with other investments/consumption.

    You CAN however calculate the direct return of some media spend in traditional media and some campaign in social media. In most cases, Social Media is quite pale in comparison to for example SEO or SEM or TV.

    However, if you use a combination of social media investments, with media consumption. Then the return of your media consumption will be much greater than if you hadn’t made the investment in social media.

    So, to answer your question. You can measure ROI on social media activities, but only on some of them, the ones that actually are investments.

    Just as when you build an apartment complex, you produce an asset in the empty flats you are producing, a follower on a Twitter account or a Facebook page is an asset. You DON’T earn ANY money by just “owning” them. You then need to put that asset to the market (or have someone else do it, as when owning a stock or a bond) in order to gain return from it. You need to interact with your Social media user, and you need to sub-let the apartment.

    Secondly, what you measure as your return on an investment is always determined by the goals you set up when making it. If you only think money and not product when setting these goals, you will FAIL regardless if you are engaged in social media or not.

    • Hi Jesper,

      I actually forgot commenting on this excellent article, which I necessarily do not totally agree with. :)

      As I see it, there is two purposes in social media for businesses today;
      1. earn money
      2. save money

      To those two there are a wide range of other possible KPI’s/sub-purposes, which should be setup in an early stage and monitored closely.

      Key Point Indicators are metrics telling you that you are heading in the right way, and all those really important things you mention in your post is KPI’s, not ROI.

      ROI – In my humble opinion – Is one of the two main purposes (or both). And both of them are, in all ways of seeing it, possible to measure.

      Either we have a different scope of defining ROI, or I disagree on most in your post! :)

      I hope that we can meet up for that AW we have been discussing for a while. I’d love to take this discussion further over a glass of pinot noir ;)

      Have a great weekend,

      Looking forward your response (Your’s as well @baekdal).

      Best,
      Magnus

  • [...] Jesper Åström – Social Media ROI and when it makes sense [...]

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