Social Media ROI and when it makes sense

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

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