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Measuring What Matters: What’s the Real ROI of Social Media?

Measuring What Matters: What’s the Real ROI of Social Media?

By Max Thomas

Social media is still grossly misunderstood by marketers and executives. I believe we’ve all seen wide variations in how well a company understands the impact of social media on their marketing and, even more rarely, how intricately social media is tied into search, branding, reputation, perceptions and actual sales.

C-Suite Doesn’t Trust Marketing

A 2012 report from The Fournaise Marketing Group states that 80% of CEOs don’t trust the work done by marketers. In fact, 75% of these CEOs think that marketers misunderstand (or misuse) the term “ROI” while 90% trust the opinion and work of CFOs and CIOs. That’s a potential spread of 165% – not so good for marketers!

At a high level, this isn’t very comforting but it also makes sense in that “marketing” is still elusive and hard to quantify, while technology and accounting are clearly definable practices with clear goals.

In a SEOmoz post by Eric Pratum on the opinions of multiple experts about measuring social media, I think Ian Lurie summed this reality up nicely in a statement he made about social media ROI: “We can’t really track social media ROI because we’re not dealing with computers, we’re dealing with humans who can be swayed by their environment.”

Social Media Value is Much More Than a Click

Another inspiration from Eric’s post is the reminder that it’s imperative to educate executives about the significance of social media to a brand’s online presence and how it simply isn’t as trackable as a paid click via Adwords. Furthermore, the ROI of social media is much larger than what is captured via referring clicks and shares. These represent a slice of the overall impact at best.

With this in mind, I’ve attempted to create a social media model that is organized around the most important part of the ROI equation – the return, aka “sale.”

I want to mention there have been some big strides in calculating the ROI of social media metrics. Several recent outstanding posts delve deep with explanations of trackable metrics and corresponding equations; two I’d like to call out are Courtney Seiter’s 30 Social Media Metrics That Provide Real Value and Angie Schottmuller’s Social Media ROI: 14 Formulas To Measure Social Media Benefits. I won’t even begin to touch on what they’ve already done so expertly. I’d like to take a somewhat different angle and try to explain social media ROI to a C-level person who probably won’t have the time or interest to dig too deep into metrics but thinks social media is valuable enough to give it at least 5 minutes.

What’s that ROI Equation…for Social Media?

Let’s go back to those CEO’s and their mistrust of marketers’ use of ROI. I think it’s fair to say that if someone is talking ROI in the same breadth as accountants, then growth in fans and engagement alone aren’t want they want to hear in terms of ROI.

For a little backgrounder, lets look at the traditional ROI equation:

ROI = (Revenue – Costs) / Costs

      Revenue = Sales
    Costs = Labor, time, materials and other “costs” required to support the activity to generate revenue

For social media ROI, I’d like to throw in cost savings too as part of the equation, so that the revised equation looks like:

ROIsm = ( (Revenue + Cost Savings) – Costs) / costs

      Revenue = Sales
      Cost Savings = Costs that are avoided because social media was used rather than another activity
    Costs = Labor, time, materials and other “costs” required to support the activity to generate revenue (here, social media)

Creating A Social Media ROI Model

With the goal to create something that is useful in the abstract, following is what I arrived at as a potential ROI model for social media. I don’t pretend that this will cover all circumstances of social references and costs. My intention is really to create a framework that can be used for estimating the ROI of social media in general.

The model is organized according to how close a specific social activity is to a sale and then provides an “informed” estimate of what the direct and numeric impact might be. To help illustrate, it’s organized like a dart-board target: The bullseye (or center) is the actual sale and every circle around the bullseye is a social media activity that impacts the sale. How close the activity is to the bullseye reflects its impact, with Circle 1 closest to the sale and each extending circle gradually less significant. It’s the same idea as scoring a game of darts.

SMDIOS2

Circle 1 – Conversion

This conversion is from someone who clicks directly from a social media profile like Twitter or Facebook and then makes a purchase on the website. This assumes the conversion happens on a website and includes last and assisted click conversions.

The value of this social activity can be expressed as:

Activity Attributable To Sale Value Total Revenue Or Impact On Revenue
Purchase/Sales 100%* X Sale ($100)** = 100% Or $100***

*Attributable to Sale: This ratio reflects the direct impact the activity has on the sale; it’s 100% here because the visitor is clicking through to purchase.

**Value: The value is the revenue from the sale. Here, I’m using $100 as an example of a product sale price.

***Total Revenue Or Impact On Revenue: This is the direct impact the activity has on the sale. Using the $100 sale price example, I’m also showing it as a dollar value.

Circle 2 – Customer Service / Retention

Now we’re moving further away from a direct sale. These activities reflect the impact on revenue and cost savings of customer service via social media. I’ve broken it down to three parts to reflect the values of (i) customer retention (by keeping a potentially disgruntled customer), (ii) new referral customers (via happy customer who recommends company to someone else – one of the most valuable and elusive sales channels) and (iii) operational savings of using social media for customer service versus offline resources.

The values of this social media activity can be expressed as:

Activity Attributable To Sale Value Total Revenue Or Impact On Revenue
(i) Customer Retention 68%* X Sale ($100)** = 68% Or $68
(ii) New Referral Customers 75%*** X Sale ($100) = 75% or $75
(iii) Operational Savings 95%**** X Cost of phone customer service ($7.50) = 7.13% or $7.13

*Attributable to Sale: This ratio reflects the direct impact the activity has on the sale. A study by Dan Kennedy shows that 68% of customers who leave a business do so because they feel unappreciated or unimportant. Turning that around via proactive customer service could potentially result in a 68% contribution to social media’s impact to sales. (Note: This study is from 2006; I’m still on the look-out for other studies for this figure.)

**Value: The value of the activity whether it’s a direct sale or operational savings.

***New Referral Customers: The 2011 Edelman TrustBarometer study found that 75% of customers who trust a company actively recommended them to a friend/colleague. That indicates 75% of happy customers will be a company’s sales force, leading to a potential 75% impact on revenue.

****Operational Savings: This is the savings from using social media for customer service versus phone-based customer service which is more expensive. A 2012 Gartner report indicates that social media customer service costs 5% that of traditional phone customer service. Here I’ve used the average of $7.50 per customer service call (from Emily Yellin, author of “Your Call Is (Not That) Important to Us”). Multiplying 95% (phone-based customer service savings) by $7.50 (average per customer service call) results in a net savings of $7.13, or 7.13% (again, assuming a $100 product sale).

Circle 3 – Engagement

Moving further along, this reflects the impact of social media engagement (e.g., likes, comments, retweets, etc.) on sales. These are not direct visitors to a website but rather the engagement that happens on social media channels as reflected in comments, shares, likes, etc.

The value of this social activity can be expressed as:

Activity Attributable To Sale Value Total Revenue Or Impact On Revenue
Social Media Comments & Interactions 63%* X Sale ($100) = 63% Or $63

*Attributable to Sale: A 2012 IDG Research study shows that 63% of consumers are more likely to buy new products and try new services if they read positive social media comments about them. This can be interpreted to indicate that active engagement with consumers via social media might have a direct impact of 63% on sales.

Circle 4 – Audience Growth

I’ve placed social media Audience Growth after customer service and engagement because both of those speak to a higher level of customer interaction than increasing fans, followers and other social activities. Here, the goal is to quantify the impact audience growth has on sales in general via the impact on sales of (i) Social Media Click-Through Traffic and (ii) New Facebook Fans (which cautiously could be extrapolated to Twitter and other social channels too).

The value of this social activity can be expressed as:

Activity Attributable To Sale Value Total Revenue Or Impact On Revenue
(i) Social Media Click-Through Traffic 1.2%* X Sale ($100) = 1% Or $1
(ii) New Facebook Fans 24%** X Sale ($100) = 24% or $24

*Social Media Click-Through Traffic: Optify’s 2012 B2B Marketing Benchmark Report found that 1.2% of social media website traffic resulted in a conversion. This is a B2B study but the B2C impact is most likely the same or slightly higher. This results in an impact of 1% to total revenue or $1 given our $100 example.

**New Facebook Fans: A 2011 Hitwise study demonstrated that 1 Facebook fan is apparently equal to 20 additional visits to a retailer’s website over the course of a year. Multiple that by the 1.2% conversion rate for social media website traffic and we can see how 1 new Facebook might have a 24% impact on total revenue.

Circle 5 – Impact On Search

It’s well known that Google has been tracking social mentions since at least 2011. While many sites are seeing bumps in rankings from an increase in social mentions, finding a correlation between social mentions and rankings isn’t easy. Meanwhile, Google has clearly stated that it’s influencing search results based on Google+ activity. Even so, following is an attempt to estimate the direct impact of social media to rankings to conversions. I imagine as we all see more empirical data and studies, this figure will change considerably.

The value of this social activity can be expressed as:

Activity Attributable To Sale Value Total Revenue Or Impact On Revenue
(i) Increase In Google Rankings 28%*
(ii) Increase In Search Traffic 27%**
(iii) Increase In Search Conversions .1%*** X Sale ($100) = .11% or $.11

*Increase In Google Rankings: SEOmoz’s 2013 Ranking Report is reportedly in the works so in the meantime I’m relying on Will Critchlow’s excellent post from 2012 in which he walks through his analysis to prove a correlation. In the end, he couldn’t find a definitive correlation but he also didn’t refute the link between social mentions and rankings either. Even so, I’m going to go out on a limb and use the figure of 28% which is the sum of 21% for Domain Level Link Authority and 7% for Page Level Social Metrics (both from SEOmoz’s 2011 Ranking Factors).

**Increase in Search Traffic: Optify’s 2011 study, How The New Face Of SERPs Has Altered The CTR Curve, shows how the click-through rates increase from 8.9% on page 2 to 36.4% on page 1 of Google for a net gain of 27%. For sake of this model, I’m making the gross assumption that the majority of sites will increase in rankings to page in Google.

***Increase in Search Conversions: This figure comes from 28% (Increase in Google Rankings) X 27% (Increase in Search Traffic) X 1.45% (organic search conversion rates from Optify’s 2012 B2B Marketing Trends study), which equals .1% or $.11 given the $100 example.

What’s the Outcome?

Tallying together these figures results in a potential return of 338.24% from social media activities.

SM_A&IOS2

Keep in mind that this is an abstract, or industry, estimate. Also, factoring in costs would be required to get a true ROI. Likewise, these figures do not reflect scale and volume which vary according to specific campaigns and companies.

Don’t Stop…Drill Down to Get Specific ROI Metrics

To get a more precise picture of a company’s social media ROI, I highly recommend visiting Seiter’s and Schottmuller’s posts on social media ROI.

Bonus: Another exercise of great value is to calculate the Customer Lifetime Value of your sales, and customers. Avinash Kaushik has a fantastic post on this topic from several years ago. It’s still highly relevant and becomes even more so as social media greatly amplifies the recommendations and referrals of customers.

What are your experiences and thoughts about social media ROI? Please share via the comments!

Max Thomas

Max Thomas is ThunderActive’s founder. He loves new ideas, laughing, shoes, personal style, and art.

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