5 Simple Steps to Measure Social Media ROI

Eric Harr-Resonate Social Media
Eric Harr Fouder & President, Resonate Social

Posted on March 8th 2012

5 Simple Steps to Measure Social Media ROI

The glow of one warm thought is to me worth more than money.

~Thomas Jefferson

Show me the money!

~Tom Cruise

Two very different Toms. Which one are you with? Jefferson? Or, Cruise?

I suppose both have a point. While Jefferson may have been right on a spiritual level — heck, I love to bask in the warm, fuzzy, feel-good glow of social media as much as the next Twitterati — many businesses are now in the Cruise camp of: “Show me the money!”

There are, without question, myriad soft benefits of social media: elevated customer service, real-time market research, influencer engagement, crisis management, brand protection, brand equity and word-of-mouth marketing. But, many companies want to be able to see ROI (shocker, I know.) They want to know that social media is a sound investment of their time and money.

Here’s how to do it in five simple steps:

  1. Determine Your Social Media Spend (SMS). This includes hard and soft costs, including your time. Yes, time! Despite what social media zealots say, social media is not free. Your time has value; in fact it is your most precious, non-renewable resource. If you spend $100 a month on various social media tools and technologies, and you invest five hours a week at an hourly rate of $100, then your social media spend is $2,100/month. Count it all.
  2. Determine your Customer Lifetime Value (CLV). This is a terribly important metric, yet most companies don’t know it. Know it. If you get clear on the true value of a customer, you can make better business decisions. More importantly, if you can engage customers and inspire them to share your brand with their trusting communities, it will boost their CLV dramatically. That's where the power of social comes in--not so much for customer acquisition, but for customer retention--and evangelism (where the real value is). Marinate on this: If I buy your $200 shoes and go away forever. I’m worth $200 to you. If I buy your $200 shoes and you keep in touch with me, inspiring me to share my experience in social media, and 30 people buy your shoes as a result of my endorsement, my CLV just shot up to $6,100. Ask your current customers how much they roughly spend on your product each year, then, multiply by 20 to arrive at their CLV.
  3. Determine New Customer Value Via Social Media (SMV). Track conversions using Google Analytics or any other website tracking software. Google Analytics allows you to slice by social. This takes time, but it’s necessary if you want to understand your ROI from social media. Track sales, conversions, etc. and place a value on those items. For some, it might be hard-dollar sales; for others (typically B2B): the value of a contact form submission.
  4. Determine Impression Value (IV). There is value in impressions; it’s what traditional media sell. To determine IV, add up your impressions from Twitter and Facebook, cumulative YouTube views, website traffic and any other online source. Divide that total by 100 and then multiply by an industry-appropriate CPM (cost per thousand impressions).
  5. Calculate Customer Service Value (CSV). Twitter and Facebook are arguably the most efficient, cost-effective, forward-facing customer service platforms ever created. Social media can reduce customer service costs - in the form of inbound call deflections - which is a tangible value. This is a subjective one, but you need to take a crack at valuing it. For example, if you feel like Twitter provides $1,000 of customer service value a month to your business, write that in. It matters.

Now, let's add up that Investment Return (IR), shall we? (Customer Value/10 (years) x Number of New Customers) + Impression Value (IV) + Customer Value Via Social (SMV) + Customer Service Value (CSV).

Social Media ROI = Investment Return (IR) – Social Media Spend (SMS) / Social Media Spend (SMS).

Et, voila!

Now, you can have the best of both Toms: basking in the glow of the warm thought…that social media can “show you the money!”

Eric Harr is the new Social Media Expert for CBS News and the Founder & President of Resonate Social, a boutique, integrated marketing agency in San Francisco. He is the author of “The REAL TRUTH About Social Media: 8 Timeless Truths Uncovered & 8 Monumental Myths Revealed” now available in Barnes & Noble nationwide and on the REAL TRUTH Website. [Use code “GIVEBACK” and receive 10% off. Proceeds benefit CARE, to defend dignity and fight poverty worldwide.] He is the creator of SocialSee, the first technology that shows True ROI from social media in a real-time dashboard. It goes live: April 1, 2012.

Eric Harr-Resonate Social Media

Eric Harr

Fouder & President, Resonate Social

Eric Harr is the new Social Media Expert for CBS News and the Founder & President of Resonate Social. This post is excerpted from his best-selling new book: “The REAL TRUTH About Social Media: 8 Timeless Truths Uncovered & 8 Monumental Myths Revealed” available online and in bookstores across America. [Use code “GIVEBACK” on the REAL TRUTH Website and receive 10% off. Proceeds benefit CARE, to defend dignity and fight poverty worldwide. For more information, visit: http://ericharr.com.

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Comments

Posted on March 9th 2012 at 9:13AM

I think Lifetime Value for each customer is probably the hardest one for me to get a solid figure for.

Eric Harr-Resonate Social Media
Posted on March 11th 2012 at 6:36PM

Hey Chris:

You've got that right! Our agency has worked with dozens of clients from small businesses to multi-national corporations like HP, and exceedingly few have any kind of a grasp on CLV.

While it's important to know, perhaps the broader, more important point is that CLV can be increased by orders-of-magnitude via social media.

Engage with your customers. Care about them. Listen to them. Provide "wow customer service," and those customers will roll up like a juggernaut and form a marketing army for you, sending their CLV off the charts!

Thanks for taking your time to comment, Chris!

E.

JenLovisa
Posted on March 9th 2012 at 11:06AM

Hi Eric,
Thanks for writing a good post. However I find it hard to understand the second point. How can I multiply it by 20? What guarantee do I have that a customer stays with me for 20 years? (I assume that's what you mean by multiplying by 20?)
Especially today in a million choice society, it's rather unlikely a customer stays with you for 20 years unless you're IKEA, Amazon or another huge "all-ages-type of company".
Cheers from Barcelona
Jenny

Eric Harr-Resonate Social Media
Posted on March 11th 2012 at 6:12PM

Hello Jenny! Thank you for the kind words - and the very valuable feedback. CLV generally uses 20 years as a benchmark, but you are quite right, for smaller organizations, it may not be realistic to have a customer for 20 years (although one might want to strive for that! ;-)

I am going to edit the article to make it 10 years. I think that is more realistic particularly for the readers here - and I truly appreciate the feedback!

E.

Panos_St
Posted on March 9th 2012 at 2:32PM

First of all to congratulate you for the simplicity of the approach. I also understand that this is meant to trigger conversation, and that is good.

@ Step1: The calculations do not make sense. You meant to say"..and you invest five hours a WEEK at an hourly rate of $100.." :-)

@ Step 2: CLV is the holy grail! You are now throwing the ball on the brands' court to check how organised they are! Based on my experience, as the calculations for CLV involve a number of assumptions, it only makes sense to look at it comparatively among your target segments. But then how can one relate effectively brand's target segments to social media platform users?

@ Step 3: SMV I believe ignores the effect of other marketing channels and the existing brand equity that has established healthy relationships ready to be converted!

@ Investment Return calculation: I think that you should clarify that the time frame your the calculation is annual. Very helpful if one wants to calculate the Impression Value for example

On the central formula: 

Social Media ROI = Investment Return (IR) – Social Media Spend (SMS) / Social Media Spend (SMS).

to be mathematically correct you should include both terms of the numerator in brackets.

Overall, I believe that the inherent problem of such a challenge is to be able to isolate the social media effect on new customer acquisitions (step 3). There are many reasons why somebody converts within a social media environment whilst somebody else converts within the context of another channel. All lead to a more complex cross channel exercise that will facilitate budget allocations too.

 

Eric Harr-Resonate Social Media
Posted on March 11th 2012 at 6:17PM

Outstanding feedback. Thank you. And you are absolutely spot-on when you say: "I also understand that this is meant to trigger conversation, and that is good."

The fact is we are all breaking historic ground here. Social media is the fastest-growing form of communication in history. It is the #1 online activity - and I believe it is the future of marketing and customer service/engagement.

It's so new, however, that we're trying to figure out how to caluclate ROI. I see this as an exciting opportunity!

That said, let's work together on it.

E.

Panos_St
Posted on March 12th 2012 at 3:22PM

Thank you very much for the comments. It is amazing that you take the time to answer al comments individually!

Best Regards,

Panos

KevinHorne
Posted on March 10th 2012 at 9:49PM
neither simple nor accurate. how could 59,551 people actually "like" this on Facebook?
Eric Harr-Resonate Social Media
Posted on March 11th 2012 at 6:15PM

Hello Kevin: I am sorry you feel that way. Social media is so new - and wrapping our arms around how to calculate tangible and intangible ROI is imperfect. We're all breaking new ground - and it's quite exciting!

So, let's work together to come to a gold standard of measuring Social Media ROI. I'm all ears - and I am taking feedback into account and making modifications based on it.

It's very much a collaborate effort, which I enthusiastically embrace!

Thank you again, Kevin.

E.


Incidentally, the 59,601 likes are for Social Media Today, the website, not my article - which currently has about 600 social shares.

tchaffee
Posted on March 11th 2012 at 11:07AM

We need more articles like this showing that social media ROI is not just a fuzzy concept and can be calculated.  I attempted to explain Social Media ROI in 140 Seconds at the March 2010 London Twitter Developers Nest. I'd like to think the presentation is still relevant and builds upon your article.

ragtag
Posted on March 13th 2012 at 8:41AM

Sorry, but too much of this requires guess work and makes no mention of specific activities that a company may be undertaking or the opportunity cost of not doing other things. Overall this is trying to answer a question which is the wrong one to ask and way too broad. I don't think this is breaking new ground at all, people have been calculating the ROI of business activities since the dawn of business.