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Finally Unlocked: The Social Media ROI Formula
Posted on November 19th 2012
At last, it’s been done- A simple, proven social media ROI (smROI) calculation for both B2B and B2C marketing efforts. Though this formula has been the bane of marketers for the past decade, we can now begin to quantitatively analyze the variables and bridge the gap of obscurity that has typically marred social media marketing.
Social Media Return on Investment (smROI):
= Net Gains As a Result of Social Media
= (Tangible Related Revenue + Estimated Intangible Related Revenue – Cost of Social Media) / (Cost of Social Media)
Liked e=mc², this simplified formula is actually an easy-to-digest abbreviation of a much more complex environment. By utilizing a few assumptions, we can start to track the data and draw meaningful conclusions- whereas without the assumptions, it would be impossible to do so. Since there’s not a place for numbers such as estimated intangible related revenue on an income statement, we’ll have to take a deeper dive to try to triangulate the true values for this calculation.
Social Media Revenue
The revenue variable is broken down into both tangible and intangible, with the tangible portion being the easiest part because it’s more quantitative. Basically, the number is the lifetime value of the customers who found you via directly social media. Taken from Wikipedia, customer lifetime value is equal to the
(Avg Monthly Revenue per Customer * Gross Margin per Customer) / (Monthly Churn Rate)
While that formula alone can get more specific, by keeping it simple we can save lots of time and maintain accurate results. We want accuracy, but at the same time we’re not exactly trying to land on the moon here. The important thing to look for is changes over time. Whichever way you choose to measure, tie it back to revenue and always compare apples to apples. The trends will show problems either internally or externally and hopefully validate the spending.
A Million Little Pieces
Intangible social media related revenue is made up of a million little pieces. How do you know exactly how social media influenced a purchasing decision that was made online? How did social media monitoring and triage affect a branding incident? How did that affect sales over time? How does social influence SEO? Frankly, the exact answers are impossible to know.
The good part is that sometimes you don’t have to know the exact answers to draw meaning from representations. Like with numerical integration,you can devise ways to reach the truth with enough accuracy to suffice. They can include activities like consistent customer surveys that ask what influenced their purchasing decisions. Sentiment analysis, follower counts, engagement activities, and brand recognition all play into the social ecosystem.
If you’re more time conscious, it may even be okay to leave out the intangible aspects of smROI. While they for nice marketing reports, they’re often too much to convey to those that don’t have a rich understanding of the interrelated marketing processes. Fancy charts can come across as meaningless to those that don’t live and breathe social media. Remember that management is after the bottom line and too much information can cloud the message.
So What Does It Cost?
There are two ways of looking at the cost of social media marketing. The narrow view would look at the hours spent, pay per hour, consultant fees and SaaS fees- These numbers are very important to the financially focused. They are also very misleading.
The broader view is more intelligent and it takes into account the opportunity cost.
The opportunity cost includes the benefits of gaining social market share, SEO rankings, the digital consumer and societal shift to digital natives. People need to realize that regardless of industry, eventually all customers will be digital natives who regularly utilize the internet to make purchasing decisions. If your business isn’t a player on this new field, it will become increasingly difficult to win in the future.
Many businesspeople mistakenly make the decision to short investments in social media. This is usually a result of comfort, apathy, ignorance and/or a narrowly-focused view of the cost and tangible ROI. It’s up to us as marketers to show the holistic benefits of social media marketing in a concise scientific way. If you can do this, you’ll finally have unlocked the social media ROI formula.
What’s your smROI?