Social Media ROI – Part 1

There is an ongoing discussion whether Return on Investment (ROI) should be used on Social Media. One camp argues that the primary reason ROI should not be part of Social Media is because the development of Social Media is so recent that the key performance indicators (KPI) used to calculate the ROI have not yet been defined. Moreover, this camp also argues that there is no reason to slow down the work on Social Media due to lack of ROI metrics. The metrics will be found at some point.

The other camp argues that even though social media is a recent phenomenon, the fundamental businesses principles still apply – when you invest, you expect a return. The idea that something is so recent, so new, so different that you cannot calculate the ROI is simply hogwash, the argument goes, while pointing the finger back to the Internet bubble of 1990’s.

These postings will try to open up and clarify the discussion. We’ll discuss that there are different types of ROIs used for different purposes, and that there are a different ways of calculating an ROI based on different sets of metrics, and we will follow up with a conclusion.

In a marketing campaign, you expect your return to be higher than the amount you invested within a pre-determined time frame. This type of ROI is used when you are trying to make more money.

On the other side, you also use the ROI calculation when you are trying trying to lower costs. For instance, in product support, you use an ROI calculation to see the estimated savings on a new product or procedure. Even though you are not making money, you are still lowering your support costs, with other words, you might still have a positive ROI.

In addition, when calculating the ROI of social media, you need to include risks. Until FDA releases guidelines on a pharmaceutical company’s responsibility with respect to adverse event and off-label promotions on a company-sponsored social network or community forum, the pharmaceutical industry, in general a very risk-adverse vertical, will be resisting using Social Media.

As there are different ways of calculating the ROI, there are also different types of social media marketing campaigns, short term, long term and always ongoing, and there are also non-marketing campaigns like the above example of product support.

Next posting will talk about ways of calculating the Social Media ROI. Links will be posted to Jeremiah Owyang and Charlene Li of Forrester Research, Bill Johnston of Forum One Communications, and Lithium Technologies and Powered Social Marketing.

Comments is a fundamental part of social media, so do your social duty and add a comment with your thoughts.

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14 Responses to Social Media ROI – Part 1

  1. Andrew Riggs says:

    Why not calculate the ROI on a social media? Better to be proactive than reactive…

  2. dagholmboe says:

    Andrew, thanks for your comment. I think the answer to your question is in the next post “Social Media ROI – Part 2.” If not, let me know.

    The ROI should not be a tough thing to calculate for Social Media. If I launch a social media marketing campaign in a social network and I expect 1,000 people to show every month, and out of those 1,000 people, I expect 2% to pay $100 (= $2,000/month), then I know that my campaign needs to cost less than $2,000/month (disregarding any other costs and overhead) if I want a positive ROI.

    Now, if I also can gather a five great ideas per month from these 1,000 people’s comments. Comparing the cost of great ideas to using off-line focus groups (from where I have a fixed cost) and put a value at $500 per great idea, then I win an additional $2,500/month. So now my campaign can cost $4,500/month and I break even.

    And that is calculating it proactively, as you suggest.

    Please read Part 2 for additional calculations.

  3. […] Media ROI – Part 3 From Social Media ROI – Part 1 and Social Media ROI – Part 2, we saw different ways of calculating the Social Media ROI.  In the […]

  4. Robbin Block says:

    I like that you explain that there are different ways of looking at ROI. And your calculation above is interesting. What’s difficult to figure out, as with other promotional methods, especially PR which parallels social media, is whether that sale is a direct result of a social interaction. It’s often a combination of communications (and many other factors) that lead up to a sale. That doesn’t mean that trying to measure the results of marketing activities is a waste of time; rather, looking at trends may be a better way to interpret the data.

  5. dagholmboe says:

    Robbin, thanks for your reply.

    Yes, because of all interactions (the client read the ad, he talked to his friend, he heard about it on the radio/TV, he went online and talked to a few user groups, and so) how do we know what caused him to buy?

    I agree, looking blindly at numbers is not useful but a strong ROI, based on metrics that have been proven over time, taken together with other data including gut feel can only help improve decision making. Also, both trending and spot checking needs to be included a solid calculus.

    Robbin, did you get a chance to download the ROI calculator at:

    https://dagholmboe.wordpress.com/2009/04/26/social-media-roi-part-3/

  6. […] Social Media ROI – part 2 – part 3 Blog posts about the Return Of Investment on social media in three parts. […]

  7. Victoria says:

    What kinds of risks would be included in the ROI calculation?

  8. Leah Leavitt says:

    It is difficult to calculate the ROI in real time because social media is more about creating a relationship and image overtime. It is not as important to measure the amount of fans or followers you have but more importantly the relevance of the content being shared.

  9. […] Social Media ROI – Part 1 « Klurig Analytics Social Media ROI Tools Internet Social Media Marketi… (tags: social+media ROI) […]

  10. frank says:

    Good post thx, note this does not calculate impact pos/neg on brand recognition – also, you can use web analytics on landing pages to get a clearer accounting on cause/effect on campaigns

    • dagholmboe says:

      Thanks for the comment. Our solution estimates the value ($) on brand awareness so if you trend the brand awareness value month-over-month, you will have your pos/neg on brand awareness based on dollars (which is ultimately what really matters).
      The solution actually takes clicks to landing pages into account in order to estimate the value of clicks, which have been generated based on links in your social media campaign.
      All in all, it is a very powerful solution to calculate the social media return and social media ROI.

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