A Simple Way to Calculate Social Media Return on Investment

Monday, June 13, 2011

When you hear the phrase, “social media return on investment,” you may ask yourself how you could possibly measure a return on investment of using something that costs you virtually nothing.  But if you think about it, although the major social media sites are free, you still have to take time out of your busy day to post something or engage with your followers.  Or if one of your employees posts things online for you, they are taking time out of their schedule which costs you employee salary.  And what if you hire someone to engage in social media?   You have to be able to measure your return on investment to judge whether or not your social media activity is working positively for your business.

Social media return on investment (ROI) means different things to a lot of people.  It could mean a “return on engagement,” or a “return on creativity and/or originality.”  Simply put, social media ROI is a measurement of effectiveness.  In a strictly technical sense, it is a way of measuring the effectiveness of marketing through social media.  This may sound complicated and tedious, but it is actually quite easy, and well worth the time.

What Exactly is ROI?

Before we go in depth about calculating the return on your social media investment, let us first make sure we all know what ROI really means, and why it is so important.

In the world of business, ROI is meant to measure the efficiency of an investment.  It is based on the financial formula:

ROI = (return – investment) / investment %.

In short this formula tells you whether or not your investment was worthwhile.  If you keep your investment the same while seeing in an increase in returns, this indicates a positive ROI.  A negative ROI means that your returns decreased while keeping the investment the same.  It goes without saying that an increase on your ROI is much more desirable than a decrease on your ROI. 

Because the formula for ROI uses just two variables, it is a quick and easy way to not only measure, but compare your marketing campaigns.  That way you can always go back and see what worked for your company, what did not, and how to improve any less-than-successful campaigns.  

Now that we understand the importance of measuring ROI and what it actually means, we can begin to apply it to marketing through social media.  If you want a more in depth look at ROI, see Investopedia’s definition here:

Social Media ROI: What is your investment, and what is your return?

So, now that we understand ROI and everything knowing it accomplishes, we can just take our social media returns and investments and plug them into the formula, right?

Social media ROI = (SM return – SM investment) / SM investment %

Not quite.  Although the investment in social media is fairly clearly defined, the return is not so easy.  What exactly is the return on social media, and how do you attach a dollar value to it?  Just like everything else in marketing, metrics are essential.  Thus both of these questions must have answers before we can move on and accurately measure your social media ROI.

The Social Media Return: What do you Plan to Accomplish?

You cannot just dive head first into a social media marketing campaign.  As in all aspects of marketing, regardless of the investment, you must have goals.  Without goals, nothing is measurable and without metrics, how can you know if you actually accomplished anything?  One of the best things about marketing through social media, however, is you can tweak the definition of your social media return to suit your company’s personal goals.  As Brian Solis from the Altimeter Group says, “Everything starts with an end in mind.”

The social media return is a way of showing what you have gained from that particular campaign.  Let us say, for instance, that what you want out of your social media investment is more sales.  Your social media return then becomes the amount of sales that have sprung from your social media engagement.  But what if instead of boosting sales, you wanted to make your brand more recognizable?  Then you would launch a social media campaign focused on promoting your brand, and your return becomes brand awareness.

Another great thing about social media marketing campaigns is that you can launch multiple campaigns from multiple angles with multiple end goals in sight.  For example, let us say that you want to drive sales while promoting your brand and building relationships with your followers—you can do that!  Be aware, however, that having more comments, likes, and followers is not indicative of your return.  More specifically, your return is indicated by whether or not those follows, likes and comments have moved you closer to your goal, whatever that may be. 

In short, you do not want to use social media just to keep up with the times.  You must be able to prove that your investment in social media has accomplished something positive for your company, thus you must set realistic and measurable goals for yourself.

But How do you Quantify Your Social Media Return on Investment?

Now we arrive to the most complicated part.  We have set our goals and defined our social media return, now what we need to do is assign value to that return—quantify in terms of money.  This is without doubt the most difficult part, because you need to assign a dollar value to something that may not necessarily be tangible. 

When using social media to promote your sales, the quantification of that return is relatively straight forward.  You can pass out coupons that are only available to followers, and in so doing you can track how much business was generated from using social media.  But in cases of, say, building relationships, quantifying becomes a bit murkier, yet still essential.

One way of doing this is by asking new clients how they heard about you, or why they chose your company.  If you keep track of the answers you get, you can see exactly how much new business was generated by taking the time to listen to your followers.  Then you can begin putting value on your return.

Basically, the idea is to be able to see and measure not only the value of building rapport and relationships, but the effectiveness of doing it through social media.

Putting a value on promoting brand awareness is yet another beast entirely.  You could accomplish this by sending out e-coupons to your fans and followers and keep track of the traffic and business generated from online.  In this way you can judge not only how effective your social media marketing campaigns are, but how they compare with your other marketing techniques.  According to the social media analytics company Virtue , who in April of 2010, stated that according to their research, the average Facebook fan is estimated to be worth $3.60. They did this by looking at the average number of messages each fan received, and then compared this number to what it would cost to purchase impressions in order to send the same number of messages to each fan. 

Social media offers a multitude of channels for quantifying the value of your return, and in this way allows you, the marketer, to be more creative and innovative in your methods.  

Social Media ROI: How Does it Compare?

Once you are able to quantify the value of your social media marketing campaign, and have estimate your investment, you will be ready to plug your numbers into the ROI formula, then, presto!  You now can now clearly see if you returns in social media marketing were worth the investment.  

The great thing about having accomplished this is that you can now use your calculation of one social media campaign and compare it to your other ROIs.  Did you launch other social media marketing campaigns?  If so, you can now see which ones were effective and which were not.  What about offline campaigns or e-mail campaigns?  You can now see how your social media ROI compares to those.    Remember, ROI is a measurement of efficiency, so having calculated the ROI of your social media campaign, you use the ROI number to compare to other social media campaigns and also your TV, print, radio and other campaigns.

For a more in depth look at strategizing your social media focus areas, check out the Altimeter Group’s research report by clicking here!

When you are able to calculate the ROI in all forms of marketing, you can start to create a clear picture of what works best for your company—what type of campaign is most effective and efficient.  This is why ROI is so very important, and becomes one of the most useful and powerful tools in your company’s marketing arsenal. 

DJ Heckes, CEO & Author
EXHIB-IT! Tradeshow Marketing Experts
Full BRAIN Marketing

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