The -real- ROI of Social Media?

in Marketing, Social Media by Gianluigi Cuccureddu SMP on March 7th, 201015 Comments

Much has been written about the ROI that can be generated by Social Media, I’ve read many kinds of ROI’s, all trying to reflect efforts and its return.

But there’s a paradox when having a closer look at the two terms in relation to the new open business environement.
First let’s decompose ROI and Social Media.

ROI:

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

Keep in mind that the calculation for return on investment and, therefore the definition, can be modified to suit the situation -it all depends on what you include as returns and costs. The definition of the term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one “right” calculation.

For example, a marketer may compare two different products by dividing the revenue that each product has generated by its respective marketing expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product.

This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user’s purposes, and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used.

Secondly, let’s have a look at the definition of Social Media:

Social Media is media designed to be disseminated through social interaction, created using highly accessible and scalable publishing techniques. Social media uses Internet and web-based technologies to transform broadcast media monologues (one to many) into social media dialogues (many to many). It supports the democratization of knowledge and information, transforming people from content consumers into content producers. Andreas Kaplan and Michael Haenlein define social media as “a group of Internet-based applications that build on the ideological and technological foundations of Web 2.0, and that allow the creation and exchange of user-generated content. Businesses also refer to social media as user-generated content (UGC) or consumer-generated media (CGM). Social media utilization is believed to be a driving factor in the idea that the current period in time will be defined as the Attention Age.

When thinking of both terms and and how they can relate to each other, I conclude that the terms are “forced” in order to create meaning with current understanding and definitions.
The ROI of Social Media is like trying to ascribe ROI to a telephone line.
Part misinterpretation and misunderstanding of both terms and part the necessity to quantify in order to meet business objectives, are reasons why this enigma won’t be solved soon.

Return on Investment is a short term metric, a direct relation between cost and return is calculated, and (short term) objectives don’t have much room for tactics or actions that don’t add direct value to the ROI.
Here’s where the complication is, communication and interaction often do not add direct value to a quantifyable objective (for example sales).
The best example within Social Media is Trust. How can the long term process of gaining and retaining trust be expressed in a ROI?
Surely, when consumers do a purchase (be it a soft or hard conversion), it is the only quantifyable and “visible” action/reaction within a much larger process by the company and other consumers.

The latter is important and the crux within this question.
Social Media is causing a paradigm shift where all conventional wisdoms are becoming obsolete.
One of these wisdoms is the notion of two seperated entities, businesses versus consumers and the interaction between these two, ending up in sales, profit, revenue, ROI and so on.
A revaluation is necessary, in this transparent digital world, the seperation is disolving and consumers are complementing and replacing pieces of business processes.

If consumers become part of the business, how must these external entities be calculated and taken into account?
It’s not only the -direct- cost business cost what counts, but also the indirect and consumer-added related costs which should be taken into account in order to understand the new relationships and impact.

So, what is the real “ROI” of Social Media? I do not have a clear and sustaining answer yet.
A new digital landscape requires as a new way of conducting and quantifying business.
I believe the first step in this paradigm shift is to release the legacy of conventional business rules. Comparison -with old standards- is in this case a devaluation of the real opportunities and power of Social Media.
From there on, known metrics and KPI’s will have new interpretations which explain relations and money flows better than the current ones.

It’s a long learning curve and many challenges won’t be solved within months. Take the business effects of Social Media into long term strategies, set aside budget to research and test this phenomenon. In the mean time, transitions will happen and New and Old ways will meet.

What do you think the ROI of Social Media is?

Gianluigi Cuccureddu SMP

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Responses to “The -real- ROI of Social Media?”

Annelies 7.03.2010 um 11:19 pm
I think in the long run it will be the same as it was (and still is) for e-mail. Social networking it only an advanced version of e-mail and chat. We still use e-mail for marketing purposes, but we are at the same time aware of the fact that e-mail is a personal channel to communicate with eachother. Social networks are just another channel on the medium Internet. What business need to understand is that although social media has a lot of opportunities for making customers care and buy your products, it still is a personal channel to communicate with friends and likeminded people. We don´t use the channel for finding information about companies, products or the best deals. Of course some do, but most of the time those things get by us through word of mouth from people we trust and like. Listening to the sounds of protest to having ads in Twitter or other networks, learns us that we don´t want companies to intrude our personal lives like that.
Use Social Media to listen and interact only if your target audience wants to interact with you. Don´t push it. And don´t use it if your target audience is better reached through other channels. The real ROI of social media and networking is having a peer group of audience that wants to let you know how you can improve your products or services, and you don´t have to have 1000 followers or lot´s of interaction to have that. Just search for your company name alone will give you enough information. It´s not bad that people don´t talk about your company online. They probably do that somewhere else. Find that out first. My 50 cents.
Gianluigi Cuccureddu 8.03.2010 um 5:43 pm
@ Annelies,

True, still remains that -currently- companies seek justification of these efforts through some sort of metric.
Why? Because the Web is traceable, or at least much more than offline WOM, TV and so on, which raises expectancy and importancy.
Annelies 8.03.2010 um 5:57 pm
@gian true, but how do they measure e-mail? How do they measure the effects of a chatsession as service? Can’t they do a altered measurement for social media? How many time has a video been watched and by whom? How many times has a tweet been retweeted and by whom and how many times did you plug that tweet? How many visits do you get from social networking sites to your site? Enough to measure it seems to me. How many of those visits convert to purchase? How many of those who retweet go to your website in a certain amount of time? With all those numbers there has to be a way to calculate the ROI of social media, as much as it’s possible to calculate the ROI on e-mailmarketing…Sometimes it helps to look back a little on what we’ve learned about other channels and sometimes I think you need to realize that not everything falls back on numbers but some things you can see as brand engagement or use as crowdsourcing possibilities, and that’s also something you can substract to numbers…
Dan G 8.03.2010 um 11:37 pm
“I believe the first step in this paradigm shift is to release the legacy of conventional business rules.”

OK, let’s set the Wayback Machine to 10 years ago.

“One cannot value internet companies by profits. Even revenue measures are incorrect in the new economy. Once these companies begin to monetize the eyeballs, their market power will create enormous returns for shareholders. Buy .com!!”

Businesses invest and need to measure some return. Sometimes returns are very indirect. For instance, why would a multinational, multi-division (or multi-brand) company like GE or Unilever ever do corporate-level advertising? You’re unlikely to buy a GE locomotive and you don’t associate Unilever with a given brand of tea (even though they own one). And yet they do it. Why? Because the corporate brand has value, expressed perhaps in no other way than investors’ preference for the shares.

Social media also needs to demonstrate a return. Better customer service has a return. Less-expensive awareness campaigns have value. More responsive product development – based on better market inputs — has a value. These need to be quantified or companies’ fiduciary duty to their shareholders (not to mention inertia) will prevent large investments.

But once it’s all quantified, it becomes SOP. As you say, it becomes like having a telephone number: it’s a threshold requirement to play. We’ve got 5-10 years before that happens.
Janice Clark 9.03.2010 um 4:59 pm
Simple and basic explanation to this one. SEO process will help you in bringing more visitors and ultimately convert those visitors into customers. With every increase in your customer list, your sale also grows up. The amount of money you put in will have a better return, which is nothing but Return on Investment (ROI).
Ben Schwarz 11.03.2010 um 1:12 pm
As Dan G pointed out, the Googles of this world wouldn’t be here if they had focussed on ROI too soon. When google rose up from nowhere it was burning capital.

Twitter has steered a good course so far, but despite being a global phenomenon that has reached critical mass, I don’t believe they make much money.
No one knows how to monetize social media traffic yet, but I agree with Tom McDonnell (http://www.monterosa.co.uk/blog/conversationiscurrency) that we’ll se at least one big commercial success this year.
Chuck Balcher 16.03.2010 um 6:07 am
The real value in ROI may not be known as it is difficult to track where your success is coming from. Thanks for finally defining ROI, so that I can understand it.
Chuck Balcher 16.03.2010 um 6:10 am
I think that businesses that strive to maximize their exposure will always outperform those that don’t.
micromind 19.03.2010 um 5:33 pm
You guys are way, way, way overthinking this, from the original author onward. Tearing apart what ROI means in the fine detail the author does, simply points out there is no real return on Twitter. If there was a real value it would be staring you in the face.

Why is this even being discussed? Because while Twitter may be fun it serves little purpose other than to serve people’s need to shout from the streetcorner (who cares if anyone is listening?). For business, the only purpose I’ve ever seen in Twitter can be boiled down to advertising, but only to people who want to be advertised to. Oh, yeah, that’s what I want: every time Ford wants to remind me to buy a new car (every 12 seconds) then I want a tweet from them, not every 5 years which is the natural period for which I might want to buy a car of my own free will.

Every time I’ve tried to utilize social media to monitor the goings-on at a conference or event, it’s just more noise; more shouting from PR people or “it’s 10am, come listen to Frank talk about mating habits of beetles” or “they’re serving yesterday’s bread for lunch”.

If GE wants to hire one person to send out 50 tweets a day to improve its brand to the under-30′s, then they may get positive return on their $100,000 investment, but they’d probably do a lot more by promoting promoting a mercury-recovery program by recycling flourescent lightbulbs.
Ben Schwarz 20.03.2010 um 12:51 pm
Micromind, I empathize with your point about the dreary noise twitter can be.
But the scale of their success goes beyond hype. They must be delivering something people find useful to have become quite so big. Short lived things like second-life got a lot of hype too but never reached the critical mass usage twitter has.

Almost all web-based success stories start-out with no clear business model. Or at least an ROI that turns out to be totally different from anything that was sold to the investors.

The great Google still hasn’t been able to monetize Youtube despite its galactic success and the fact that it does serve a real need. It took them 10 years to find a business model for their core business after all.

But I’ll bet you a beer micromind that this time next year, I will be able to convince you.
McLaughlin 30.03.2010 um 4:14 pm
ROI is possible to measure on SM, just like it is possible to measure on a phone line.

I run a call center. I have 100 agents and 100 phone lines. Each agent makes 5 calls an hour.

My client want to increase my calls from 500 calls a day to 750 calls a day, so I have to increase my call center infrastructure.

To add 250 lines costs me $3000.
To add PBX hardware costs $6000.
These are both CAPEX.
I have to hire 8 new agents at $1000 a month.
and so on until you determine the cost per call. That is exactly how we do it in call centers and an easier example than an office phone.

If you want to see the RIO on SM, hire someone to do that and nothing else. That employee cost is your investment.
Determine what the result is from hiring that person in terms of revenue. That is your revenue.
Do the division.

Again, that example is easier than determining the cost of one person doing SM from a home office. With a small business, adding extra work takes time away from something else, so the calculation is more difficult to determine, but it is possible.
Gianluigi Cuccureddu 30.03.2010 um 4:45 pm
Richard,

I do understand where you go with your explenation, and there’s a correct way in assigning usage of communication lines as a basis. But from there on, it’s the actual communication that defines success or not.

In an offline setting, your description is a correct way to introduce a basic understanding of ROI, but in a super-measurable and quantifyable environment as the Web, standards are increasing and the content itself can be researched and quantified, but not with conventional metrics.

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