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Making the ROI case for social media

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Executives eager to avoid getting involved in the whole social media thing frequently cite lack of clear return on investment as a shortcoming. It's time to put that misperception to bed.

The Internet is the most measurable medium ever invented, and anything that can be measured can be used to calculate ROI. The first thing you need to know is the value of a customer. If you don't know that, get your CFO to figure it out. It takes about two hours. Then you need solid customer relationship management practices and decent Web analytics. Here's how it works.

Let's say a typical customer spends $10,000 with you annually and stays for five years. If your profit margin is 10%, then the average new customer is worth $5,000. Once we know that, then we can plug in conversion rates to figure out the value of a website visitor, a Twitter follower, a webcast registrant or anyone else.

Let's say Twitter brings an average of 1,000 monthly visitors to your website and that you typically convert 50 of them to customers. That's $250,000 in monthly Twitter value. If it took 50 tweets to get 1,000 visitors, then each tweet was worth $5,000.

Or let's say a search optimization program brings an additional 1,000 visitors per month and that searchers convert at a 0.1% rate. That means the program is delivering $50,000 a month in value. If you spent less than that, you have positive ROI.

It isn't that simple, of course. You also need to understand the cost of getting those additional visitors. But if you have a clear picture of staff and time costs, that's not rocket science. For example, if the fully loaded cost of a full-time social media expert is $100,000, and if you can trace 20 new customers to her efforts, then she's paid for herself.

Why aren't more businesses using these simple metrics? For one thing, most of them don't know the value of a customer. Fix that.

The bigger problem is that few companies use Web analytics or understand the analytics they use. They look at meaningless statistics like page views and ignore the capabilities of today's sophisticated tools to identify what visitors do once they reach a website.

Custom URLs let you easily identify where people came from; analytics let you profile their behavior. When you know the percentage of respondents to a Facebook promotion who drop a lead and the percentage of leads that convert to customers, you can easily figure the ROI of Facebook.

Does this take time and effort? Sure. Is there anything more important to your business than understanding the behavior of your customers? I can't think of anything.

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